The opportunity costs of attending college include the:

Students calculate the opportunity cost for an activity that is very relevant to their lives—attending class. Explicit costs of attending school for one semester are identified and then reduced to a per class amount. Identification of the implicit cost entails listing several alternatives and estimating a per class amount for the alternative with the highest value. The opportunity cost of attending one class is the sum of the explicit and implicit costs. Not only do students benefit from a practical application of an important economic concept, they also become more aware of the importance of attending class!

Students will realize that calculating the opportunity cost of choices made includes both the explicit dollar amounts spent and the implicit value of foregone wages.

Any course that introduces the concept of opportunity cost. This short demonstration takes up to 30 minutes to complete. Students need not have any previous knowledge of economics or opportunity cost.

PDF version of this page for faculty use in the classroom -- this would include all notes. (LINK TO PDF) Mark, I'm not sure what goes in here?

In a recent class that met MWF for one hour during a sixteen-week semester, the calculated opportunity cost of attending one class ranged from $40 - $80. Lower costs were seen for students who live at home, close to campus, and for those who estimated fairly low wages. The median opportunity cost of attending one class was $56.

Student handout with instructions for calculating the opportunity cost of attending one class.

Opportunity Cost Handout (Microsoft Word 2007 (.docx) 14kB Jun5 10)

This activity follows the steps of an Interactive Lecture Demonstration (LINK to HOW TO PAGE) 1. Prediction The instructor starts with a general discussion on the costs of going to school. Students are asked to predict how much it costs them to attend one class. Students can discuss prediction with other students in the class. The instructor asks for the predictions but does not comment on them. 2. Experience

Students, working individually or in small groups, follow instructions in the handout to estimate the explicit, implicit and total opportunity costs of attending one class.

In order to save time, the instructor might give students the per credit hour tuition and fees total and/or the number of times the class the class meets during the semester. Otherwise, students usually have a good idea of how much their total bill was and most will have calendars on their cell phones. 3. Reflection

Students report their costs to the rest of the class. The instructor leads students in a discussion of how much higher the calculated costs are compared to the predicted costs. The instructor can point out that the relatively high opportunity cost of attending one class also implies a high cost of deciding not to attend class. Since each student will have a different opportunity cost, the class could also discuss why this variation occurs, including differences in experience and training.

Students may submit their completed cost calculations for instructor review. The activity could also be graded. The instructor can also ascertain student understanding through their contributions to the reflective class discussion.

Instructors who use pre-tests and post-tests could include these or similar questions:

• How are opportunity costs measured in economics?
• Suppose you need to see the dentist and the appointment will take two hours. The dentist will charge $100 and you make $10 an hour at work. What is the explicit cost of this appointment? What is the implict cost? What is the total opportunity cost?
• What is the difference between the way an accountant measures costs and the way an economist measures costs?

Jaison R. Abel and Richard Deitz

First of two posts

College is much more expensive than it used to be. Tuition for a bachelor’s degree has more than tripled from an (inflation-adjusted) average of about $5,000 per year in the 1970s to around $18,000 today. For many parents and prospective students, this high and rising tuition has raised concerns about whether getting a college degree is still worth it—a question we addressed in a 2014 study. In this post, we update that study, estimating the cost of college in terms of both out-of-pocket expenses, like tuition, and opportunity costs, the wages one gives up to attend school. We find that the cost of college has increased sharply over the past several years, though tuition increases are not the primary driver. Rather, opportunity costs have increased substantially as the wages of those without a college degree have climbed due to a strong labor market. In a follow-up post, we will consider whether college is still “worth it” by weighing the benefits relative to the costs to estimate the return to a college degree.

Tuition Is Only Part of the Cost of a College Degree

The economic cost of college has two components. The first is out‑of‑pocket costs, which are expenses associated with attending college that wouldn’t otherwise be incurred. Tuition and fees are out-of-pocket costs, but room and board aren’t since they need to be paid regardless of whether one is in school. The second component is opportunity cost, which represents the value of what someone must give up in order to attend college. For most people, the opportunity cost of a college education is equivalent to the wages that could have been earned by working instead of going to school. It turns out that the opportunity cost of college is much more substantial than out-of-pocket costs, though both have been climbing in recent years.

Out-of-Pocket Costs

To measure the out-of-pocket cost of college, we utilize data on the average tuition and fees at four-year institutions, published by the College Board. These figures represent the “sticker price” of attending college. However, because of financial aid, many students, if not most, do not actually pay this price. The “net price” subtracts funds students receive that need not be paid back, including grants, tuition concessions, and tax benefits. Student loans are essentially a financing tool used as a way to pay for college, and so they are not considered a cost of college (interest might be considered a cost, but interest rates on student loans are frequently subsidized at below-market levels and interest is often deferred while a student is attending school). All in all, the net price is more representative of the out-of-pocket expenses paid by the average student, and tends to be less than half of the sticker price.

In the chart below, we plot the average sticker price and net price for a bachelor’s degree over time. The average sticker price increased from about $5,000 per year in the 1970s to around $18,000 today. However, net prices are much lower due to financial aid, and have tended to increase a bit more slowly than sticker prices. On average, the net price of college has increased from around $2,300 in the 1970s to about $8,000 today. Thus, if a student completed a bachelor’s degree in four years, he or she could expect to pay an average of roughly $32,000 out of pocket.

Opportunity Costs

While the high and rising cost of college tuition receives considerable attention, out-of-pocket expenses prove to be only a small part of the total cost of college once opportunity costs are considered. Attending college on a full-time basis typically requires delaying entry into the labor market and forgoing wages that would be available to those with a high school education. As is common, we use the average wages earned by a high school graduate during the first four years of employment as a proxy for the opportunity cost of college, though this provides only a rough estimate since there may be inherent differences between people who go to college and those who don’t.

Using data on wages and an approach outlined in our 2014 study, we estimate this opportunity cost, shown in the chart below. Someone pursuing a bachelor’s degree could expect to forgo more than $120,000 in wages—almost four times net tuition costs. This opportunity cost has changed over time as the wages of high school graduates have fluctuated. Notably, opportunity costs fell following the Great Recession as the wages of young workers with only a high school diploma declined, but picked up markedly after 2012 as the labor market strengthened and wages increased.

Total Costs

Adding out-of-pocket expenses and opportunity costs yields an estimate of the total economic cost of a bachelor’s degree, shown in the chart above. Looking at the pattern over time, costs were flat or declining from the early 1970s through the mid-1990s, as rising tuition was offset by falling opportunity costs during this period, which were declining as the wages of high school graduates fell. Despite ongoing tuition hikes, rising costs were not really apparent until the late 1990s. By then, the wages of high school graduates had begun to climb, increasing opportunity costs and total costs until the early 2000s. Costs fell again shortly after the Great Recession before resuming their upward march in 2012. Over the past several years, rising tuition has combined with increasing opportunity costs to push up the total cost of college from less than $120,000 in 2011 to more than $150,000 in 2018—a roughly 30 percent increase in just seven years. Still, while the cost of a bachelor’s degree has in fact climbed, it is only about 10 percent higher than it was in the early 1970s.

Cost Is Only One Side of the Equation

It may be tempting to conclude that the high and rising cost of college means that obtaining a bachelor’s degree is no longer a good investment. However, such a conclusion would be premature without first considering the payoff. Our next post weighs the economic benefits relative to the costs to estimate the return to a college degree.

Disclaimer

The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

How to cite this blog post:

Jaison R. Abel and Richard Deitz, “The Cost of College Continues to Climb,” Federal Reserve Bank of New York Liberty Street Economics (blog), June 3, 2019, https://libertystreeteconomics.newyorkfed.org/2019/06/the-cost-of-college-continues-to-climb.html.