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Transcript
- Lucas: So the May CPI came in at a 3.3 percent year-over-year increase — which, if you've been following this show, feels like the new normal. But here's the number that caught my eye: college tuition and fees have gone up 6.2 percent in that same period. Luna: Nearly double the headline rate. And it's not a one-month blip — that's been the trend for a while now. Lucas: Exactly. So today I want to unpack why tuition inflation is so sticky, and what it means for anyone who's saving for college or paying down student loans. Luna: Let's start with the obvious question: why is tuition rising so much faster than everything else? Lucas: There are a few structural reasons. First, the biggest expense for most universities is salaries — and faculty and staff wages have been climbing faster than the broader labor market. Second, administrative bloat is real. According to a recent analysis, the number of non-teaching administrators at U.S. universities has grown by over 60 percent since the early 2000s, while enrollment has barely budged. Luna: So you're paying for more layers of management, not more teaching. Lucas: Right. And then there's the decline in state funding. In 1980, state appropriations covered about 60 percent of public university operating costs. By 2025, that number had fallen to around 40 percent. So schools have had to make up the difference through tuition. Luna: And that's public universities. Private schools have their own pricing power — they can charge whatever the market will bear because demand hasn't dropped. Lucas: Exactly. And demand is actually rising. College enrollment ticked up last year for the first time since the pandemic, especially among traditional-age students. So the pricing power is there. Luna: Let's talk about what this means for a listener who's trying to plan. If you have a 529 plan, how do you account for a 6 percent tuition inflation rate when the market's been choppy? Lucas: That's the million-dollar question. The S&P 500 is down about 1.1 percent over the past five days, and the NASDAQ is off nearly 2 percent. So relying on equity growth alone to keep pace with tuition inflation is risky in the short term. Luna: But 529 plans are long-term vehicles. If you've got a newborn, you've got 18 years. Lucas: True, but the glide path matters. A lot of 529 plans automatically shift into conservative investments as the beneficiary approaches college age. If your kid is 16 and the market drops 20 percent, your savings could take a big hit. That's why some advisors recommend keeping a portion of the portfolio in Treasury Inflation-Protected Securities, or TIPS, specifically for the tuition component. Luna: TIPS adjust with CPI, but tuition inflation is running above CPI. So they'd only cover part of the gap. Lucas: Right. There's no perfect hedge for tuition inflation. But one thing you can do is be more aggressive about contributions early on, so you build a cushion. Another is to look at prepaid tuition plans if your state offers one — they lock in current tuition rates for future attendance. Luna: Those are less common now, but Florida, Texas, and a few other states still have them. Lucas: Let's also talk about the student loan side. The Supreme Court struck down Biden's broad forgiveness plan in 2023, but the current administration has been chipping away at it through income-driven repayment plans. The new SAVE plan, for example, caps payments at 5 percent of discretionary income for undergraduate loans. Luna: But that doesn't change the fact that the principal keeps growing if your payments don't cover the interest. And with a 6 percent inflation rate on tuition, the cost of borrowing is going up too. Lucas: And there's a new wrinkle. With Kevin Warsh taking over as Fed chair, there's been speculation that the Fed might eventually get more involved in student loan policy — maybe through some kind of interest rate cap or refinancing program. But that's speculative. Luna: Right now, the best defense is a good offense. If you're a parent, start saving early and consider a mix of assets. If you're a student or recent grad, look into refinancing while rates are still relatively low. Lucas: The thing is, tuition inflation is one of those costs that feels inevitable, but understanding the drivers at least lets you make better choices. Luna: Speaking of making better choices — if you found this episode helpful, you know that we keep the show ad-free. That's possible because of listeners who support us. If today's conversation was useful to you, you can help keep it going at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small gesture that makes a big difference for us. And it means we never have to sell your attention to advertisers. Luna: So, back to tuition — one thing I've been wondering is whether the rise of online education and alternative credentials will eventually put downward pressure on traditional tuition. Lucas: That's a good question. Enrollment in alternative credential programs — things like coding bootcamps, Google Career Certificates, and micromasters — has grown by about 20 percent year over year. But so far, that hasn't dented demand for four-year degrees. The signaling value of a bachelor's degree is still strong in the job market. Luna: So we're stuck with 6 percent tuition inflation for the foreseeable future. Lucas: Unless there's a major policy shift or a cultural change in how employers hire. But for now, the best strategy is to plan, save, and stay aware of the specific inflation rate that matters most to your family. Luna: And that's the bottom line. Thanks for listening, everyone.