Who Should Pay For College?

By Stephen D. Simpson, CFA | June 18, 2012 AAA
Who Should Pay For College?

There's little debate that higher education in the United States is not only quite expensive, but getting more so at a rapid rate. The average total cost for one year of college is now over $21,000, while the average private school costs nearly $33,000. By comparison, the median household income is around $50,000. What's more, while household net worth fell about 40% from 2007 to 2010, the cost of higher education rose about 10%. In a normal market, high costs are supposed to reduce demand. However, higher education isn't a normal market. Not only does the federal government get involved in the form of grants, subsidized loans and other kinds of assistance, but there is a widespread viewpoint that higher education is essential to future success in life. Consequently, students have little choice but to figure out some way to pay for their education.

The First National Bank of Mom and Dad
Although the expectations of parental financial contribution to higher education experiences seem to vary along many different socio-economic classifications, the fact is that parents end up playing a major role. Setting aside merit-based scholarships, parental income and assets go a long way towards establishing a student's need for financial aid. That said, those parents may not necessarily agree with the schools' calculations regarding expected contributions. A recent survey from Legg Mason highlights how relatively affluent parents ($250,000 or more in investable assets) still believe that they should not be solely responsible for paying for college. While less than 10% of respondents believed that the student should pay for all or "most" of the cost for higher education, one-third thought that they should pay up to half. The majority believes that students should be responsible for some portion. Parents pay almost 50% of college costs according to a study by Sallie Mae and Gallup. Perhaps not surprisingly, the percentage increases as income moves higher, with high-earning parents paying more than 50% of costs and low-earning parents paying about 20%.

The Government's Role
State and federal governments play a major role in funding higher education, but it can be surprisingly difficult to put an exact dollar amount on the contributions. State schools, as the name suggests, are funded in part through state budget allocations. Need-based financial aid provided by state schools can be said to be a state-funded subsidy to those students. The federal government is also a major provider of funds for higher education. The U.S. Department of Education reports that roughly $180 billion in direct aid and tax benefits will be provided for 2012. For 2011, the federal government had a budget of nearly $36 billion for Pell grants (at a maximum of $5,550 per student), nearly $1.2 billion in work-study and over $116 billion in loan programs. This may actually underestimate the federal government's contribution, though, as grants, scholarships and other awards can be funded through other programs.

Not surprisingly, there's ample controversy about the federal government's role in paying for college. Some allege that the government's willingness to subsidize student loans has empowered academic institutions to raise their tuitions. From a straight economic perspective, this is a relevant argument. If the federal government will continue to fill the gap in funding, there's little incentive for schools not to increase tuition. There's also debate, though, about the government's proper role in education. There's an argument to be made that the government has a vested interest in promoting a well-educated citizenry that is able to produce more, earn more and pay more in taxes. Likewise, it can be argued that so long as companies and universities feel the need to "import" foreign workers and students to fill high-tech jobs and graduate programs, there is an incentive for the government to support American students filling those positions. On the other hand, federal subsidies for higher education clearly only benefits a portion of the population (those going to school), and there's an argument that doing so is basically trying to "pick winners" by subsidizing certain kinds of education and training over others.

Student, Pay for Thyself
Last and by no means least is the student. Whatever is left to pay after scholarships, grants and parental contributions comes down to the student. While most students have minimal financial assets to contribute to higher education, they are often expected to pay for higher education through work-study, unsubsidized work or student loans. Not surprisingly, there is ample argument over the "right" mix and the right amount of financial burden to place on the students. Though some argue that it is unfair to expect students to work, studies have indicated that students working up to 20 hours a week actually outperform those students who don't work by about 0.09 in GPA, reports Boston University.

Likewise, some people are now talking about student loan debt as the next "bubble" to burst. The Project On Student Debt reports of college graduates graduating in 2010, two-thirds had student loan debt and an average balance of more than $25,000. Some argue that this is unfair and leads to graduates starting off their lives under significant financial pressure. On the other side, some hold that students ought to be expected to pay for their own schooling, and that they should bear the responsibility for finding an affordable education.

The Bottom Line
There is no credible reason to believe that education costs will subside. Even if companies become more willing to hire workers without four-year degrees, the fact remains that colleges have expensive faculty and facilities that have to be paid for every year. Likewise, the federal government is so deeply involved in the financing of education that it is hard to imagine the disruption that would occur if there was a significant cut. It is likely that the higher education payment model will be a mixed one, and perhaps this is for the best. All of the parties currently paying for higher education have a vested interest. Parents want to do right by their kids and set them up for success later in life, the government needs a trained workforce and students ought to be responsible for at least some of their own educations.

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