A solution to the college-cost crisis

If you want to measure the impact of the recession, there’s no better place to look than college financial aid offices. According to a just-released survey by the National Association for College Admission Counseling, some 90% of colleges and universities reported a spike in financial aid applications during the last admissions cycle. To meet the surge in demand, schools provided financial assistance to a larger number of students, as well as boosted the amount of grants, loans and work-study.

Another bullet dodged. But the scramble to meet the needs of last year’s freshman class raises a couple of urgent questions. Will the schools be able to provide adequate aid for students applying for next year’s freshman class? And over the long run, will colleges remain affordable for middle-class students?

To answer to the first question seems to be: doubtful. Many college officials are already worried about their ability to provide sufficient financial aid.

Meanwhile, the colleges themselves are in worse shape than last year. Endowments have taken a big hit, which has left even elite schools, including Harvard and Yale, facing steep cost-cutting. State universities are also facing steep slashes in government funding. All of which means it will be even harder for colleges to meet demands for financial assistance next time around.

The current aid crisis only underscores the never-ending problem of soaring tuition costs. As Money and many other publications have frequently pointed out, colleges are jacking up tuition costs at twice the rate of inflation; education expenses have far outpaced inflation for more than two decades.

Meanwhile, most families are less prepared than ever to meet those bills. Numerous surveys have shown that few have the cash stashed away to pay the five-figure tuition amounts required by many schools. So expect aid applications to soar again.

But the recession does offer a sliver of a silver lining—the higher education establishment is finally taking a serious interest in controlling tuition costs. For one thing, research outfits like the Delta Project are taking apart college balance sheets to analyze the true drivers of price inflation—something that, amazingly, has not been done before. Armed with this type of information, college administrations and policymakers may finally make smart choices to rein in spending.

Even more promising, there’s growing competition for higher education dollars from online universities. In a recent Washington Monthly article, “College for $99 a Month,” Kevin Carey, policy director of Education Sector, discusses the booming number of students attending online classes at very low fees—a trend that threatens to disrupt the business model of traditional colleges.

Writes Carey:

“…the day is coming—sooner than people think—when a great deal of money is going to abruptly melt out of the higher education system, just as it has in scores of other industries that traffic in information that is now far cheaper and more easily accessible than it has ever been before. Much of that money will end up in the pockets of students in the form of lower prices, a boon and a necessity in a time when higher education is the key to prosperity.”

Unfortunately, that day won’t be soon enough for families caught in today's recession. And no one, even Carey, believes that high-priced Ivy League schools are facing extinction—there will always be families willing to pay up for brand name educations. Still, as a result of these market forces, hundreds of second- and third-tier colleges are already hard-pressed to justify their steep costs. And for students seeking an affordable education, that’s a promising sign of things to come.