Federal College Ratings Will Harm Higher Education

Posted on November 21st, 2013, by Leave a comment

On August 22, President Obama outlined his plan to make college more affordable for students and limit the financial strain that loans place on graduates. The new plan measures college performance and, he claims, provides the most financial aid to schools that offer students the best value. Publications such as The Chronicle of Higher Education and Forbes, however, have decried Obama’s plan as ultimately detrimental to the lower class.

Let’s examine some common arguments against Obama’s plan and outline why—contrary to administrative statements—it may not be a “better bargain for the middle class.”

Obama’s plan focuses on a number of outcome-based variables such as graduation and transfer rates, graduate earnings, and number of advanced degrees earned. It also examines aspects of accessibility, tuition levels, scholarships, and loan debt. If all goes well, colleges and universities will be rated under the new system by 2015, shaped by input from “state leaders, college presidents, students and parents” obtained at public hearings.

Descriptions of the ratings system do not indicate how schools will be categorized. The Obama administration claims that it will “promote innovation and competition;” however, based upon the current language, institutions that predominantly serve lower-income students will be punished with reduced appropriations, as those institutions tend to have low graduation rates and high levels of student debt. Those schools might provide a quality education, but they fare poorly when compared to other institutions, as their student body has a weaker academic background.

Geography limits many low-income students when choosing a college; in that regard, certain colleges might get punished for their inability to choose students, just as students might get punished for their inability to move. Student self-selection can bias traditional metrics. With wealthy, high-performing students picking selective institutions over cheaper, local alternatives, the administration’s plan could encourage a growing disparity between wealthy and poor institutions.

The Obama administration has already released a “college scorecard” that offers information regarding affordability and value. Under the new ratings system, a detailed website would be created. Ronald Volpe, president of Hood College, expressed his concern that such a ratings system would attempt to railroad prospective students toward select colleges. The private marketplace, he contended, is perfectly capable of rating colleges and giving students information. For example, U.S. News and World Report, The Princeton Review, and Forbes offer reputable college rankings used by individuals and organizations alike (including the Center for College Affordability and Productivity).

As opponents to Obama’s plan have pointed out, the data used for the ratings is incomplete. Federal graduation rates only include first-time, full-time students. Furthermore, graduate earnings data are limited. Such a ratings system could mislead students and provide unfair appropriations.

The Obama administration has responded to concerns regarding flawed data, claiming that while no institutional data is ever complete, the Department of Education would remain mindful of updated information. Additionally, Secretary of Education Arne Duncan stated that the plan would bring greater transparency of institutional data to the public. Considering the actions taken against transparency by this administration in nearly every other sector of government, Duncan’s claim warrants skepticism.

Obama’s plan does one thing right: Capping federal loan repayment rates at 10 percent of income. But ultimately, the government is best to stay out of the ratings game. Endorsing schools based on uncertain and contested metrics cannot have a positive effect on the higher-education market. The final plan and ratings system will be made public next spring; until then, it seems likely that heated dialogues will continue between the Obama administration and the universities, educators, and students whose futures are at stake.

Changing the Higher Education System: Lowering Costs, Improving Outcomes

Posted on November 15th, 2013, by 1 Comment

Richard Vedder presented the following remarks on November 15, 2013 at a Free Market Forum in San Diego sponsored by Hillsdale College on “Markets, Government, and the Common Good.”

Let me present you with a counterfactual proposition.  Suppose that the federal government had never enacted the Higher Education Act, and that they had not entered into the business of providing financial assistance to college students. In other words, suppose we had no federal guaranteed student loans, no Pell Grants, no federal work study programs, no higher education tax credits or any other program designed to ostensibly aid students pay for college. Given the limited focus of this session, I will ignore other federal encroachments into higher education, such as federal research grants.

What would higher education be like today? While no one can answer that question with any absolute certainty, I expect the following would have happened. First, there would be a somewhat lower proportion of adult Americans today with college degrees, but in both absolute numbers and as a percent of the adult population, we would today still be at an all-time high. Higher education enrollments would have grown, but not quite as much.

Second, I suspect tuition fees of universities would be significantly lower than they are today. My guess is that sticker prices at colleges or universities would conservatively be 20 percent lower than they in fact are, and probably even lower than that. Similarly, fees at state universities would also be lower.

Third, I would predict the proportion of recent college graduates from the bottom quartile of the income distribution would be greater than it actually is today. In other words, the substantial variation of college participation by income would be at least modestly less than today, and higher education would have a somewhat less elitist character to it.

Fourth, I would predict that the strong disconnect between labor market realities and the output of college graduates would be significantly less. We would not have over 115,000 janitors with bachelor’s degrees, nor over one million retail sales clerks.

Fifth, we would have significantly better academic outcomes than in fact we have today. We would have fewer college dropouts, for example, and a larger proportion of those who graduate would have done so in the traditional four years. We would probably have less grade inflation. We would have fewer climbing walls and luxury dormitories, but a larger portion of students showing they acquired meaningful increments to their knowledge about our civilization or to their critical thinking skills while in college.

Sixth, we would have a much smaller army of collegiate bureaucrats, what Johns Hopkins’ Benjamin Ginsburg calls “deanlets,” probably very modestly lower salaries for faculty, possibly greater emphasis on teaching, and fewer, maybe no, million dollar university presidents. Universities and colleges would have smaller budgets, and the total resources devoted to higher education would be tens or scores of billions of dollars less than we in fact spend today. The actual productivity decline in higher education would have not occurred. There would be no talk of a higher education bubble, no U.S. presidents making speeches denouncing university fiscal behavior, or the like. The American Council on Education and other higher education trade groups would have fewer lobbyists at 1 DuPont Circle trying to collect economic rents from the federal government. In short, the face of higher education would be dramatically different than it in fact is.

Let me briefly elaborate on these necessarily somewhat speculative assertions. I do think the provision of grants and subsidized loans has increased the demand for education from what it otherwise would have been. It probably also increased the supply of educational services too, but to a lesser extent since many higher education institutions do not try to maximize enrollments, believing they derive prestige by turning customers away. McDonald’s does not have an Admissions Office, but Harvard does. The government induced expansion of demand and to a lesser extent supply means total enrollments, and probably the number of graduates, is higher than it would have been otherwise. The government programs have succeeded in getting more kids through college, even though I suspect the six year graduation rate of Pell Grant recipients, which is a state secret that even the National Security Agency probably does not know anything about, is somewhere in the order of one third –for every Pell recipient who graduates, two do not.

Since these financial aid programs raise demand, they lead to higher tuition fees. Then Education Secretary Bill Bennett posited that hypothesis in 1987, and I think he was right then and right now. The possible offset of rising demand by rising supply has not occurred for a variety of reasons, including the aforementioned aversion of many colleges to enrollment expansion as it detracts from maximizing prestige, but also because accrediting agencies impose barriers to entry into the higher education business, and no doubt other reasons.

Federal data suggest that around 1970, before Pell Grants and when federal student loans were very modest in number and size, around 12 percent of recent college graduates came from the bottom quartile of the income distribution, compared with barely 7 percent today. Despite federal financial assistance programs that have multiplied more than ten-fold even after allowing for inflation, a smaller proportion of poor persons are college graduates, suggesting that these programs have abysmally failed at achieving their ostensible goal of expanding educational opportunity to the economically less advantaged.

Lower income persons are more price sensitive than more affluent ones, and high sticker prices have led  more lower income persons than higher income ones to say no to college, or pick less expensive options  like community colleges. The FAFSA form required because of the federal programs has been historically a highly complicated and intrusive way of getting financial information. Kids from affluent families complained about the forms but filled them out, but many from lower income environments just gave up rather than answer  over 100 questions, many demanding highly personal information that if asked by any other type business might have led to their facing potential criminal charges.

In 1970, less than one percent of taxi drivers had college degrees. People did not work their way through college to take a job requiring less than a high school education to perform. By 2010, the proportion of taxi drivers with bachelor’s degrees or more exceeded 15 percent. College graduates expect their degree means a ticket to a comfortable, moderately affluent middle class life in a managerial, technical or professional job. Yet almost half of graduates are in occupations that the Labor Department tells us typically requires less than a college education to perform well. To the extent the enrollment explosions in recent decades have been fueled by federal student financial assistance programs, it has aggravated this problem, which is NOT merely a consequence of the slowdown in employment growth reflecting the financial crisis and the anti-work public policies of the government.

The connection between university student performance and federal student financial aid is arguably more indirect and subtle, but in my judgment is nonetheless real. The amount of time students spend on academics has declined in tandem with increases in federal student aid programs.  Grades have risen with increased student aid—and reduced student academic effort. The Civics Literacy Test of the Intercollegiate Studies Institute and the decennial Adult Literacy Survey of the U.S. Department of Education show that core knowledge and literacy amongst college students are falling. Arum and Roksa compellingly argue that critical thinking and writing skills are not substantially advanced during the college years.  I don’t think this is coincidental. Despite rampant grade inflation, college dropout rates remain stubbornly high.

I think a major reason for deteriorating academic standards amidst rising federal student aid is that there is absolutely no performance expectation associated with receiving this aid. Indeed, I suspect on average mediocre students get more Pell Grant money than good students, since good students are likely to take four years to graduate while the mediocre ones take longer. Colleges have no skin in the game, so they accept and promote federal student borrowing for those who they know have low probability of academic success. All of this contributes to a dumbing down of the curriculum and standards.

If colleges have raised tuition fees more because of federal student aid, this has added to their revenues.  Where have these incremental funds gone? A look at changes in college staffing and spending suggests that a large portion has gone for non-instructional purposes. Particularly noteworthy in the period since the student financial aid explosion began is the huge growth in non-instructional professional staff at universities, roughly speaking, administrators. Rising university revenues have probably also stimulated the collegiate Edifice Complex –expensive buildings, many of them for not academic purposes. The federal student financial aid programs are helping fund a costly and academically dubious academic arms race.

The Dilemma: Changing the System

My remarks have emphasized that the current federal financial aid program is dysfunctional –costly, not achieving its initial goals, worsening the rise in tuition fees, and so forth. Obviously, getting rid or at least significantly downsizing the program is highly desirable. Ideally, it should be eliminated, not reformed. The dilemma, however, is that an immediate elimination of the program would have significant disruptive effects and arguably be unfair to individuals expecting these programs for college financing. In other words, there are significant transitional issues involved in moving away from the status quo. Moreover, given the huge political constituency that has received or anticipates receiving federal student financial aid, it is probably politically impossible to eliminate the program overnight. But I think there may be politically feasible ways to move to mitigate its negative impact.

Here are seven actions that would dramatically reduce the burden to taxpayers and inefficiencies and pathologies associated with the current system. First, return the program to its roots: helping poor persons attend college. Right now, over 17 percent of students from families with incomes from $60,000 to $80,000 a year get Pell Grants—these individuals have above median incomes. Over a few years we should tighten eligibility significantly, reducing the number of Pell recipients by perhaps 50 percent.  Similarly, PLUS loans to parents of high income kids should end. Tuition tax credits benefit families whose kids would go to college in the absence of the credit, mostly from above average incomes. Go to a single grant program and a single loan program.

Second, impose academic performance standards to continue receiving grants. Reward students who graduate in less than four years, and cut off aid for, say, students who are in their sixth year of full-time attendance.

Third, get the federal government out of the business of making loans, confining their role to guaranteeing loans made by private lenders. The Feds have to borrow to pay their own bills, so implicitly they borrow from, say, Chinese bond purchasers in order to lend money to college kids. Not only return lending to private lenders, but strengthen the tie between interest rates charged students and market rates.

Fourth, make participating colleges have some skin in the game. If colleges accept students and promise them Pell grants or guaranteed loans, make them share in the burden of high levels of defaults on loans, or the failure associated with Pell recipients not graduating. This would lead to a needed reduction in lending to persons who lack the aptitude, background, or discipline for college level learning.

Fifth, view federal aid as assisting students obtain a basic college education from a relatively low cost university. Limit the assistance to a few thousand dollars a year, and do not subsidize a Harvard education more than one at a relatively lower cost state university. This implicitly involves reviewing limits on aid per student. Right now there is a vicious circle. Colleges raise tuition fees so the Feds make larger loans to students, leading the colleges to raise their tuition fees still more. Cap per student federal assistance expansion to the rate of increase in inflation. In other words, allow all students to borrow, say, $5,000 a year on a federal guaranteed loan regardless of the school attended, with the amount rising annually only with the rate of inflation.

Sixth, convert the Pell Grant program into an educational voucher. Right now, Pell money is managed and distributed by school financial aid offices. The college offers government money to students, as if it were the college’s money. Why not give the money to the student directly and let them use it wherever they want, empowering them more and make the institutions more attentive to student needs? Moreover, such educational vouchers could be issued only to very low income students, and made progressive, with the voucher size diminishing with need. Similarly, receipt of the voucher could be tied to academic progress, with a merit dimension included. Top students could be paid extra for superior academic performance. If 5 million of these grants were made at an average amount of $4,000, some $20 billion would be paid out –more than 40 percent less than currently, and virtually all Americans attending college who were truly “poor” would be accommodated.

Seventh, encourage private investors to begin human capital equity funds, where students sell equity in themselves rather than debt. The investor would pay the cost of college upfront, with the graduate paying the investor a portion of his or her income for a specific time period. The seller of equity gets college financing and knows in advance what the post-graduation burden of college repayment for college will be. Markets would adjust to favor students with better prospects for graduation and greater post-graduate productivity. A graduate from M.I.T. majoring in electrical engineering might have to pay 8 percent of his income for 12 years, while a graduate in anthropology from Central Michigan University might have to pay 15 percent for 20 years. These market signals would be useful in reallocating resources within higher education. The mechanics of encouraging such funds need resolution, but the idea of students paying for college with equity rather than debt commitments is an appealing one.

To reiterate, in a perfect world I think the federal government should get out of the financing business. America has suffered, not benefited, from the existence of a Byzantine number of federal loan, grant, work study and tax credit plans. But if the government presence is going to continue, at least rationalize the system by downsizing and redirecting it. Getting out of the student financial aid morass is going to require imagination, political will and even political entrepreneurship.  The current system is dysfunctional and not sustainable. The time for reform is now.

 

Dual-Enrollment Programs Can Cut Costs and Accelerate Degrees

Posted on October 22nd, 2013, by Leave a comment

For many students, the last year of high school can seem inconsequential and tedious. Indeed, a report from the University of Chicago indicates that most high-school seniors in the Chicago Public Schools system are neither challenged by their coursework, nor sufficiently prepared for higher education.

Enterprising students can challenge themselves and bring renewed purpose to their final year of high school by participating in one or more dual-enrollment programs where they earn college prior to graduation. CCAP has discussed some of these options in Chapter 2 of 25 Ways to Reduce the Cost of College.

Programs such as Advanced Placement (AP), the College Level Examination Program (CLEP), online education options, Post Secondary Enrollment Options (PSEO), and the International Baccalaureate (IB) accelerate graduation while helping students transition from secondary to post-secondary education.

More students can and should participate in programs to earn college credit. Students intent on attending a university experience the “real deal” prior to signing costly loans, and students on the fence about college make better decisions with experience. Some students are even able to cut an entire year of college, which saves on tuition.

In many cases, high school students seem to learn better when involved in dual enrollment programs. A 2008 report by the Community College Research Center found that Californian students with low grades in high school classes earned better grades in their college courses. An earlier study by the same organization found that dual enrollment programs positively affect high school graduation and college enrollment rates, GPA and degree completion.

Although dual enrollment in any form can be beneficial, some programs may be more so than others. Programs such as AP are taught by high-school faculty at high-school facilities. Those programs might offer more difficult work to students, but their homogeneous class composition likely provides fewer benefits than on-campus courses.

U.S. News and World Report suggested that students may learn better when taken out of their element and exposed to a college environment. Programs similar to PSEO give students a taste of advanced class work along with the faculty expectations. Still, some students may find working alongside their peers to be more agreeable. Hesitance to attend a college campus shouldn’t dissuade students from earning early credit, and high-school faculty can play a role in encouraging students to attempt it.

The costs of dual enrollment programs vary by state. Some states cover tuition and other associated fees, while others offer partial coverage or coverage on a pass/fail basis — if a student passes the college course, the state will pay for it.

Of course, where on-campus programs save students money, they take money away from school districts. For smaller school districts with fewer high-school students, this can be a real obstacle. The Cannon Falls school district spends between $5,000 and $6,000 per PSEO student. In order to counter those losses, the district promotes its AP program to qualified students. With more students attending PSEO courses each year, districts such as Cannon Falls may have to innovate their in-school dual enrollment programs to remain competitive.

As higher education costs continue to soar, it is more pertinent than ever for college-bound students to consider options that reduce these costs. States seem to realize this, as several have passed legislation to encourage dual enrollment. Students interested in dual enrollment should explore the programs offered by their school, and determine which are best suited to their needs.

Five Constructive Ways to Change American Higher Education

Posted on October 14th, 2013, by 1 Comment

Richard Vedder gave the following lecture at Dartmouth College as part of their Daniel Webster Project on October 14, 2014.

My thanks to Dartmouth for inviting me to participate in the Daniel Webster Project. I particularly love to come to Hanover. I teach American economic history, and forever am telling students two things about the extraordinary 1819 Supreme Court battle in Dartmouth College v. Woodward. First, it was one of the half dozen most important judicial decisions of the 19th century, one that enhanced the rule of law and expanded protections of private entities from governmental confiscation. Second, Webster’s statement “It is Sir…a small college. And yet there are those who love it” is the single best statement of the special ties that institutions of higher education have to the public, the quintessential statement of how colleges and universities can profoundly influence us for decades after passing through their ivied halls. Thank you for including me.

Why I was asked to speak is beyond me, as economists have three deserved bad raps: first, they are often wrong. Second, they are deadly boring. Lastly, they are often perceived as cold and heartless. Over the course of the lecture, I will illustrate each of those points. Regarding the much-deserved reputation for inaccuracy: The dean of American economists in October 1929, Irving Fisher of Yale, proclaimed that “the stock market is on a permanently high plateau,” whereupon it promptly began the largest decline in American history, bankrupting Fisher among others. In 1985, leading American Nobel Prize winning economist Paul Samuelson in his iconic textbook said “The Soviet Planning System is a powerful engine for economic growth.” Within 7 years, the Soviet Union had disappeared along with its planning system that no one today believes accelerated growth. Less than five years ago, the Chair of the President’s Council of Economic Advisers Christina Romer proclaimed that if the president’s stimulus package were adopted, the unemployment rate would not rise above 8 percent, which it promptly did — for 43 consecutive months. So in the interest of consumer protection, I readily admit I might be wrong.

I am going to suggest later in my lecture what the title suggests: five constructive ways to change American Higher Education. But first, I thought I should deal with the issue of why is even change necessary. So I will deal with several issues relating to higher education quality and costs first, and then move into suggestions for change.

I am frequently asked the question “is America in a higher education bubble?” If forced to give a straightforward one word answer, it would be “yes.” At the same time, the higher education bubble differs somewhat from other bubbles in history, such as the 2000 dot-com stock market bubble or the 2007 era housing bubble.

As in earlier bubbles, a rising demand for higher education led to sharp increases in prices, as manifested in tuition fees. The causes of those rising fees, however, are many, and some reflect very long term trends more than an episodic “bubble.” At some point, growing concerns arose that the price of higher education was getting high relative to the benefits or relative to the ability to pay for the service. This is similar to the dot.com and housing bubbles. Also, like the housing bubble, government subsidies, especially in the form of exploding student loan and Pell grants, aggravated the demand for higher education. Like the housing bubble, interest rates were pushed by public policy to low levels that provided artificial stimulus to the demand, stimulating the bubble. And while the housing bubble led to a time to foreclosures and vacant homes, the college bubble has led to loan defaults and increasing number of students who are underemployed, working in jobs paying less and requiring fewer skills than what the anticipated when they entered school.

Indeed, I will argue this afternoon that for a growing proportion of Americans, attending college is not a good proposition. Increasingly, high school guidance counselors, college admission officers, political leaders and foundations tell us that personal and national economic success requires our youth to receive a college degree. Students have responded to this message, but increasingly end up deep in debt with a job that pays little or no more than what would have been received with a high school diploma.

One of the most time honored concepts in economics is at work: the Law of Diminishing Returns. In a society of relatively uneducated persons, the provision of a college education to more students very well might be good both for the individuals involved and for society as a whole. But today, when nearly one-third of adults already have four year college degrees, the further exhortation of young Americans to complete a degree leads to much smaller gains to both the individual and society –gains, in fact, which often are less than the considerable and rising cost of college attendance.

Americans are beginning to grasp the just stated realities. Enrollments in American universities fell last year, and I suspect will show further decline this year. High cost problems with little reputation or endowment are in deep trouble. Several hundred of them are going to die in the next decade I believe –what Joseph Schumpeter called “creative destruction” –markets signaling to reallocate resources to alternative uses.

Let me give you what I believe are 10 stylized facts about American higher education that suggest we may well be overinvested, not underinvested, in it.

  1. The Bureau of Labor Statistics of the U.S. Department of Labor evaluates jobs on the educational attainment required to fill them; 48 percent of all U.S. college graduates with bachelor’s degrees or more are in jobs requiring less than a four year degree;
  2.  Over 40 percent of students entering four year schools fail to graduate within SIX years; excepting schools like Dartmouth and perhaps 100 other selective admission institutions, most institutions fail to graduate a majority of entering freshmen within the advertised four years;
  3. A major National Research Council study of collegiate learning found that seniors at American universities had only marginally better critical learning skills than freshmen;
  4. Multiple surveys of student work habits suggest that the typical undergraduate student spends less than 30 hours weekly on academics for perhaps 30 weeks a year, or 900 hours total, suggesting massive underutilization of these vital human resources;
  5. Student loan default rates measured after three years of starting payments are in excess of 13 percent, suggesting many of the nearly 40 million Americans holding over $1 trillion in student loan debt have very significant financial difficulties –a default rate that in a nonsubsidized market would be dangerously and unsustainable high;
  6. It is commonly argued that “investing” in higher education promotes economic growth, yet when I examine the issue empirically I observe actual negative relationships between, for example, what state governments spend on higher education appropriations and economic growth;
  7. As the proportion of Americans entering college increases, many colleges dumb down the curriculum, giving high grades for limited student effort; the Adult Literacy Survey and Intercollegiate Studies Institute Civic Literacy tests suggest either little fact-based learning occurs, or that literacy is declining amongst college graduates;
  8. Public support for colleges is often justified as a way of promoting greater income equality and the American Dream, yet rising college attainment has been accompanied by falling, not rising equality, and the proportion of recent college graduates from the bottom one-fourth of the income distribution is smaller today in 1970, before Pell grants and massive federal student loan programs;
  9. Even if in the past college education was a good investment, and even if it is today, which is increasingly doubtful, nevertheless the rise in real costs of attendance, along with a general sharp slowdown in American economic growth since 2000, suggests strongly that potential future gains from that attendance are likely to lag; and
  10. There is a growing gap between the perceived advantages of going to college among students and their parents on the one hand, and actual outcomes on the other, so not only are students often not getting particularly well paying jobs out of college, but they also are caught completely off-guard, sometimes leaving them in precarious financial shape and emotionally devastated from having unfilled expectations.

Let me elaborate on some of these points. We now have more janitors with bachelor’s degrees than we have degree holding architects or chemists. We have more college graduated retail sales clerks than we have soldiers in the United States Army. As on 2010, we had over 115,000 janitors with bachelor’s degrees. Over 15 percent of taxi drivers held such degrees, compared with a fraction of one percent in 1970. We have over a million persons with degrees who work as retail sales clerks –at places like Wal-Mart or Home Depot. This is a phenomenon that was once rare but now common-place. For all the talk about the STEM disciplines and a knowledge-based economy, the numerically most important areas of projected job growth for the most part are in occupations that the BLS tells us do not really require a college degree. The five jobs the BLS projects will have the greatest growth in this decade include Registered Nurse, retail salespersons, home health aides, personal care aides, and office clerks –none actually requires a bachelor’s degree.

The distinguished social scientist Charles Murray summed things up well recently: “The reality is that we have a piece of paper that for most students in most majors is close to meaningless. It is serving a gateway function that the majority of young Americans cannot reasonably aspire to attain. And it exists in the context of a culture—and a president—that says everyone should go to college.”

College is first and foremost a screening device – a way of separating the smart, the motivated, the disciplined, the hard-working and the honest –from those lacking those characteristics. College graduates have these qualities in greater abundance than high school diploma holders, and thus command sizable earnings premiums. As the proportion of college graduates grow, the bachelor’s degree itself is starting to become somewhat tarnished as a screening device. You not only have to graduate from college, but from a good college –a degree from Slippery Rock States isn’t what it used to be. Or, you have to get a master’s degree. Interestingly, the earnings differentials between college and high school graduates narrowed noticeably between 2008 and 2011, reversing a long-term trend upward.

Before proceeding, remember I told you economists were boring. Let me tell you a story related to me by the president of one of our Federal Reserve Banks. A women went to the doctor and got devastating news: she had an inoperable brain tumor and had six months to live. She said, “Doctor, isn’t there anything you can do?” He said, “Unfortunately, there is nothing I can do medically, but I have some good advice.” She eagerly asked, what is that? He replied, “Marry an economist and move to North Dakota.” She said, “Why would I want to do that?” He said, “You won’t live a day longer, but it sure will seem like a long, long time.”

Back on topic, there are a number of studies suggesting the rate of return on private investments in higher education average a rather good 10 percent or so. Yet these studies generally do not fully adjust for the risks associated with college attendance. If over 4 percent of college students fail to graduate in six years, and if close to another 20 percent of those attending graduate but take more than four years to do it, the rate of return on the college investment is grossly overstated if one looks at earnings and cost of education profiles of only those who graduate. Some recent studies suggest the risk-adjusted average rate of return on college investments may be substantially less than earlier studies have indicated. Moreover, what is important is at the margin: if college attendees in 1995 or even 2005 had a good return on their investment, it does not necessarily mean the graduates of 2015 will, particularly given the rapid growth in the number of graduates relative to the growth in high paying jobs.

Of course, a major reason why the rate of return on the college investment is becoming problematic is that the size of that investment has soared with rising college costs. Several economists, including myself, have written books several hundred pages on why college costs have risen so much. Today, I will can only superficially touch on that topic.

Let me critique three common explanations. The first is sometimes called Baumol’s Disease, after a Princeton economist, Bill Baumol, who argued that teaching is somewhat like theatre –a professor, the actor, gets up in front of an audience. It takes the same number of actors today to perform King Lear as it did when Shakespeare wrote it 400 years ago. In most fields, labor productivity advances over time as machines and tools substitute for labor –that is not possible in higher education, or so it has been argued. I sometimes jokingly say that, with the possible exception of prostitution, teaching is the only profession that has had absolutely no productivity advance in the 2,400 years since Socrates taught the youth of Athens.

While there is certainly some truth in the Baumol proposition, it is overrated as a major explanation of rising college costs for two reasons. First, with modern technology, a single “actor” or teacher can reach thousands of students whereas before she could only reach dozens or at most hundreds. Sebastin Thrun’s Stanford course on artificial intelligence drew an audience in the six digits, for example. We could make online education both exciting and low cost by using the best American professors to teach lots of good material well. Second, in reality, usually less than one-third of university budgets go for faculty salaries—much of the cost explosion is in non-instructional areas, especially the growth of administrative staffs, but secondarily such things a upscale recreational centers and dormitories and, at some schools, exorbitant explosion in intercollegiate athletic subsidies.

The second explanation is sometimes called Bowen’s Rule, after another Princeton economist and also former Princeton president Bill Bowen. Colleges spend whatever they earn. This idea strikes me as very true. Job security conscious college presidents raise buckets of money through gifts, subsidies and high tuition fees and then bribe vocal constituents by giving them what they want –the faculty get pretty good pay, good parking, and low teaching loads –the alumni get fancy alumni centers and good sports teams –the administrators get lots of assistants or what Johns Hopkins professor Benjamin Ginsburg calls “deanlets” to do their heavy lifting –and the students get light work loads, high grades, and access to booze and sex.

The problem is there is no real “bottom line” in higher education. Did Dartmouth has a good job last year? Who knows? Colleges try to maximize reputation, and feel spending money helps, so we have an academic arms race going on that is pushing up costs. You can improve your US News rankings by buying good professors and good students. You think you attract good students through attractive buildings so you have a college edifice complex of constructing expensive buildings.

The third explanation for the cost explosion is the Bennett Hypothesis, the view of former Education Secretary Bill Bennett that federal student financial assistance programs has enabled colleges to raise their fees more than they otherwise would. The scholarly evidence of the validity of this proposition is mixed, although the most recent studies are supportive of it. I think it is exceedingly unlikely that the federal government could engage in lending and grants of $200 billion or so a year in a $450 billion sector without impacting at least modestly on pricing. I believe the Bennett Hypothesis is correct.

Let me say a few words about collegiate education and income equality. When a college degree was reserved for a small portion of the adult population, say in 1970 or earlier, an ambitious, bright and hard working person from a family with limited income could, and often did, advance up the economic ladder. Higher education served the American Dream. When a degree becomes commonplace, however, it starts to lose its value as a certification device. In 1960, Slippery Rock State College was not one of America’s citadels of higher learning, but a degree from there put a person easily in the top one-tenth of the nation’s population in terms of educational attainment, and that motivated employers to offer him or her a good job. Today, with upwards of one-third of adults with a degree, employers might say the student graduating from Slippery Rock is merely average —not worthy of the 20 percent or so jobs available mostly in the managerial, technical and professional fields that generally pay well.

So today, you have a high probability of success you have to go to an Ivy League school, one of the other great elite private schools like Stanford, Duke, or Northwestern, or at the very minimum to one of the few public flagship universities that essentially act like a private school –say the University of Virginia. Universities today no longer promote equality—they reinforce inequality, sort of an academically-based aristocracy not dissimilar to the landed aristocracy of, say 18th century England. Interestingly, 8 of the top 25 schools on the US News list of top American universities in 1988 were public schools –today, only three are. Public universities were created primarily to offer low cost access to economic advancement for students of moderate means, but today these schools are increasingly perceived to be inferior, not to mention costly. The ones perceived to be the “best,” such as UVA, actually have a smaller proportion of Pell Grant recipients than many of the Ivy League schools –Mr. Jefferson’s university is an enclave of rich kids.

Advocates of the “college for all” movement like President Obama, or the Gates and Lumina Foundations, usually emphasize one statistic: college graduates on average earn far more than those with a high school diploma, and that the high school/college differential on average has risen over time. I don’t deny the accuracy of those numbers, but I think they are highly misleading for four reasons in speaking about the current generation of college students.

First, comparing high school graduates to college graduates is like comparing apples to oranges. The typical college graduate is pretty smart, probably with an IQ typically above 110, while the typical high school graduate is typically less smart, with an IQ perhaps averaging 95. The college graduate is typically more ambitious and disciplined, doing better in high school partly because of higher innate intelligence but partly because of a better work ethic. Indeed, employers looking for bright, disciplined and ambitious persons use the diploma as a screening device to separate potential workers with desirable attributes from those lacking those attributes.

Second, remember that over 40 percent of those entering college fail to graduate within six years –for high school graduates to plunge into higher education lured by the earnings differential statistics but simultaneously be only dimly aware of the risks of non-graduation is a national tragedy that has brought hardship to many college dropouts with mediocre jobs but sizable college debts.

Third, the statistics mentioned are averages of all college graduates, including, for example, me, who graduated a half century ago. It appears that those graduating before 1990 largely got high end, high paying jobs, but that the glut of college graduates is now such that recent graduates are almost certainly faring poorer relative to non-graduates than was the case in the past. Unfortunately, published government statistics do not provide adequate information to evaluate that assertion.

Fourth, not everyone earns the average. Earnings vary enormously for college graduates between majors, and with the quality of college attended. For example, an examination of PayScale.com data shows average mid-career earnings of electrical engineers and economists of over $100,000, while for social work, Spanish, music, or education majors, the average is under $55,000. Similarly, mid-career earnings at a sample of elite private universities averaged about $105,000 a year, compared with $67,000 at relatively unselective state universities.

I don’t want to convey the impression that I think college is a bad thing for all. The student graduating at the top of her class from a very high quality suburban high school or private boarding school who is accepted at Brown, Cornell, and Dartmouth is likely to graduate in four years and get a good job. However, the kid who is in the middle of his class at a high school of so-so reputation, who has mediocre SAT scores, and is accepted at a college and where the six year graduation rate is 40 percent is very likely going to have a bad experience in college. Unfortunately, there are as many or more students closer to the second example I gave rather than the first one where the student could go to Dartmouth.

I am finally getting to the topic of today’s lecture, but let me relate briefly a story about economists being insensitive and uncaring. Shortly after 9/11, a suburban New York country club honored four firemen who lose their eye sight while battling the blazes at the World Trade Center. They were playing golf. A threesome of a doctor, a priest, and an economist were playing behind them. The pro told the threesome, “things will be a little slow today since the heroes we are honoring today are blind.” The doctor said, “Oh, let me talk to them—I know of a new procedure that sometimes can partially restore eyesight.” The priest said, “I, too, can help. I have some thoughts that have previously comforted many in distress from physical disabilities.” The economist snapped at them “What’s with all of you! Why don’t you make them play at night!”

What can we do about higher education’s problems? Let me suggest five ideas. This list is not comprehensive, but if we did all or most of the things we suggest I suspect the problems would be substantially less.

 

FIRST, RADICALLY REFORM AND RESTRICT FEDERAL STUDENT FINANCIAL ASSISTANCE.

The federal government disburses about $175 billion in student assistance in the form of grants, work study awards, guaranteed student loans, and tuition tax credits. The system is Byzantine, costly, and ineffective. Its initial goal when created and expanded decades ago was to assist lower income persons gain college access, but the proportion of low income persons among recent college graduates is lower today than in 1970.

If the Bennett Hypothesis is even half right, students today pay more for college than they would have without these federal programs. A large part of the billions of federal payments have gone into higher tuition fees that the colleges then use to help fund the aforementioned academic arms race. Rising sticker prices have deterred some lower income students from applying for college –they are simply frightened by fees that in some cases exceed the household’s entire income.

There are no rewards for academic excellence or improvement in the federal programs. Indeed, I suspect on average poorer students get more help than better ones, since they hang around school longer and use more Pell Grants or loan money.

Colleges have no skin in the game. If college X accepts large number of academically marginal students who subsequently fail to graduate and thus disproportionately default on their student loans, the school faces no adverse consequences of their admissions decisions that imposed a burden on the American taxpayer.

The interest rates charged students bear no resemblance to economic reality –the move towards tying the interest rates to market rates will be a small direction towards sanity, but interest rates in general are depressed from their natural rates dictated by human preferences by our largely failed Federal Reserve expansionary monetary policies.

The fact that a single monopoly provider of loans exists introduces the problems always associated with a single provider of services –low quality, indifferent service, and so on. The people who brought us the U.S. Postal Service are not known for their efficiency and quality of service.

A new National Bureau of Economic Research studies confirms what many of us have suspected –many colleges have gamed the student financial aid program for their own purposes. Moreover, the state government reductions in subsidies to state schools are at least partly tied to the massive increase in federal programs.

What should be done? My preference would be to eliminate federal student financial aid completely over a period of a few years. In the decades before we had federal assistance, enrollments rose and a healthy proportion of lower income Americans attended colleges aid by much private philanthropic aid and state support.

Without federal aid, the ability of schools to raise fees would be sharply curtailed. Enrollments would fall some, which I would view as a good thing, as too many unqualified kids go to college, and too many who graduate end up underemployed with mediocre jobs. As Plato said in the Republic two dozen centuries ago, necessity is the mother of invention. Colleges facing reduce revenue inflows would do all sorts of things to cut costs –reduce bureaucracies, increase teaching loads, embrace technological innovations more, intensify building utilization, lower athletic subsidies, and so forth. My guess is that graduation rates would improve, and more would finish within more years. We would end up doing more with less.

What I desire is politically impossible in the short run. The current system if maintained can be seriously improved. Get rid of aid for students who could go to college without the assistance. Say goodbye to PLUS loans to middle class kids, to tuition tax credits that help the affluent more than the poor, and even to some Pell Grants. At present, over 17 percent of students from households with incomes from $60,000 to $80,000 a year get Pell Grants—a few years ago, it was near zero. These are kids from solidly middle class homes, with above average incomes. They would find a way to go to college without federal funds.

Also, make colleges have skin in the game. If they accept lots of kids who fail to graduate and subsequently default on loans, make them pay something towards the cost to society of this decision. Put stricter limits on the number of years for which federal aid can be extended. Cut all the aid programs down to two –a single student loan program and a grant program –not 15 or more programs as at present. Put strict limits on the amount that can be borrowed, and raise those limits over time only with the general rate of inflation. Change federal laws to make tenable purely private human capital equity contracts on the Pay Forward principle. In short, reduce, privatize, simplify, make more efficient.

SECOND, GIVE MONEY TO STUDENTS, NOT INSTITUTIONS

Related to the first point, instead of state governments making grants to schools, have them give vouchers to deserving students. Do the same with Pell Grants. Instead of sending funds to college financial aid offices, send payments to the homes of students. Make them progressive performance vouchers. By “progressive”, I mean give more money to lower income kids than those from affluent families. For example, a Pell Grant could range from several thousand dollars for those from families with incomes of, say, under $25,000 a year, to a few hundred dollars for those from families with $50,000 a year in income, to zero to those from families with $60,000 or more income. By “performance,” I mean give students who excel academically and graduate in three years a little bonus for their excellence and saving taxpayers money, and cut back or eliminate aid to students who consistently earn low grades and show little prospect of graduating.

With more money coming directly from students, colleges would have to be more attentive to their needs, and engage in less cross-subsidization where they downgrade undergraduate education to fund other priorities. Funds would be targeted to those where access is truly dependent on outside financing. With a growing proportion of students not getting support, colleges would be compelled to engage in a bit more price competition.

THIRD, DEVISE ALTERNATIVE WAYS OF CERTIFYING COMPETENCY

Polling shows that the single most important motive for college attendance is the investment motive. People go to college hoping to buy a ticket into a comfortable middle class life or above. It is clear college is a screening device, and that a large part of the earnings differential associated with a college diploma actually reflects attributes that have little or nothing to do with college itself. The fact that a large portion of college graduates take positions in areas far removed from the academic discipline they studied the most in school suggests colleges are not primarily vocational schools, even though some areas such as engineering and accounting involve coursework very useful to pursuit of those occupational areas. College graduates are on average smarter, harder working, more disciplined and more dependable than high school graduates, and the diploma for most merely is a screening device denoting the likely presence of these positive employment attributes.

Yet maybe we can denote to employers most of what a diploma indicates for a lot less money. For example, what if we had a College Equivalence Examination that in some what mimics what the GED does to denote high school equivalency. Essentially, many are paying $100,000 or $200,000 to buy a piece of paper denoting competency and gaining the possibility of obtaining a good paying job. The new exam might cost $100 or $200 and if it correlates reasonably well with the attributes that college graduates have, it would enormously lower the costs of becoming credentialed, ending the credential inflation whereby bars are now sometimes demanding college degrees of applicants.

What would such a test look like? Employers and even faculty claim they want students who can think critically. The Collegiate Learning Assessment, or CLA, is a good test of critical thinking skills as well as writing ability, with a new CLA+ variant designed for purposes similar to what I suggest here. Supplement the 90 minute CLA + test of critical thinking and writing skills with a knowledge laden test that evaluates the test takers knowledge about things an educated American should know about regarding basic skills and our civilization. Maybe have an 80 to 100 question 90 minute test that incorporates questions in mathematics, science, literature, history, civic institutions, and economics. The total three hour exam then would measure both the acquisition of knowledge and critical thinking skills.

A person could take the proposed test at any time –at age 16 or 60. Many would go to college for a year or two, take the test, and, if they did well, start applying for a job. Cooperation with business groups like the Chamber of Commerce or the National Federation of Independent Businesses would be essential in making this an option –offering a non-college or lesser college option to denote competency for employment.

This testing would not impact much on schools like Dartmouth. College is both an investment and consumption good, and many attend residential schools in part for enjoyment, partly to soak up intellectually stimulating ideas, in part to make new friends and network with those who could help with career advancement. The alternative credentialing route would be for those viewing college solely or primarily as an investment, not a consumption decision.

FOURTH, PACKAGE LEARNING DIFFERENTLY AND MORE EFFICIENTLY

Like other colleges, Dartmouth is an instructional packager. Students take roughly 40 courses here and Dartmouth certifies that they constitute a corpus of knowledge deserving of a bachelor’s degree. Occasionally, a student will be allowed to have a few courses from other schools or packagers included in the degree package.

But we could package courses into degrees different ways. A person could take 8 courses at Dartmouth, 4 at Amherst, 6 at the University of New Hampshire, 6 at the University of Phoenix, 8 at New York University, 4 from Coursea or EdX, and 4 from StraighterLine, a for profit course provider. The student , might well take the College Equivalence Exam as well to certify overall competency, and someone, may the College Board, maybe Underwriters Laboratories, maybe the Consumer Union, would certify that the student had both the quantity and the right mixture of colleges to be given a bachelor’s degree.

At the high end of the market, the Rolls Royce/Neiman Marcus segment, a company called the “Ivy League” could package courses from the eight Ivy League schools plus M.I.T. and offer an Ivy League degree. At the Honda Civic/Wal-Mart end of the market, a consortium of for-profit schools and small state universities and private schools could do the same thing. This would dramatically reduce the hassles and often the costs of taking courses from different providers –schools themselves would provide courses more than degrees. Students could get the advances of superstar professors from multiple providers. By mixing on-line with traditional learning, the time spent in expensive residential learning could be reduced, but a student wanting that great experience in smaller quantities could do so.

Similarly, as part of a reconfiguration of the way we offer instruction, we could incorporate MOOCs, massively open on line courses, and other innovative online ideas into the mix. And in rethinking ways to provide the bachelor’s degree, we might ask the question: why is it four years? Why not three or five? It is impossible to incorporate the total body of knowledge into a degree –as it is, we pick and chose what is important. Does the fourth year at the margin at to the student’s capabilities of functioning as a responsible adult as much as the second or third year? If a three year degree works at Oxford, Heidelberg or the Sorbonne, why not at, say, Dartmouth? The three years could be accomplished by asking students to work more than 900 hours annually on academics, including summer school. There are some real long term savings on capital costs implicit in this idea.

FIFTH, REFORM OR ABOLISH ACCREDITATION

A major obstacle to major forms of innovation such as those just suggested is accreditation. Accreditation in America is badly broken, a cost-enhancing device that does provides consumers and taxpayers little real information on educational quality. I am running out of time, but let me mention just a few problems briefly.

Accreditation is like pregnancy –you are or you are not. It is “you are good so we accredit you,” or, “you are bad so we will not accredit you and you will probably have to go out of business.” True, sometimes warnings are given to schools, and sometimes they are put on something resembling probation – but the consequences of being mediocre are few. Why not give schools scores from zero to 100, with a certain minimum required to meet minimum standards necessary to receive monies from governments or tax exempt philanthropic contributions?

Other problems –accreditation is riddled with conflicts of interest. This year people from college A accredit college B, and next year people at B accredit college A. The governing boards are dominated by those getting accredited. Another problem is a lack of transparency—accreditation reports are not routinely made available to the public, so criticism often found in those reports is hidden from public scrutiny. Why? Historically, another problem is that accreditation is input-based, not outcomes oriented. That is changing some, but arguably not enough.

Diminishing returns have set in –let me conclude before you tell your friends you attended the intellectual equivalent of a hemorrhoid operation. Should everyone go to college? Absolutely no. Should some go to college? Absolutely yes. We have forgotten the admonition of Aristotle to do things in moderation. We have ignored the Law of Diminishing Returns. And because of that, we have invested too much in college educations and led to hardship for millions of young Americans. Colleges are partly responsible, using a flood of federal financial aid to increase their tuition fees to finance an academic arms race that stresses country club like amenities more than learning. The colleges are complicit in leading millions of young Americans to a path not of financial salvation but one of despair.

Let us rethink our financial aid programs, rethink the way we certify workplace competency, think the way we provide services and also revitalize non-college forms of vocational training. Sometimes doing less or doing thing different is doing more –creating more happiness, less angst, less financial stress, and aligning labor market realities with educational outcomes.

Thank you.

 

Sometimes, a Two-Year Degree Beats a Four-Year University

Posted on October 10th, 2013, by Leave a comment

Most students attending universities in America will spend at least four years working toward their degree. In a society where employers regard higher education as necessary for job acquisition, it comes as little surprise that more than 30 percent of people over age 25 in America have earned (at least) a bachelor’s degree. The costs accrued in the process are nothing to scoff at: Students attending a public university for four years can expect costs to reach more than $80,000, according to The College Board. As if that weren’t enough, tuition prices trend upward.

Students receive scholarships, grants, and other forms of financial aid that lessen the burden of tuition over the course of four years. Even so, many students could benefit with alternatives to the bachelor’s degree.

CCAP has written before about the savings potential for students who attend a two-year school, as well as the savings to society if more students went to community college. On average, the annual in-state tuition for a public four-year university is more than $5,000 greater than the annual tuition at a two-year school. Out-of-state students and students at private universities can anticipate higher yearly bills.

However, some two-year degrees can earn close to—or as much as—their four-year counterparts. They’re concentrated in occupational and technical careers (in general, liberal-arts enthusiasts are better off pursuing their bachelor’s), but when the cost of attendance is compared with the relative income of an associate’s-bearing graduate, a two-year degree might be worth more than a four-year degree.

Nurses, air-traffic controllers, and radiation therapists, for example, see only marginal differences in median income between two- and four-year degree holders after college. Surprisingly, it also applies to history and political-science majors, who earn just over $1,000 more with a bachelor’s degree than with an associate’s degree when entering the workforce.

One major benefit for holders of bachelor’s degrees: Professionals with advanced degrees still tend to earn more over their lifetime than those with a two-year degree.

Professionals with two-year degrees can always augment their education —and earnings—by enrolling in a four-year program later in their career. Students with an associate’s degree who entered the workforce before tackling their bachelor’s can likely avoid many of the expensive loans that the average 18-year-old accrues.

The two-year degree might not be for everyone, but it’s applicable to more students than the public believes. Anyone pursuing a skill-based or technical career should explore their options at two-year schools before enrolling at a four-year university. The potential for savings —and greater earnings—may be worth the effort.

Blood and Circuses

Posted on October 8th, 2013, by Leave a comment

This article originally appeared on SeeThruEdu on October 7, 2013.

 

Where in America is there severe economic exploitation by older adults of young individuals engaged in physically demanding and dangerous work, where the government subsidizes the exploitation, allows the exploiters to derive large incomes from their behavior, and the public lionizes the most successful perpetrators? Intercollegiate football and basketball.

Several dozen universities each year collect literally tens of millions of dollars in revenue, yet pay the key workers (players) in scholarships worth rarely more than $30,000 annually, even though if they were playing in the professional NFL would be making at least 10 times that.  One study showed the typical basketball player at Football Bowl Series schools was worth $289,000 annually, almost 13 times the typical scholarship award. Another study notes that less than 20 percent of athletic revenues go for scholarships, while pro teams typically spend over 50 percent of their receipts on player salaries. While players are undercompensated, coaches earn super sized salaries, often many times that of university presidents. They are compensated for recruiting and effectively utilizing talented but highly exploited (and disproportionately African-American) players.  The enforcement arm, the National Collegiate Athletic Association (NCAA), punishes the payment of even a few hundred dollars to players for autographs or other memorabilia, and makes large amounts using the name of long graduated players in video games, etc.  This is occurring when growing medical evidence suggests the long term harmful effects of playing the game might be quite severe –not just bad knees that reduce physical movement but cognitive loss of brain function that impairs earnings and the quality of life.

Yet amidst all of this, some university presidents are calling out “more, more.” According to the Wall Street Journal, Colorado State University President Tony Frank is pushing a plan to build a $246 million 40,000 seat stadium. Never mind the fact that the team (currently ranked 101 of 125 schools in the USA Today poll) rarely fills its current 32,500 seat stadium, or that if in the unlikely event it filled every seat seven times a year at $25 a seat, it would not cover even the interest payments on the stadium’s costs assuming the money were borrowed. President Frank believes a good stadium will draw better athletes, more football attendees, lucrative TV contracts, enhanced national recognition, and, ultimately 5,000 more high tuition out-of-state students eager to be at a school with first class football. Moreover, if the University of Oregon can be successful by upgrading athletics, why can’t we?

The problem is that this approach seldom works, and further trivializes universities as institutions obsessed with ball throwing contests rather than the dissemination of knowledge and appreciation for creative works accumulated over the centuries, not to mention the advancement of knowledge through research.  For example, the University of Akron inaugurated a gorgeous new 30,000 seat stadium in 2009 costing over $60 million with high hopes of similarly using it to achieve greater national recognition. Additionally, an indoor practice facility was provided to lure athletes to the school. Last year, average home game attendance was under 10,000; the team is currently ranked 107th in the USA Today poll.  Academic success has been similarly elusive. In the rankings of America’s best universities that the Center for College Affordability and Productivity performs for Forbes, Akron ranks a lowly 585 of 650 rated schools.

The biggest problem is the Iron Law of Sports: every time someone wins a game, someone else loses. People like to watch winning teams, not losing ones. Only a small percent of the 125 schools aspiring to major national athletic glory can succeed. Well over 80 percent of them lose money annually, meaning students typically subsidize the programs, directly (through various forms of activity fees) or indirectly (through direct institutional subsidies that could have gone for tuition reduction or student scholarships). Research by David Ridpath and associates suggests students facing high tuition fees often question the legitimacy of these subsidies.

While the public quest for entertainment is eternally strong, the status quo is probably not sustainable. The chief enforcement arm, the NCAA, or the colleges themselves are under attack on at least four fronts. First, the student exploitation problem is seriously being challenged legally in O’Bannon vs. NCAA. Assuming the suit is certified as a class action, the potential of damages resulting in huge payments to the plaintiffs (athletes) is substantial.

Similarly, lawsuits are pending against the NCAA over medical damages associated with injuries. The vulnerability of the college athletic establishment has probably risen hugely with the announcement that the National Football League has agreed to pay out potentially hundreds of millions of dollars to resolve legal claims.

Third, as the truly top athletic powers (about 64 teams) merge into perhaps ultimately four conferences, the temptation grows for them to withdraw from the NCAA and organize their own national basketball tournament and football championships, free from rules and regulations partly determined by schools whose interests deviate from their own.

Fourth, given the huge number of scandals from Jerry Sandusky on down, public enthusiasm is probably waning for the current system, but not the entertainment it provides. One by-product of this: why do we give tax exemptions for donations for luxury sky boxes in stadiums or for building indoor practice facilities? These are predominantly non-academic activities. Why should we tax earnings in the NFL but not in college football? Several members of congress have previously raised the issue, and it easily could arise again when tax reform becomes a national issue.

Arrogance, wealth, power and monopoly – these terms describe the current collegiate athletic establishment. But arrogance and monopoly lead to complacency and a false sense of invulnerability, and that could lead to major changes within college sports.

Richard Vedder directs the Center for College Affordability and Productivity, teaches economics at Ohio University, and is an Adjunct Scholar at the American Enterprise Institute.

Improving Federal Financial Aid and Rewarding Success

Posted on October 3rd, 2013, by Leave a comment

Richard Vedder delivered the following remarks at a Washington, DC Brookings Institution event on October 3, ” Reimagining Aid Design & Delivery: Improving Federal Financial Aid for Students.” 

Since 1971, federal student financial assistance programs have grown almost 10 percent a year, or 5.3 percent a year adjusting for inflation. In the last decade, the real growth rate has been even greater, roughly 6.7 percent.  This is unsustainable. Moreover, the proportion of individuals from lower income backgrounds amongst recent college graduates is lower than when these programs were in their infancy. Egalitarian goals have not been met.

The undesirable unintended consequences of student financial aid programs are numerous. When the Feds expand aid programs, two things happen: state governments reduce college appropriations and universities raise tuition fees. Both work to reduce the intended benefits to students. I think a decent case can also be made that these programs have contributed to high dropout rates, mediocre levels of student work effort and academic performance, and the substantial but under-discussed problem of underemployment among college graduates —the emergence of more college retail-sales clerks with college degrees than soldiers in the U.S. Army, for example, or more janitors with college degrees than architects or chemists. I think we are probably over-invested, not under-invested, in higher education in the United States, creating a credential inflation arising from using degrees as an obscenely expensive screening device, one involving massive wastes of potentially highly productive human resources.

What should we do? I think most reform proposals are tinkering with a broken system and we would be better off phasing out federal aid over the next decade or so and force colleges and families to adapt to a new reality —an adaptation involving massive innovation, following Plato’s maxim that necessity is the mother of invention.  But if we are going to keep federal aid programs, politically certain in the short run, we must above all correct two perverse incentives. First, there needs to be rewards for good academic performance and negative financial consequences for poor performance. Good students should get more money than poor students, other things equal, not the reverse as at present. Second, colleges should have skin in the game. Their inappropriate admissions decisions or inattention to floundering students massively contributes to loan defaults, yet they face no adverse consequences. That needs to change.

Beyond that, simplify the system, restricting aid to more affluent families, doing away with PLUS loans and tuition tax credits, in line with RADD recommendations.  We also should convert Pell Grants into progressive performance vouchers. By “vouchers” I mean money should go to students, not to university financial aid offices, empowering students more and making colleges more attentive to their needs. By “progressive,” I mean vouchers should vary inversely with income, being generous for truly low-income recipients, but non-existent for those whose income reaches the median. By “performance” I think that good academic performance should have some reward. No full-time student should get money for more than five years. “A” students graduating in less than four years should get a small bonus for saving the government money and as a reward for high academic achievement.

Also, I think we should have a federal policy environment encouraging new private approaches to financing, especially equity financing, where students contract to forfeit part of post-graduate earnings in return for financial support of college—the human capital contract approach. This would provide market assessments of future market outcomes that potentially could immensely help allocate scarce educational resources more efficiently.

That said, I am delighted with the RADD findings as summarized by Beth Akers. My wife, a high school guidance counselor serving low-income students, tells me that the FAFSA is a major impediment to low-income college access, and it adds little information to what IRS data already provides. Increasing consumer information on employment outcomes is vital and long overdue. Summer Pell Grants are in principle a good idea. While I think aid should be partly tied to student performance, I also favor discriminating in favor of institutions with good outcomes, although the devil is in the details. The same applies with income-contingent debt repayment: this is a good idea in principle, but schemes involving de facto partial loan forgiveness for most borrowers would have huge undesired unintended consequences.  The debate about the optimal amount of student borrowing has arisen because of the rising ratio of college costs to post-graduate income, and modest tinkering with the system is not going to decisively deal with that. Still, on the whole, this is a constructive report and the Gates Foundation should be commended for its support.

Thank you.

MOOCs: Not a Revolution, but Perhaps a Reformation

Posted on September 30th, 2013, by 1 Comment

The wave of hype and optimism for massive open online courses—MOOCs— is ending. In Slate, Will Oremus questions MOOCs as a substitute and remedy for skyrocketing costs:

As much as everyone wants to see college costs reined in, replacing thousands of professors and classrooms with a handful of websites populated by remote talking heads cannot be the answer. But before we throw the whole idea out the window, it’s worth asking: Mightn’t there be a way that online lectures could complement the traditional higher-education experience rather than replace it?

Oremus’ advocates for small private online classes (SPOCs) instead, and that seems to be the dominant online learning style for traditional students. SPOCs engage students in discussion and allow instructors to interact in a meaningful way, critical for students who aren’t as self-driven or interested in the topic. MOOCs, in contrast, do better for access, cost-control, and flexibility. A 200-student MOOC course on psychology won’t spark an interest for many students, but it’s a cost-effective way for uninterested students to earn required credit.

I’m skeptical of MOOCs dominating four-year colleges and universities. They have more appeal for non-traditional students who have families or jobs that make a degree difficult to obtain (and it’s a demographic that few four-year universities target, anyway). Community colleges could leverage MOOCs for lower costs and distance learning, but some data indicates that community-college students who take online courses have a higher dropout rate. Encouraging online course growth could backfire. Community colleges take a conservative approach to MOOCs. Traditional universities with abhorrent graduation rates and student debt levels are vulnerable. In that case, good riddance. As only 59 percent of students finish a four-year degree in six years, taking MOOC courses for timely graduation could reduce debt and allow early entry into the workforce.

Displacement in academia might happen, but experimentation and evolution within teaching methods should be encouraged for the sake of students, not discouraged to save the jobs academics. Opposing MOOCs because it might alter the status quo is a shabby argument. Protectionism isn’t new, but I don’t see why sympathy with the faculty should trump quality alternatives for students.

The abysmal completion rate for MOOCs gets too much attention. With no barrier to enrollment aside from an internet connection and an email address, combined with class sizes that can reach 50,000 students, shirking should be expected. Were academic credit or a small fee required, I’d expect a drop in students and an increase in completion rates. Many people (including myself) take MOOCs as a hobby and enroll on impulse. Some will follow through; others won’t. That’s an indictment of individual drive or dedication more than the MOOC itself. I’m currently in a SPOC, but I’m much more dedicated to it than a MOOC due to greater interest in the content and greater interaction with others in the SPOC.

Have MOOCs been overhyped? Absolutely. It’s difficult to go more than three days without reading about MOOCs; a search on Inside Higher Ed returns four MOOC-related posts in 2011, 214 in 2012, and 313 in 2013.  The Chronicle of Higher Education has 67 from less than three years ago and 328 from less than one year ago. Coverage centers around speculation rather than empirical results, however. Georgia Tech’s experimentation with a MOOC to earn a master’s degree in computer science, the first of its kind, provides a case study to watch. The benefits and disadvantages of MOOCs will become clear only after their use expands.

Technological advancements in teaching are rare. Instead of fretting about unemployed academics, universities should concern themselves with what’s best for students and the long-term goals of the institution.

Testimony at the University of North Carolina from Richard Vedder

Posted on September 23rd, 2013, by Leave a comment

Recently, Richard Vedder testified in front of  the University of North Carolina Board of Governors at their September meeting. From his remarks:

I am honored to be here today. Alas, my message is not altogether pleasant. Indeed, it may be the intellectual equivalent of having a hemorrhoid operation performed by an unlicensed French physician just returned from a wine laden lunch.

Read his full testimony here.

How The $1.2 Trillion College Debt Crisis Is Crippling Students, Parents And The Economy

Posted on September 4th, 2013, by 1 Comment

Originally published on Forbes.com here on 8/7/2013

Total Student Loan Debt: $1 Trillion                   

Two-thirds, that’s right, two-thirds of students graduating from American colleges and universities are graduating with some level of debt.  How much?  According to The Institute for College Access and Success (TICAS) Project on Student Debt, the average borrower will graduate $26,600 in the red.  While we’ve all heard the screaming headlines of graduates with crippling debt of $100,000 or more, this is the case for only about 1% of graduates.  That said, one in 10 graduates accumulate more than $40,000.

It’s a negative sum game for both student-borrowers and the economy. According to the Consumer Financial Protection Bureau, student loan debt has reached a new milestone, crossing the $1.2 trillion mark — $1 trillion of that in federal student loan debt.

This pushes student loan debts to dizzying new heights, as they now account for the second highest form of consumer debt behind mortgages.  With the federal debt at $16.7 trillion, student loan debts measure at 6% of the overall national debt.  This is no small figure, and national debt carries many consequences including slowing economic growth (translating into fewer jobs being created) and rising interest rates.  Capital will not be as easy to access.

The majority of student loans are backed by the U.S. government through banks like Sallie Mae, or since 2010, by the Department of Education.  Translation: the creditor in this scenario is the U.S. tax payer, who if students default on these loans will be subject to carry the burden of these loans.

Federal Loans are Safer than Private

Lauren Asher, president of TICAS, a nonpartisan policy group, says that government loans are the safest type of loans to take while financing education. “Federal student loans are the best way to borrow if you have to in order to get through.” She identifies a lack of information as a major problem in the debt game as she identifies growing private loan debt as a major problem. “Half of those taking out private loans have not maxed out on federal loans.”

Why the preference for federal loans with federal debt being such a hot topic? “Federal loans are subject to income based payback, fixed interest rates, and take nine months to default on, making them a much safer loan for students to take,” Asher explains.  Conversely, private loans have done away with late fees, and in the fine print have redefined the right to claim default on the loan after missing a single payment.  Default is a one way ticket to bad credit.  “Any ding in credit rating can affect [a borrower] more now than ever, even employment,” says Asher.

Asher argues, however, that higher education “is still the best investment in your future.” The college degree is getting more and more weight as political leaders are calling for upwards of 60% national higher education attainment by 2025.  And the demand for higher education is increasing.  “When the economy is down, more people turn to higher education to get an edge in the job market, but have less money to finance it,” explains Asher.

Debt and Community Colleges

If you are under the impression that only four-year schools are subject to debt, think again.  Of those students completing an associate’s degree from a community college in 2008, 38% graduated with debt.  In the for-profit sector of two-year degrees, over 90% have debt.  The average debt load at a public two-year institution is $7,000.

One community college, Henry Ford Community College in Dearborn, Mich., is offering a one-time student debt amnesty program that will allow students who owed a balance prior to or including the winter 2012 semester to afford to return to the college. The program “offers the opportunity for students to pay 50% of what is owed on their account to settle their debt with the College.”  Will this become a norm within the two-year degree space as more and more debt is accumulated?

The Cost of Debt

Of this $1.2 trillion in student debt, about $1 trillion is in federal student loans.  This figure does not tell the full story, however, as the $1.2 trillion does not include funds students must divert away from retirement savings, parent borrowing, or credit card debt.  President Obama is expected to sign the bipartisan Senate bill to tie federal student loan interest rates to the market this week.  On one side, this will reverse the interest rate hike that went into effect on July 1, lowering the current rates for undergraduate students from 6.8 to 3.8%. As the market climbs, however, these rates will climb until they reach a cap of 8.25%.  By TICAS calculation, this may cost families $715 million more over the next 10 years.

What does 3.8% interest translate to for students?  If we go back to that average figure of $26,600, compounding for interest year over year using the 10-year-payback plan that is the standard, the total cost of your $26,600 loan is about $38,600.  Break that down by monthly payments and you are looking at about $320 per month going toward student loan payments.  “Debt costs you time in savings, pushes back when and whether you can buy a home, start a family, open a small business or access capital,” says Asher.  Not to mention the opportunity cost of the education itself at almost $40,000.

Dealing with the Problem

What can we do?  With more and more emphasis being placed on college education for all, raising costs of an already expensive degree, and underemployment of college graduates running rampant, student loan debt is a problem that will cripple economic possibilities and success to come. In its recent report, Aligning the Means and the Ends: How to Improve Federal Student Aid and Increase College Access and Succes, TICAS is calling for simplification and better access to information regarding student loan debt, including information on consolidating debt, and increasing students’ information to both school’s default and graduation rates.

While many have been calling for debt forgiveness to help settle this score, others have a problem with burdening the taxpayer with the responsibility to pay back loans that they are neither responsible for, nor benefit directly from.  While a more educated populous has positive externalities, debt forgiveness sets a bad precedent for the financial world.  Ohio University developmental economist Julia Paxton says:

One of the problems of debt forgiveness is that it sets a precedent that similar loans in the future will also be forgiven. Although the loans are allocated toward education, money is fungible and will have the net impact of increasing the spending ability of students in other areas of their lives. As the expectation of repayment obligation falls, borrowers may enter into a situation where they take on higher levels of debt and take more risks. This will lead to a weakened ability to repay, creating a vicious cycle that hurts the financial sector and the credit ratings of the borrowers.

I have seen firsthand the effects of this phenomenon that economists call moral hazard. One friend explained to me in my sophomore year that because his student loan money finally came through he was able to put the finishing touches on his beer pong table.