Raising the 2021 Net Cost forecast for undergraduate programs based on improving economic data
- Personal income metrics important to higher education undergraduate pricing have begun to recover from COVID lows
- These improving economic drivers of college pricing imply a projected 1% increase in student spend on undergraduate programs from 2020 to 2021
- This forecast uses predictive modeling relying on granular college data and Federal Reserve income metrics
- Upside risks
- The outlook is based on wage & salary personal income data but the large government stimulus may further add to family spending power and lead to higher prices
- Application surges at certain colleges partly driven by test optional policies may cause an accordion effect benefiting schools at all levels of selectivity
- Higher income brackets have done relatively well during the COVID Recession so the prime undergraduate consumer base is in better shape than national averages imply
- Downside risks
- Consumer confidence is fragile and may limit spending
- The DoJ NACAC settlement has receded in memory over the last year but it may exert downward pressure on pricing in a normalizing environment
- Public pressure generated by sparse tuition rebates connected to virtual classroom time may result in institutional pricing restraint
Economic drivers: Federal Reserve measures of personal and family income have served as drivers of undergraduate program pricing over the last decade. In particular, the US Census metric for Family Income for families with a holder of a Bachelor’s degree (F18 from the Current Population Survey, head of household older than 25, grouped by educational attainment) has shown a high level of correlation with pricing and passed significance tests. Logically, this group would be the higher ed’s prime consumer base and its income links tightly with college pricing. Moreover, multiple other related US Census, Bureau of Economic Advisors and Fed family and personal income metrics have shown solid correlation and significance with college pricing over the last decade. While one such correlation may be a fluke, the linkage of a group of economic metrics with college costs makes it likely that a strong relationship exists and that it can be used to understand higher ed industry dynamics and guide pricing. Stepping away from the numbers, the insight here is that families and individuals decide how much to spend on college not with complex and diverse statutory asset and income tests but by the simplest financial number that they have at hand: their income.
How to measure college pricing: If certain economic metrics drive college pricing, then how to measure the average industry price of an undergraduate degree? CTAS has introduced the Net Cost metric to improve on the flawed Net Price and Cost of Attendance metrics and help solve this problem. Net Cost is a measure of student spending on undergraduate programs which shows costs as they are presented in commercial transactions outside of higher education. It represents a full-time student’s cost of attending college including: tuition, room & board, fees and estimates of supplies less institutional aid of all kinds (including need-based and merit), and less federal and state/local aid. Loans and other repayable amounts are excluded and do not reduce the cost. Total average net cost covers US residents only, not international students, and averages a college’s in- and out-of-state costs in proportion to the student body’s residence status. Broadening the Net Price metric to take into account more students, Net cost differs from Net Price by being more comprehensive and covering all first-year students, including the over 40% not included in Net Price calculations. Please note again that Net Cost is a measure of student spending so it is not equivalent to college tuition and board revenues and that, as a consequence, averages such as the ones used here contain “mix” impacts from students’ changing preferences for different schools and types of programs.
Delays in reporting: The delay in the release of information presents another roadblock in understanding where college pricing is and where it is going. Net Cost relies partly on IPEDS information which currently lags by several years. The best economic metric for understanding college pricing, Family Income (F18), is also released with a delay; 2019 figures were only recently published and those for the turbulent year of 2020 will likely not appear until later in 2021. But Personal Income data becomes available in a timely fashion with December wage & income data just released by the St Louis Fed. Personal Income has a solid relationship with college pricing in the 2010s though not as strong a one as Family Income. This forecast is reliant on Personal Income updates. Like COVID tests, you can pick slow and more accurate, or quicker and less accurate. This is the quick type, but we think it provides an important update for the industry in the wake of forecasts such as Moody’s showing pessimistic expectations for 2021. (The Moody’s outlook encompasses a more comprehensive view of institutional revenue streams. This forecast covers only undergrad tuition and residential revenues.)
The discussion here covers industry averages and general trends. Please visit the CTAS site for detailed college-by-college pricing predictions extended from these general assumptions.
Though the economic devastation COVID has inflicted on certain industries continues to be severe, US Personal Income measures are displaying a solid recovery from mid-year depths.
Federal Reserve Compensation of Employees, Received: Wage and Salary Disbursements, Billions of Dollars, Monthly, Seasonally Adjusted Annual Rate through December 2020.
The most recent December results represent a +2.3% change from December 2019 and points to a broader economic rebound:
While there were fears last year of a long-term downturn and dislocation, recent data suggests a rapidly rebounding economy, although with the growth distributed unevenly. This supports optimism for 2021 college pricing.
Average Net Cost history
Average Net Cost metric can be derived from actual higher ed reporting up through 2018/19:
But it must be estimated for 2019 and 2020. The estimate below includes assumptions about enrollment flux, both in total undergrad counts and between colleges, as well as closures of certain schools and statistical corrections.
In terms of income, 2019 was perhaps the best year economically for US workers in this century, with 8.8% income growth for the median family with at least one Bachelor’s degree holder over the age of 25 (but without grad degrees), to $121,219. The broad set of US families enjoyed a similar increase of 8.7% and other subcategories also notched excellent gains. One risk in the 2019 estimate is that the Family Income growth levels (8-9%) are far above the Fed’s reported personal wage income growth for 2019, which ranged from 4-6% year-over-year on a monthly basis. The Family Income metric is extracted from a US Census Current Population Survey (CPS), a detailled effort matching survey participants across years; it represents a high-level effort to avoid sampling distortions and missing information. Despite its sophistication, the possibility exists that CPS overstated income gains by 2-3% if the Fed reporting proves ultimately more accurate. We opted to stick with the CPS F18 index based on a pattern of sturdy historical correlations and accepted that later CPS results might correct for any 2019 imbalances. The surge in 2019 family income implies a record Average Net Cost of $21,872 covering all US undergraduate programs.
The 2020 enrollment cycle came in the midst of a COVID outbreak and the maximum level of unemployment seen in a century. Using a composite of Personal Income metrics from the Fed, we arrived at a negative 0.9% impact on college prices. One technical item worth noting is that Personal Income variability is greater than the Family Income metric (which makes sense: individual incomes are more likely to fluctuate than family incomes, often based on multiple jobs). Because we are targeting an estimate of Family Income, the immediately available Personal Income metrics need to be dampened to arrive at Family Income using historical patterns.
Fairly significant enrollment impacts also led to a further decrease in 2020 Average Net Cost. One important assumption is a COVID-influenced decreased propensity to attend out-of-state schools: a 1% decrease in out-of-state enrollment leads to at minimum a $2 billion reduction of overall higher ed tuition revenues just by itself and of course a reduction in Average Net Cost, which fell to $21,358, 2% below the 2019 estimated figure.
Given the uncertainty connected to estimating 2019 and 2020 – neither of these were normal enrollment cycles – it is best to stress the year-over-year % change implied by the recent Federal Reserve Personal Income results: economic metrics currently indicate colleges should be able to raise their average pricing by 1% in 2021 v 2020.
Average Net Cost for all US undergraduate programs, FTE weightedThe Fed Personal Income metrics point to a 0.8% year-on-year increase, with changes in enrollment projections pushing the average up to 1.1%. We can round it to +1% and, given the level of uncertainty, be satisfied.
A Positive Outlook
- The 2019 income boomlet supports a very positive view of higher ed’s revenue base entering the 2020s. Throughout the 2010s, Average Net Cost tracked at ~21.5% of the median Family Income F18 metric we have been stressing, to the point where we can view this level as the normal budget the prime US consumer base for higher ed assigned to college post-Great Recession. The 2019 blow out has pushed this level down significantly and greatly increased college affordability. The caveat is that these are estimates at this point. Even the US Census numbers provoke questions, so this all needs to be confirmed as more data rolls in. BUT if the income statistics prove durable and 2019 and 2020 college pricing comes in near where we expect, higher ed will either have improved pricing power or mitigated public complaints about college affordability – or both.
- We hold the position that the Enrollment Cliff is a myth. Colleges’ student base will be a very constructive factor in maintaining and building revenues throughout the next decade.
- The positive outlook presented here will most help private non-profits, the swing price setters in economic downturns. In the Great Recession a decade ago, private colleges, even very selective ones, steeply reduced their pricing in response to mild declines in family income. A swift recovery from COVID will allow private schools to recover their economics fairly quickly.
- To end with a qualification: a second wave of recession and unemployment or an unchecked resurgence of COVID-19 will scramble all of this. We intend to revisit this forecast at the end of the 1st quarter to refine and update it.
You can also read this post at CTAS Higher Ed Business.