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Understanding the Skyrocketing Costs of a College Education

An Overview of the Basic Reasons Behind Rising College Tuition

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The skyrocketing costs of college can lead a parent to wonder if an investment in higher education still makes sense. This is especially true when the annual cost of attending a private college can easily exceed the annual salary a graduate receives during their first few years of work.

For those parents who still have a number of years before their children reach college age, doing the math can make the dream of college sound more like a nightmare. For those within a year or two of college, the change in estimated costs can bring some major sticker shock.

So, here are some of the major contributors to rising college costs, and what it might mean for your budget and planning:

Inflation

Inflation generally refers to the natural increase in the cost of living over time. While no one loves inflation, it's generally accepted as a fact of life. In the broad economy, this annual increase has historically averaged about 2%. In other words, you would need $1.02 today to purchase what $1.00 bought you one year ago.

The inflation of college costs has not been so gentle, averaging 4-6% annually. In other words, a college education costing $10,000 this year will likely increase by $400-600 next year. In a nutshell, this means that college costs are doubling every 12-18 years, compared to everything else in the economy doubling in cost every 32 years.

Why do college costs “inflate” so much faster than other expenses? While it's hard to put an exact finger on it, we can see that large portions of a school’s budget are more sensitive to inflation that the typical American household.

For example, colleges need to replace technology more often than the typical family. Also, teachers have been historically underpaid, and are finally getting some of the raises they deserve. Lastly, insurance costs for running large institutions and businesses have risen significantly since 9/11.

Demand

One of life’s basic economic principles is that demand drives up prices. In other words, the more people want the same thing, the more that its price is likely to climb. Unfortunately for parents, this holds especially true with colleges.

The fact that more students than ever are attempting to get a college degree allows colleges to be aggressive in how they price their tuition. They do not have to worry about scaring off a few students with high prices, because there are plenty of others willing to pay full fare. This demand is welcomed by schools since it allow them to expand their programs, add amenities, and raise staff salaries.

Scholarships

If your student is not one of the lucky few that receives a scholarship, then they become one of the unlucky few who helps pay for what others receive. This is especially true with private colleges and universities that receive little or no funding from the government.

This becomes a perpetual problem that seems to feed on itself. As college costs rise, more students need scholarships. As larger scholarships are given, it continues to raise the price of higher education for the remaining students. This leaves more students needing scholarships to meet the skyrocketing costs, and so on.

Availability of Classes

Surprisingly, the popularity of certain majors and classes can lead overall expenses for certain students to rise. Since colleges often seek to limit their class size, especially with upper-division classes, students may not be able to complete college as fast as they’d like. Many students are being forced into completing their degree in five or more years because they simply cannot get all the classes they need within the traditional four years.

In addition to the 4-6% increase in tuition that students will experience during an additional year, it also leaves parents on the hook for another year of room and board. That cost alone can easily exceed $10,000.

Bottom Line

College costs are increasing faster than most of the other areas of life, and show no signs of slowing. For parents or students within a year or two of starting school, this can mean that your last year of college may cost 15-25% more than your first year. For parents or students that have a number of years until college begins, it means your savings plan needs to account for this gigantic increase in cost.

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