Out Today: The Affordability Conundrum

For such a common topic in higher education policy, college affordability has a surprisingly murky definition. Last year, in a first attempt to create a shared understanding of what it means to offer an affordable college degree, Lumina Foundation proposed a price-based benchmark for affordability, This benchmark, known as the  “Rule of 10,” asks parents to contribute 10 percent of their discretionary income over 10 years to their child’s education, and requires students to work 10 hours per week while enrolled to help cover their living and educational costs.

In a new paper out today, along with Beth Akers of the Manhattan Institute, and Jason Delisle of AEI, we explore how much students are paying for their degrees, how they’re financing it, and how these compare to the Rule of 10.

We find that few students are paying less than the standard of affordability proposed under the Rule of 10.  Only one in three students (32%) could cover the complete cost of college by working ten hours per week, and saving ten percent of their family income for the previous ten years -- the proposed measure of affordability under the Rule of 10. Instead, students pay an average of $54,092 in total for their degree -- about $20,000 more than the rule prescribes.

As far as how students are financing those degrees, on average about 30% of the cost of a degree borrowed by students or their parents, while another 30% is funded by work earnings while enrolled in school. The remaining 40% comes from other sources, reflecting some combination of savings, other consumer debt not treated as loans, such as credit cards; or cash transfers from parents or other family members.

Of course, both the total amount paid and the financing strategies students employ vary dramatically with respect to a student’s family background, the sector and selectivity of the institution he attends, and the type of degree he pursues. For one thing, upper-income students pursue far more expensive degrees than their low-income peers, with an average total cost of $92,341 over the course of a degree. Lower-income students pay a fraction of this cost, just $38,841. Low income students face lower total costs because they tend to enroll in less expensive schools, but also because they are more likely to chose associate’s degree programs that take less time to complete (which should, in theory, result in fewer years of tuition payments) and because low-income students receive additional need-based aid from federal and other sources.

While these numbers are helpful for understanding who faces the greatest costs, and how much debt families are taking on, we propose a value-based assessment of affordability -- whether the investment pays off in the long run -- to complement the price-based benchmark -- how much it costs up front -- established by the Rule of 10.  For example, we find that students pursuing an Associate’s degree pay on average $22,039 for their degree, while those who obtain a Bachelor’s degree pay close to four times that amount. That said, four-year degrees tend to lead to higher paying jobs, which justifies this additional investment on the front end for students who would succeed in either setting.

Some students may choose to attend schools that require them to pay more than others due to this long term benefits of higher education. While it’s difficult to get to the core of why affluent students choose more expensive schools than their peers, the reasons for doing so are likely approximations of value: if the school is more selective, or has better name recognition, applicants may enroll even if it  costs more than other options. While this is an imprecise and often inaccurate process, it reflects students’ (and their parents’) desire to maximize the value of the education they receive and their willingness to pay an upfront premium to achieve these later returns. Of course, implementing a value-based framework such as this would require reliable information about the labor market returns to specific degrees at specific institutions, much of which isn’t available using current data. This limited information in higher education makes understanding affordability needlessly complex.

For more on how price, value, and choice influence the affordability equation for higher education, see our full report here.