As the recession takes its toll on families’ finances around the country, the cost of higher education has become an increasingly hot topic this school year. Although the graph above only includes NYU (not including housing, food, or books!), you could create the made a chart just like mine (h/t Felix Salmon – thanks for the idea!) and simply noted, “This is what happens when prices increase above the rate of inflation for decades.”

Every year, NYU raises its tuition, usually far more than the inflation rate. Even though this year’s increase, 3.85% (2008′s inflation rate), was the lowest in almost a decade, it is likely to be well over this year’s average inflation rate (since March, there has been deflation, a negative inflation rate).

So, once again, even during a recession, the real cost of attending NYU has grown.

According to the College Board, the average indebtedness of NYU students at graduation is $34,850 (compared to a national average of $23,186). Ouch. As costs grow, so will the amount of debt we take on. In fact, the WSJ just reported that the amount of federal student loans disbursed this academic year was $75 billion, 25% higher than last year – the largest jump ever recorded.

At what point will prospective students decide that the costs don’t justify the benefits?

Reuters economics blogger Rolfe Winkler thinks the economics of higher education are already wildly distorted. He writes:

The market for college education looks a lot like the market for houses circa 2006 –  very bubbly. And the reason is similar: There is too much credit.

Colleges can keep raising prices, despite the recession, because the government keeps lending students more money to pay them.

…

But the extra credit isn’t benefiting students. It’s just inflating the price of their education, burying them under a bigger pile of debt despite stagnant wage growth and poorer employment prospects.

This is eerily reminiscent of the housing bubble, when too easy credit inflated the price of houses well beyond their fundamental value.

He continues by arguing that the federal government is making too much money available through Stafford loans (citing the WSJ piece) and artificially pushing the price of college up.

Why do we go to college? Aside from intangibles like social training and new experiences, we go because a degree offers us the opportunity to make more money during our lifetime. Does the current price (~$200,000 when you include housing) reflect that we will make $200,000 more than if we didn’t go to college?

Perhaps, but a recent study (pdf) puts the value at $121,539.

And so there may well be a bubble. If there is, the top NYU administrators should start thinking now about what they’re going to do about it. Because NYU is a tuition-driven school, if the bottom drops out of the college market and tuition prices fall 30%, it would devastate the 2031 plans, force job cuts, and leave academic departments reeling. Does NYU have the chance of a major realignment in the perception of the school’s value built into their statistical admissions models?

The underlying issue is that, last year, NYU saw a record number of applications and, according to Sexton, “enthusiastic admitted students.” The price, on its face, seems justified. Tuition hikes aren’t hurting the admissions pool, so the sensible move is to drive up prices.

Remember when everyone thought the housing market had nowhere to go but up?

To compute the percentages for the graph, I adjusted the historic tuition data to 2009 dollars using the Consumer Price Index. I used Census Bureau data for median incomes and adjusted that to 2009 dollars as well. Because the most recent median income data is from 2006, I used that number (adjusted) as the 2009 median income. To see the raw data and sources, you can download my worksheet.

Special thanks to Lindsay Dumas in the University Archives for all her help.