Rising college tuition costs can be explained by supply and demand. On the supply side, well established colleges often have restricted space and must make large investments to expand their capacity. Some prestigious schools may want to keep capacity small so they can ensure that they get great teachers, small classes, and a great atmosphere for the select few who can attend. Private for profit schools have come into the market lately as many have seen an opportunity to add supply to the squeezed higher education marketplace.

When it comes to demand, it’s clear in the ever rising college attendance rates in the United States that more people are getting college degrees. An easy way to understand why the demand for college degrees is rising is to look at a college degree like an investment. Nowadays it’s not hard to find headlines like “Among millennials ages 25 to 32, earnings for college-degree holders are $17,500 greater than for those with high school diplomas only”. Even though these are just averages, many people today are relying on data like this when they decide to go to college, even without a degree in mind.

Why it makes sense to go to college if you can make $17,500 more that if you only had a high school diploma

If you are faced with the decision to go to college, you can easily calculate how much an additional $17,500 per year will amount to over 10 years after graduation. Assuming that the opportunity cost of money is 8%, in 14 years (10 years after graduation) you will have earned $86,000 more than someone who didn’t go to college on average. This does NOT count money the high school grad would have earned while you were in school, nor does it count tuition expense. Even so, if you add up the extra earnings your college degree will afford you on average you can rest assured that you will make more money than a high school grad over your lifetime… on AVERAGE.

Why the term AVERAGE is a major driving force behind rising college tuition

Even though there are many college grads that make more than the average additional salary, there are also many that don’t. There is a lot of data out there on college degrees that represent the best returns on investments after tuition, but many college students don’t make their degree choice until they are half way through.

Typically professors are very passionate about their work and it is easy to get swayed into believing you want to pursue a career based on classes you like. The problem with this is that it takes away from the focus on return on investment and instead focuses on gaining a surface level interest in something. Passion is MUCH MORE than a surface level interest. It is something that you can’t stop doing because it feels like a driving life force. For many who have not narrowed in on a passion, a flitting interest in a class or professor can be misconstrued as passion. For this reason paying lofty college tuition before having an idea of what you want to do can result in disastrous return on investment.

There are ever increasing numbers of people willing to pay high tuition for college who don’t know what their passion is yet. The problem stems from the fact that many have been told that they will make more money over their lifetime if they go. As long as the perceived value of a general college degree is higher than the tuition cost, demand will continue to push college tuition up.

When you know you’re going to have kids you can prepare for tuition inflation by starting a 529 plan

There are many great options out there for state sponsored 529 plans. 529 plans allow you to save money and earn tax free investment returns. The key with 529 plans is not making sure that you select the perfect plan, but simply that you start investing. If you want your kids to go to college, start putting whatever amount seems reasonable into a 529 plan. The sooner you do this the better as investments need time to grow.

To ensure college is worth while, help your kids find their passion before they have to make the decision to go to college

While college is a worthwhile investment for many, it’s a much better investment if it can be focused on an already discovered passion. It’s not easy to discover your passion when you’re young, but exposure to many different lines of work and fostering of interests can help a lot.

Will tuition rise over the next 20 years as quickly as it has over the past 20?

While I only speak for myself and the people I know, I think that millennials who have been trying to find jobs after the 2008 market crash will look at college degrees differently when they raise kids. I met many people in college who had not yet found their passion who got “x” or “y” degree and then ended up working at a service job afterward or even getting a completely different degree. Those people now have student loans and have been struggling in the weak economy. I imagine that when they raise kids they will emphasize the importance of knowing what you want to do before deciding to spend a lot of money on college tuition. All else equal, the experience of my generation should lead to more careful scrutiny of the benefits of college and lower overall demand for general degrees in the future. Even though this would indicate that college tuition inflation should slow, it still doesn’t hurt to start a 529 plan early to make sure that your kids will have the ability to go to college when they are ready.