May 17, 2012

Financial Aid versus College Costs over Time

You probably know by now that the cost of college has been going up faster than inflation for a while.   When I went to college my tuition was about 1/4 of what you'd have to pay today for that school.    Thats about 7% annual increase and close to 2.5 times the rate of inflation in the same period.  OK.. but I didn't pay full tuition then and I probably wouldn't pay full tuition today either because of financial aid.  

How has financial aid trended over time versus the cost of college?  

I got all the data I'm using today from the College Board Trends in College Pricing with data from their Excel sheet and their Trends in Student Aid along with the data in Excel.

I'm going to look at all the figures in current 2010 dollars.   So this is all inflation adjusted.   I think that makes more sense than looking at the actual dollar figures since $1000 in 1980 was a lot more money than it is in 2012.   But you can still see from the charts below that college costs are rising even after accounting for inflation. 

I'm also only looking at public four year universities.   Costs and aid for private or 2 year schools are different.
Financial aid is mostly need based so the amount of aid available to you will depend on your income level and family assets.   I'm looking at just the average financial aid amount for all students, but this will differ greatly if you're low income versus high income.  If you're in the higher income levels then the amount of financial aid won't really impact you, but most families do get some financial aid so I think it makes sense to consider it in general.

First lets compare the cost of tuition, tuition + room and board and the average financial aid per student :

The green line is the total tuition and room and board cost so thats the full sticker price for college.   Purple line is just the tuition cost.   The blue line is the average financial aid per student.  

As you can see the financial aid at public universities is keeping pace with the cost of college after adjusting both for inflation.

After figuring in the average financial aid given to students we can figure out the actual net cost of college.   An individual student doesn't typically pay the full tuition rate but they instead pay the difference of the tuition less their aid award.   I think this net cost of college is a better indicator of college affordability in general.  

Here we can see that the net cost of college after aid is not gone up in the same way as college costs have over the years.    In fact today after taking account of inflation the net cost at a public university is actually lower for an average student than it was when I went to college.

Of course theres a major 'gotcha' in that last statement because a lot of the financial aid given to students is in the form of student loans.   So are we just shifting more of the cost of college into student loans?

Lets look at the average amount of loan aid versus grant aid over time :

You can see there that back in the 70's the grant awards were quite a bit larger than the student loan averages.   But since the early 1980's the loans and grants have been pretty equal and both grown at equal pace.    If we look at the % of total aid that is from student loans then we can see that portion of aid in form of loans is not changing drastically :

Since the early 80's the financial aid has been made of 40-50% loans.  

Students of course have to repay the loans.   I certainly wouldn't consider that 'free' money so we should account for the cost of the loans when looking at the students real costs.  I'll figure the 'real' cost of college by taking the tuition plus room and board then subtracting the average financial aid to get the net cost then adding back the average loan award.   The real cost is then equivalent to the full retail tuition and room and board minus the free forms of financial aid such as grants and tax benefits.

The purple line is the 'real cost' of college.    This is what an average student actually ends up paying either out of pocket or via loans.    As you can see in the chart the real cost was fairly flat from the mid 80's up until about 2000 when it went from $6033 to $6269 (in inflation adjusted numbers).   But in the past 12 years the real cost has risen considerably.  From 2000 to 2011 the real cost of college has gone up 3.8% a year even after figuring in inflation.

Again, as a reminder theres several details about this analysis:  I'm looking at inflation adjusted dollars, this is only for public 4 year universities and of course the amount of financial aid varies considerably based on your income and financial situation.  Furthermore the situation varies 50 different ways based on how the 50 individual states fund their universities and how generous they are with state based financial aid.


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