University Costs: Two Systems, Two Chances

Christian and I were discussing paying for our childrens' educations in our various systems - Christian is through the gauntlet and has one child through the European system, while Mark has two pre-teens and is planning for the expense in the US system.  The contrasts between those situations are instructive (though depressing for me).

US system is pay-as-you-go, with some substantial financial aid for those less fortunate.  Costs range from free (with scholarship) to $10K a year (for a quality in-state university option) to $70K a year for full-freight education at a highly rated private university.

US college costs have been escalating at 6-7% a year for many years now, well above inflation.  The US has been subsidizing higher education via student loans and grants, while doing nothing to control costs, so college unsurprisingly has climbed in expense due to basic supply and demand economics.  The worst case scenario for my planning works out to roughly $1M total expense.

The real challenge for Americans, though, is that the bills for even those of limited means can be $50k-$100k, which as a relative share of wealth and income is a similar financial hill to climb.  Tuition has in effect become an indentured claim against students' potential future earnings.  The US has exacerbated these issues by adding in for-profit universities and the inability to discharge student loans through bankruptcy.

But the hidden issue is that, for less advantaged students, this represents much higher relative risk.  Cost/benefit studies have consistently shown that the high end of the US university market has a good ROI.  Even though the investment is quite high, the earning potential benefits substantially outweigh the investment.  Hence the mercenary college admissions environment that led to the Stanford scandal.

The cost benefit for middle-of-the-road institutions is far less clear.  There are many colleges charging top-tier tuitions but not providing that top-tier earnings impact.  This makes risk hard to manage for prospective inbound students.  It is easy in the American system to put oneself in deep debt and not be able to find employment afterwards to match.

In this environment, those least able to evaluate and manage the risk -- the less-well off who are not earning a scholarship, often first-generation university attendees of limited means and experience -- are bearing the brunt of bad risk outcomes.

Contrast this with the European system.  Tuitions are much more reasonable relative to average income, with heavy subsidy.  And there are alternative paths for those not wishing to go the university route, with strong vocational education options.  Those options are further subsidized by structured apprenticeship programs where the costs of education are offset by meaningful work and experience built alongside the education.  Potential costs and future income do not get too far out of sync in this setup.  The US could learn from this.

Unfortunately, US policy may not go down this route.  Despite vocational education being brought up in the 2020 campaign, we appear to be going further down the uncontrolled costs road with loan forgiveness being discussed.  This will be popular short-term, but won't do anything to address the underlying risk.  In fact education will become even more unmoored from outcomes, as bad risk decisions will be rewarded by this subsidy while good decisions - either high savings to afford an education, or rational individual choices about the cost vs. benefit balance of tuition - will be left to fend for itself.  The rich get richer, despite well-meaning subsidies.