College tuition vs. the stock market

Is college getting less affordable over time?

That’s certainly conventional wisdom. A Pew Research Center survey in 2011 found that 75% of adults believe “college is too expensive for most Americans to afford”. That same study found that economics is the single biggest reason many young adults choose not to go to college at all.

Of course, most parents and students know this, and they start preparing financially for the possibility of college years beforehand by saving money and investing it in the stock market. But does that work? How does the growth of college costs really match up with the typical growth of stock investments?

Here’s what it looks like over the past 30 years.


Sources: S+P 500 Real Price tables, “Trends In College Pricing” report from the College Board. All figures are inflation-adjusted, and indexed to the beginning year (1983).

Hey, that’s great! Over the past generation, the money you invested in the S+P 500 would’ve grown faster than the rise in college costs (tuition plus fees) at both private and public institutions. (By the way, the pattern for two-year schools looks very similar to that of four-year private schools.)

But before you pop open your nice bottle of champagne… here’s the same chart for just the past 15 years:


Well, that’s a big ball of suck. Both public and private college costs have continued to climb steadily throughout the 2000’s, while the stock market has barely treaded water. Public schools obviously started at lower cost levels than private schools, but that gap is narrowing somewhat.

So yes, college is getting less affordable over time, even after adjusting for inflation and your money growing. For those of us with young kids (or thinking of having kids), we’re left with a few choices:

  1. Push for legislative changes to cap college tuition cost increases, particularly at state-funded schools, and to continue or even expand tax incentives for college enrollment.
  2. Encourage donors and external funding sources to provide more scholarships and grants for students. And research the hell out of existing sources.
  3. Hope the stock market has a decade-long upswing. It’s happened before (see the mid- to late-1990’s), so at least there’s precedent.
  4. Somehow find ways to save up a lot more money in the years ahead.
  5. Find occupations that don’t require a college education. Millions of Americans are doing very well without a college degree. Unfortunately, the overall number of non-degree jobs available continues to shrink, which leads to higher long-term unemployment for that segment, as well as other potential disadvantages.
  6. If all else fails, consider creative means of supplemental income generation.

5 Comments Add yours

  1. Mike Rodbell says:

    Div, nice article. As someone now looking at college costs in a rear view mirror (thank heavens, our youngest is just now finishing college), I would also encourage you to not only look at the market trends, but also the college costs against wages and general cost of living indices. As you’ve noted, the stock market is a gamble, and would assume that you could afford the rough equivalent of today’s college costs if you’re to assume that you could afford the projected costs.

    Unfortunately, another side effect of these costs are further stratification of society. Fewer and fewer of those that have can afford college, leaving opportunities behind. There’s been something of a groundswell of competition in education, although the cheaper alternatives haven’t come anywhere near the pedigree of the traditional/well regarded educational institutions.

    Interesting stuff to think about. Thanks for posting!


    1. divbhansali says:

      Hi Mike, thanks for the feedback. That’s a great point about wages, since obviously that determines the ability of families to save / invest for future college costs. I just did some quick research and it looks like real household income in the US was basically unchanged from 1996-2011, the most recent 15-year period for which they have data. (Sourced from here.) So in “real” affordability terms, the rise of college costs has been even more severe than I portrayed above.

      1. Mike Rodbell says:

        Another interesting angle (I had a chat with one of my employees about this), While I certainly value education, I wonder how the actual benefits people are obtaining from having either the knowledge, or degree/certification line up to the college expenses with generalized returns. Cynicism could abound.

  2. Dhananjay Agarwal says:

    Hi Div,

    Interesting topic as I have two daughters, and have been thinking about saving for their college education. While your recommendation on what to do are good, what about the disruptive effect of online education (low cost or free) on tuition costs? I am banking on that a little in my savings plan.

    Although top universities are making their college content public, they don’t award their branded degree. I am hoping this area will change. Either these top colleges will award transfer credits for knowledge gained freely or from low cost online courses, and one could get a Harvard undergraduate in 2 years instead of 4. This would cut the tuition costs by 50%. There is also a possibility that another standardized body like the SAT will come up and test students on specific subject matter area and broader areas like reasoning, aptitude and comprehension and provide a barometer that employers will accept.

    While the demand for few top ivy-leagues colleges may counter the pricing pressures from the Internet, there will be some good colleges that will exploit the opportunity. I am hoping that the increase in low cost alternatives available to college ready students 15 years out will put a cap on rising tuition costs, and could even bring it down. So we need to save as much as we can, but I am hoping that tuition costs will not increase at 8-10% every year in the future. Also, between savings for retirement and kids education, I recommend saving for retirement first as the kids can always get a loan.


    1. divbhansali says:

      Hi Dhananjay, thanks for your comment. I think you’re right that an increasing number of high-quality schools are going to find ways to differentiate themselves from the pack by either reducing tuition for most students, or by offering the chance to earn some credits from online / secondary education alternatives. It probably won’t happen with the Ivys – they seem to think any changes to their business or academic models would diminish their brand, which I think is ridiculous – but other highly rated schools could really benefit from this sort of fresh thinking.

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