College costs revised higher than in December (+1.3%) but outpaced by general inflation
The Bureau of Labor Statistics (BLS) latest data release on consumer inflation last week showed that the general inflation index for the US economy as a whole increased at an annual rate of 7.6% while the component for college tuition and fees rose 1.9%, 5.7% below the general rate.* College inflation is up compared to our previous report from December, which had reported college inflation of 1.3%, but this represents a correction of earlier numbers. This uptick represents a measurement revision by the BLS – the real world hasn’t changed but we see it more clearly now. The 1.9% increase over the last twelve months occurred entirely at the beginning of the school year, in September and October, in line with the academic calendar, as one would expect.
Moody’s outlook for 2022, issued late last year, continues to look very reasonable: “Moody’s expects median net tuition revenue to rise 2.9% in the 2022 fiscal year at private universities and increase 1% at public universities.” (Higher Ed Dive)
While college inflation rose a bit, general inflation went up even faster, causing the divergence between the two to grow. The size of this divergence may be unprecedented; certainly nothing like it has been seen in half a century.
Colleges should continue to enjoy financial stability
How will the 2021/22 inflation results affect the colleges’ financial position? Let’s distinguish between impacts on college revenues and expenses and factor in government appropriations:
- Revenues: Even in an environment with rapidly rising prices, including housing, and buoyant financial markets boosting the wealth of many families, colleges did not raise prices much. There are two ways of looking at this:
- Colleges price based on EFC: Need-based formulas used data from 2019 tax filings for this year’s allocation of aid. 2019 was a time of low inflation.
- Colleges price based on supply & demand (the CTAS view): in the spring of 2021, when most of the current academic year’s prices were set, the inflationary turmoil was relatively restrained. CPI had risen 4% year-over-year as of last April and many were writing it off as a transitory event due to subside soon. No inflationary “mindset” – a widespeead expectation of ongoing future price increases — was yet established. Moreover, long-standing price pressures and continuing weak enrollment put a brake on tuition increases. All of this led colleges and students to take a restrained approach to price increases.
- Expenses: Rising costs for things like food and energy will put some pressure on spending by colleges, but the bulk of higher ed’s costs are people – their compensation and benefits. The impact from slow tuition growth on compensation by itself would presumably be below-inflation salary increases and maybe some downsizing.
- But cost pressures have been counteracted by rising state appropriations to higher ed. The State Higher Education Finance Grapevine report calculates that state funding is up by 8.5% in the 2022 fiscal year. While this funding of course supports other programs besides undergraduate education, total state appropriations come to roughly 3/4 of net undergrad tuition revenue, offsetting many of the issues stemming from slow tuition growth. The 8.5% rise excludes the $75 billion in Federal HEERF funds allocated as part of the COVID stabilization package, a stimulus not included in the Grapevine report. The increased outlays from both state and federal sources have provided a big boost to higher education and an added cushion in the face of general inflation and the costs of managing through the pandemic.
For these reasons, institutions should continue to enjoy financial stability, despite long-term enrollment and pricing headwinds.
2022/23 Price setting
Price setting and aid decisions for the upcoming 22/23 academic year in full swing right now are likely quite sensitive to how rising prices and salaries balance out and whether households feel squeezed. Particularly important is the way colleges’ prime business segment, students from families with higher ed degrees, feel. Widely-reported worker shortages are mainly occurring in lower-compensated service jobs while white collar and professional jobs are showing pretty typical pre-pandemic wage gains. Except that these wage gains are now trailing inflation by 3-4% annually.
- An interesting Penn Wharton analysis of inflation’s impact on wages and spending by income level teases out how, in 2021, lower income households saw nice percentage gains in pay while higher income households saw wages rising slower than inflation.
- But did this correspond to reduced buying power? The Penn Wharton group calculated changes in affordability for a “spending bundle”, a set of goods and services a household would typically buy, in absolute dollars. They found higher income household income gains in absolute dollars outpaced rising costs while lower income ones did not, as shown in the chart below. (A product of percentages. E.g. lower income workers saw nice percentage gains, but from a low income base, meaning small raises in absolute dollar terms.)
Penn Wharton’s analysis reveals contradictory trends, although it does clarify the different factors driving household finances. With the Ukraine invasion rattling global commerce, inflation will probably remain high, placing the drivers of higher ed pricing and inflation in uncharted territory. At the end of this year, the BLS will finalize its calculations for August, September and October, the months when the bulk of college inflation occurs. Only then will we know how this plays out.
Read this post and others at our CTAS Higher Ed Business blog on Substack.