Tuition Increases: The Untold Story

Perhaps the most interesting information that I gathered from my analysis is some basic data on the inflation of college tuition. According to FinAid.com, average college tuition rates historically increase at double the rate of inflation. Even though the worsening economy has required schools to increase their tuition in higher proportions to inflation (see the Business Week article for 2009 rates), the rate increases are still modest (4.4% in 2009 for private colleges). Compare that with The King's College, which increased its tuition rates 9.8% from 2006-2007, 10% from 2007-2008 and 11% from 2008-2009.

Admittedly, I have limited data to analyze (if anyone has tuition rates from earlier years, I would love to see them), yet regardless of data, there are significant problems with this policy. In economic terms, The King's College (and other schools with tuition inflation) is at least guilty of misinformation and at the worst, guilty of cross-subsidizing (charging one group of consumers more than other consumers for the same product). Let me show you what I mean with some examples.

1) Existing student scholarships do not increase along with tuition inflation, so students receive a smaller ratio of scholarships to tuition. A student with a $10K scholarship at a school that costs $20K receives scholarship funds at a 1:2 ratio, or half of his tuition. If tuition increases the next year by 10%, tuition will then cost $22K while the scholarship remains at $10K, and the student's ratio decreases to 5:11, or 45% of his tuition.

2) 4-year cost estimates of college costs rarely take tuition inflation into account, unfairly saddling students with more debt than they anticipate. A student that expects to pay $25,000 annually for 4 years ($100K in total) would actually pay $116K total with 10% annual increases (25K + 27.5K + 30K + 33.3K).

3) The admissions department occasionally increases the annual scholarship cap to encourage new students to attend. For example, the Founder's Scholarship used to be the highest-paying scholarship at $10K annually, but new students can now receive up to $17K annually, depending on their grades + test scores. One could even say that the school can afford to increase scholarships through the process of tuition inflation - by charging existing students with one hand while reducing costs for new students with the other. This is the definition of a cross-subsidy.

By increasing tuition substantially each year, TKC imposes a fee upon current students to subsidize the increased operating costs of having more students, offering more programs, etc. This way, they keep initial tuition rates lower to appeal to potential high school students. If a college has 300 students paying $25K annually, and tuition increases 10% each year, that represents an extra $750,000 in revenue for the school (the same as 30 new students @ $25K). Remember that 30 students is roughly equal to 45% of incoming first-time freshmen in 2008 (source) -- and that the money received through the 10% increase is essentially "free" of additional costs incurred by providing services to new students. Who says no to free money?

Now does this system somehow make King's worse than other schools? Well, only as a matter of degree. Do any schools adjust their scholarship disbursements to correspond with tuition inflation, or make an effort to inform their consumers (students) about the annual increases? Yet even though many schools have this same problem, few increase tuition by 10% every year. The King's College administration should carefully evaluate this policy and take steps to mitigate the unfortunate consequences for students.