Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the College Admissions Market
Transcript
- Lucas: If walking through the economy with us has made something click, I want to start with a number that surprised me this morning. The CPI reading for May came in at 334.0, up from 332.41 in April. That's an annualized inflation rate north of 4 percent, and it's been hovering there for months. Meanwhile, real GDP growth is at 1.6 percent. That's the stagflation box — high inflation, slow growth — and it is now reshaping something you might not associate with macroeconomics: college admissions. Luna: College admissions? I know tuition has been rising for decades, but how is stagflation specifically changing the game right now? Lucas: Great question. The key shift is that family incomes, adjusted for inflation, are stagnating or even falling in many brackets. The average hourly earnings data we saw — $37.50 in May, up from $37.41 — is barely keeping pace with inflation. So the pool of families who can afford full-freight tuition at elite private colleges is shrinking. Meanwhile, those colleges have huge fixed costs: faculty salaries, campus maintenance, financial aid budgets. They can't easily cut costs, so they need to find students who can pay. Luna: Right, so they're leaning more on international students, who often pay full price. I've seen that at schools like the University of Chicago and MIT. But isn't that a long-term trend, not something specific to 2026? Lucas: It is a long-term trend, but stagflation is accelerating it. Let me give you a concrete example from this admissions cycle. Many need-blind colleges — schools that claim to admit without regard to financial need — are quietly changing their policies. A few years ago, a school like Bowdoin or Amherst would commit to meeting 100 percent of demonstrated need for all admitted students. Now, some are capping need-based aid or shifting to 'need-aware' for waitlist students. They're not shouting about it, but the admissions consultants I've talked to are seeing it. Luna: So 'need-blind' is becoming more of a marketing term than a reality for some families? Lucas: Exactly. And here's where the data gets interesting. The unemployment rate is 4.3 percent, which is low historically. So a lot of parents are working, but their wages aren't growing fast enough to cover tuition increases that are running at 3 to 5 percent annually. Meanwhile, the real value of a degree is being questioned. When growth is slow, the opportunity cost of four years in college — the wages you forgo — becomes more painful. Luna: That's a good point. I've seen some analysis suggesting that for certain majors, the return on investment is negative at current tuition levels. Especially if you're paying full price and graduating into a weak job market. Lucas: Right. And that's leading to a fascinating development: income-share agreements, or ISAs. Instead of taking out a traditional loan, a student agrees to pay a percentage of their future income for a fixed period after graduation. Purdue University was an early adopter with their 'Back a Boiler' program. Now, more schools are piloting ISAs, especially for professional programs like nursing or engineering where starting salaries are more predictable. Luna: ISAs have been around for a while, but I think the stagflation environment makes them more attractive. If inflation stays high, fixed-rate loans become cheaper in real terms over time, but variable-rate loans — which many private student loans are — become more expensive. ISAs adjust with your income, so there's some built-in flexibility. Lucas: That's exactly right. And the JOLTS data from April showed 7.6 million job openings, up from 6.9 million in March. So the labor market is still tight. That's a double-edged sword for colleges: it means graduates can find jobs, but it also means potential students might skip college altogether because they can get a decent job without a degree. Community college enrollment actually ticked up this year, while four-year enrollment at private schools dipped. Luna: Are we seeing any colleges actually lower tuition in response? Or is it all just financial aid games? Lucas: A few have tried. For example, the University of the Ozarks in Arkansas announced a 10 percent tuition cut for the 2025-2026 academic year. But most elite schools are maintaining list prices and discounting heavily. The average discount rate at private colleges is now over 50 percent. That means the published tuition is almost meaningless — it's a starting point for negotiation. Luna: So the list price is like the suggested retail price for a car. Nobody pays it. Lucas: Exactly. And that creates a lot of inefficiency and inequity. Wealthier families who know how to negotiate get better deals. Less savvy families end up paying more. It's a bit like the used car market we talked about in episode 43, where information asymmetry drives prices. Luna: If today was actually useful to you, the way these episodes stay ad-free is listener support. We don't run commercials, and we want to keep it that way. So if you got something out of this, buy me a coffee dot com slash fexingo. It really helps us keep digging into these angles. Lucas: Luna's right. We're able to do deep dives like this because listeners chip in. No pressure, but if you value this kind of analysis, that's the way to keep it going. Luna: Yeah, and we appreciate every bit of it. Now back to the admissions world — I want to ask about another data point. The 10-year breakeven inflation rate is at 2.25 percent, down slightly. Does that affect how colleges think about their endowment spending? Lucas: Great catch. Yes. College endowments typically spend about 4 to 5 percent annually. If inflation is running above 2.25 percent, the real value of that spending erodes. But if breakevens signal lower future inflation, endowments might feel more comfortable with their spending policies. However, with nominal returns on bonds being low, they're under pressure to find yield elsewhere. That's why we've seen more colleges allocating to private equity and real estate. Luna: So the entire business model of higher education — tuition, financial aid, endowments, enrollment — is being squeezed by stagflation from multiple directions. Lucas: Exactly. And the schools that will thrive are the ones that can adapt. That might mean more online programs, more competency-based degrees, or more partnerships with employers. The University of Texas system recently launched a program where students can earn a bachelor's degree in three years, reducing costs by 25 percent. That's the kind of innovation we'll see more of. Luna: It feels like the whole value proposition of a four-year residential degree is being questioned. And stagflation is forcing that conversation faster. Lucas: It really is. And for families making decisions right now, the calculus is different than it was five years ago. The risk of taking on debt is higher, but the potential payoff of a degree from a top school is still significant — just more uncertain. One thing is clear: the days of assuming a college degree is always worth the cost are over. Luna: And that's a shift that will have long-term consequences for the economy, for social mobility, and for the labor market. Lucas: Absolutely. We'll be watching how the 2027 admissions cycle shapes up. Until next time.