The Costs of Higher Education (for Students) vs. Economic Decision-Making

In another article, “The Value of Higher Education (for Students),” I wrote about higher education’s value. This article is the complement, addressing the costs of higher education.

In one sense, higher education’s cost is straightforward:

Tuition + fees + room & board + books + other living expenses

And the ways that students can pay these costs are well-defined:

Cash + grants + scholarships + subsidized loans + unsubsidized loans + other aid (e.g. work study)

OK–now let me step back. How do you decide whether something is worth buying? In economics, there is a concept of “bounded rationality,” which basically means that you act as rationally as you can given the data you have available. With that caveat, people ought to weigh the cost of something vs. the (perceived) value to them to determine whether to buy something.

There are several big challenges in applying economic decision-making to “traditional” prospective college students:

  • The economic value of a “gift” to the purchaser vs. the recipient. If I purchase a $30 book for someone for their birthday, it’s worth that to me to have something nice to give. However, the recipient might never have spent more than $5 of their own money for the same gift. In the same way, parents or other people paying for higher education may be willing to pay more than the student would pay if it were their money.
  • Traditional college students are coming out of high school and do not have (much) experience managing money. They often have not had to pay bills, and they do not understand salaries and living expenses. This is to say, they do not necessarily understand where your money would go if you make $15,000/yr vs. $50,000/yr.
  • Traditional college students do not necessarily understand how loans work. When I talk to a loan person and they say “oh, it would just be another $10/month in your 30-year mortgage to borrow $2,000 now,” I have the experience to know they’re talking about me eventually paying $3600 nominal dollars. (For that matter I know what a nominal dollar is.)
  • Traditional college students¬†realistically have no idea what their future income is going to be or what effect college will have on their salary (although they can see historical studies and averages).
  • As described in the “value” post, there are many possible dimensions of value for the student, and they may focus on one over another when weighing costs (e.g. the student may consider immediate values such as the social activities or gym facilities vs. the long-term values such as the alumni network)

These factors distort the “price” of higher education because they make it more difficult for prospective students to make rational, informed decisions about the cost of college.