Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your College Tuition
Transcript
- Lucas: So here's a number that stopped me this week. According to the latest CPI release from May 2026, college tuition and fees are up 4.2 percent year-over-year. Core CPI, which strips out food and energy, is running at around 3.3 percent. So tuition is meaningfully outpacing the basket of everything else. Luna: That's frustrating because it's not like we're in a hot economy right now. The Fed funds rate is sitting at 3.63 percent, which is still restrictive by historical standards. Lucas: Right, and the 10-year breakeven inflation rate—basically the market's expectation for average inflation over the next decade—is flat at 2.23 percent. So the bond market isn't betting on a big inflation breakout. Yet tuition keeps climbing. Luna: So what's driving it this time? In the 80s and 90s you could blame the 'cost disease' theory—the idea that universities have to compete for faculty and facilities, and they can't automate teaching the way other industries automate production. Lucas: That's still part of it. But there's a more immediate factor today: state funding. Since the 2008 recession, many states have never fully restored per-student funding to public universities. The College Board data shows that even after adjusting for inflation, state support per student is still about 15 percent below where it was in 2008. Luna: So the burden shifts to families. Tuition at public four-year schools has more than doubled in real terms since the early 2000s. Lucas: And the administrative side has grown a lot too. Between 2000 and 2020, the number of administrators per student at US colleges roughly doubled. That's not all bad—compliance, mental health services, career counseling—but it adds cost without directly generating revenue. Luna: What about the idea that universities are just pricing what the market will bear? With federal student loans so readily available, they can keep raising tuition because students can borrow. Lucas: There's definitely a version of that argument. The Bennett hypothesis—named after former Education Secretary William Bennett—says that increases in federal financial aid enable colleges to raise tuition. And there's some empirical support: a 2020 study in the Journal of Human Resources found that each dollar of additional Pell Grant aid was associated with a roughly 50-cent increase in tuition at private colleges. Luna: So the aid ends up fueling inflation. That's perverse. Lucas: It is. But I want to be careful not to oversimplify. The data isn't uniform. Public universities in states that cut funding the most saw the steepest tuition increases. Meanwhile, some elite private universities have been able to moderate increases because their endowments are so large. For example, Harvard and Yale have effectively been tuition-free for families earning under a certain threshold. Luna: But that's not the experience for most families. The average annual in-state tuition at a public four-year school is now over $11,000. Out-of-state is closer to $28,000. And with room and board, you're looking at $25,000 to $35,000 per year. Lucas: And that's before the 4.2 percent inflation. So if you have a freshman starting this fall, that cost is going up faster than the general price level. The question is: what can you do about it? Luna: I mean, locking in tuition at a public university is one option. Some states offer guaranteed tuition plans where you pay a fixed rate for four years. That hedges against inflation. Lucas: Exactly. Texas, Florida, and Illinois are among the states that have prepaid tuition plans as part of their 529 programs. But those are less common than they used to be. Another option is to seriously consider the net price—not the sticker price. The College Board reports that the average net price at public four-year schools is actually around $15,000, because of grants and scholarships. Luna: And then there's the borrowing piece. If you do take out loans, the federal Direct PLUS loan rate for 2025-2026 is 6.31 percent. That's below the cpi plus tuition inflation rate in real terms, but only if you graduate and get a good job. If you don't, the real cost of that debt compounds. Lucas: Right. And this gets to the heart of it: college is an investment in human capital. The return on that investment is increasingly variable. According to the Georgetown Center on Education and the Workforce, the median return on a bachelor's degree over a lifetime is about $2.8 million, but the range is enormous. A petroleum engineering major at the top school can earn way more than an early childhood education major at a lower-ranked school. Luna: So inflation is eating the purchasing power of your tuition dollar in real time, but the bigger risk might be whether the degree itself holds its value. Lucas: Yep. And that's where income-share agreements come in. Some schools, like Purdue, have experimented with ISAs where you pay a percentage of your income for a set period after graduation, rather than taking on traditional debt. The payments cap if your income is low. That shields you from the downside risk. Luna: But those aren't widespread. And they can be expensive if you end up earning a lot. Lucas: True. Look, I think the practical takeaway for listeners is: treat college as a financial decision with a clear ROI calculation. Look at average starting salaries in your intended field. Compare net prices after aid. And consider that the inflation rate for tuition is likely to stay above the general rate for the foreseeable future. Luna: One thing that might help is that the breakeven inflation rate is flat, which means the bond market thinks inflation overall will moderate. But tuition inflation is a category of its own. Lucas: And we should acknowledge that this conversation can feel abstract if you're a family just trying to figure out how to pay next semester's bill. That's why I appreciate that we keep this show ad-free—so we can focus on what actually matters to listeners without trying to sell you a refi or a credit card. Luna: Yeah, that's intentional. If you find these deep dives useful and want to support that choice, you can do it at buy me a coffee dot com slash fexingo. It's a small way to help us keep the show independent. Lucas: Appreciate that. So back to tuition: the big thing to keep an eye on is the broader purchasing power erosion. Even if your income growth matches overall inflation, your tuition dollar buys less each year. That's why it's smart to front-load payments if you can—use a 529 plan with tax-free growth, and if you have the liquidity, pay tuition early in the semester to avoid any mid-year increases. Luna: And avoid variable-rate private loans if possible. With the Fed holding rates steady at 3.63 percent, we're not in a cutting cycle yet. If you lock in a fixed rate now, you won't be exposed if rates stay elevated. Lucas: Exactly. So wrapping it up: tuition inflation is running hot, driven by state disinvestment, administrative growth, and the Bennett effect. The market doesn't expect a broad inflation breakout, but tuition is a special case. For families, the playbook is to focus on net price, use state prepaid plans where available, and think carefully about the ROI of the degree itself. Because in the end, the best hedge against tuition inflation is a degree that pays off.