May 27, 2023 by Ethan Gilbert
Recently, a client told me she had read that private college would cost $250,000/year for children born today. Intuitively that seems crazy but where was the author getting that number and will they be correct?
From 1990 to 2020 total inflation in the U.S. averaged 2.5%. Over the same period, education inflation averaged 5.8% - more than double broad inflation! The 2023-2024 cost of nearby private colleges (Syracuse University, Cornell, University of Rochester, Colgate) all fall between $85,000 and $89,000. If history repeats itself, in 18 years a freshman at SU can expect to pay $87,000 x 1.058^18 or $240,000. It will increase to $284,000 by the time they are a senior and will average $262,000 over their four years!
My goodness, the author is right… except they aren’t. That’s because history likely won’t repeat itself and is already trending against the author’s assumptions. If education inflation continued to outpace ordinary inflation at that rate, eventually college costs would make up the entire economy. You also hear about this with healthcare. Healthcare inflation has greatly outpaced regular inflation over the last 60 years and has grown as a percentage of the economy. In 1960, 5% of the U.S. GDP was spent on healthcare. In 2021 it was 18.3%. Will that growth continue? Probably not. The following chart breaks down the components of inflation.
In the 1980s, education inflation and medical inflation were extremely high. They have been in a steady decline since then and over the last 3.25 years have averaged substantially below inflation seen in the broader economy. Will that trend continue? We don’t know but it’s highly unlikely education and medical inflation will continue to outpace broad inflation like they have in recent memory. It's still a good idea to plan on college being expensive and saving in a 529 is never a bad idea, but don't worry about spending $1,000,000/kid in 20 years.