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The Higher Education Bubble Pt. 2
Diving deeper into the problems plaguing higher ed
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A couple months ago I published The Higher Education Bubble which claimed that colleges are charging too much, acting like a monopoly, and aren’t setting students up for success in the job market.
In this piece I want to go a bit deeper on those claims.
College is too expensive.
The total cost to society, as measured by higher education spending as a percent of national output, has roughly tripled over the past half-century.
College in the United States costs at least 2x as much as in other countries, and it increases every year.
Students are spending less time in classrooms; faculty teaching went from 40 hrs to 27 hrs a week; 40% of students drop out; and 3% of GDP is spent on colleges.
There's this ever-present myth that we've slashed funding for public education in the US over the last 40 years, but meanwhile we've tripled it in terms of cost per student — and results have been flat: a massive price increase with no positive change to quality.
Why has this happened? Partly because of demand. Over time, demand for higher ed has increased due to a growing population, rising incomes, credential inflation, evidence that people with degrees perform better in the job market, and the ease by which people can pay for university (through financial aid programs, scholarships, etc.).
Costs have also increased as a result of hiring more administrators, the "country-clubization" of college, and athletic programs which use boatloads of money to attempt to build community & increase donor activity in the school's ecosystem.
Without accounting for the hidden costs (income lost by reduced participation of the population in the labor force), the total cost to society, as measured by higher education spending as a percent of national output, has roughly tripled over the past fifty years. If we do take into account the unearned income, we’re looking at trillions of dollars.
Baumol, Bowen, and Bennet have different reasons for the cost increase, as I read in Richard Vedder’s book Restoring the Promise: Higher Education in America:
Baumol claims productivity increased elsewhere, which means we have to pay higher ed employees more to keep them.
Bowen says universities spend every dollar they have because they can't measure progress.
Bennet posits that college professors have benefited financially from programs designed to aid students.
(Learn more about their theories in the books/articles linked above.)
College is a monopoly
Why is competition lacking in this market? The accreditation system. It’s basically a government sponsored cartel, where the incumbent businesses get to decide who's going to compete, and how they're going to compete. This is why the last entrant into the top 10 was over 100 years ago (Stanford).
Accreditation is a device originally serving a legitimate purpose: informing consumers, donors about the quality & legitimacy of various academic institutions and programs. But in the era of massive government financial programs, accreditation is necessary to receive federal largess.
Accreditation had a good purpose initially, to separate wheat from the chaff after the GI Bill post-WWII.
But when people were spending their own money, they made sure they're getting an education. Now that they’re essentially spending somebody else's money, they aren't as discerning.
Further, non-accredited universities don't benefit from tax breaks and federal subsidies & loans so it's hard to compete.
Harvard, Yale, and Princeton, receive hundreds of millions of dollars annually in benefits directly or indirectly from the federal government, not only in direct financial grants for research but indirectly through special preferences granted by the tax code.
Colleges are allowed to run nonprofit at the operating level. And they're *also* allowed to invest their endowments on a nonprofit basis. So in practice they don't pay taxes on either operating income or investment income. If the Harvard endowment is $40b, that’s basically a tax sheltered hedge fund.
Where does financial aid go? Not the classroom or education quality. It goes to administrators, athletics, buildings, and high status professors. Only 30% of it goes to education. That’s $600 billion annually, not including tax exemptions.
Not to mention federal financial aid programs have been growing exponentially and consequences of their growth include rising student loan debt, more loan defaults, and growing student underemployment. And also perhaps declining household formation and reduced amounts of savings.
And yet, colleges are still trying to bring in as much money as they can. They're caught competing in this weird market where you don't pay out anything to shareholders. So the benefits go to the professors, who nowadays are working less and getting paid ever more.
We’ve recreated the healthcare system by basically moving to a system of 3rd party payer, where people basically don’t have to pay for it themselves, because there's so many subsidies directly and indirectly built into the system that it breaks down all accountability from consumers.
This is what happens when the government restricts supply: price escalates. Quality remains stagnant. The system is running as designed!
Not only that. Our government also subsidizes demand with taxpayer funding, causing prices to rise even higher.
We see the same thing in housing and healthcare.
There is a mismatch between student job expectations after graduation and market realities. This results in massive amounts of underemployment, as students take jobs as baristas, clerks, and taxi drivers when they could in fact be starting larger businesses with a more substantial economic and social impact on society.
We can now see a broader societal issue where our job market doesn’t demand what’s offered by a college degree if only a small majority of college graduates take jobs requiring a bachelor’s degree or more. And if only 37% take jobs requiring just a high school diploma, it’s clear that the number of college graduates has grown faster than the number of jobs requiring relatively high levels of education.
Thus, by early in the second decade of the twenty-first century, we had nearly 50% more employed college graduates than we had jobs requiring a college degree. We had over 13 million college graduates working in jobs for which a degree was not necessary.
Looking back, there were over 100,000 people in the 2010 census with bachelor's degrees who became janitors. And there were over 5000 with master's degrees who became janitors. So what’s the deal here? Do you need to earn a master’s degree (incurring the financial and time-based costs associated with the education) to correctly wash windows or mop floors? I don’t think so.
This results in credential inflation — people make a college degree a requirement for the job, even though nothing learned in college directly makes the person more competent for the position. This is a self-fulfilling nightmare, and the same is true with grade inflation. Schools admit the same students who study the same things, and yet they have much better grades than classes before them.
With enrollment growth, the proportion of adults with college degrees went from under 5 percent in 1940 to about 11 percent in 1970, 21 percent by 1990, to about 30 percent today (over 50% if you count dropouts and associate degrees).
Can education truly be “higher” if it is something provided for a majority of Americans?
Colleges either must flunk out more students and be criticized for high dropout rates, or lower standards to accommodate the “new normal.” (They currently do the latter, engaging in grade inflation.)
Why do the colleges admit people who can't succeed? Often, because these students provide them with tuition revenues and, in the case of state universities, public subsidies. No downside for dropouts.
The taxpayer suffers, but colleges have no skin in the game. They should!
We have special exams to indicate mastery of preparation for graduate-level work (GRE, GED, CLA, CPA), and we should have the same for higher ed.
As we’ve detailed, colleges are in a tough spot. Here are some of questions I have about colleges going forward:
Will removing the SAT & GRE dilute the signal a college provides?
How will colleges financially survive long-term? (Bailout?)
Will remote degrees matter as much as a credential earned from a top-tier university?
Will international students continue to pay exorbitant prices for a U.S. education?
What alternatives will emerge, and when?
If you have any recommended readings or writings on the topic, please let me know. I gleaned a bunch of the ideas in this piece from Richard Vedder’s book “Restoring the Promise”.
Thanks to Zach Davidson for contributions to this piece
Read of the week: An epic story involving Martin Shkreli
Listen of the week: Building Membership-Based Communities w/ Greg Isenberg and Justin Murphy
Watch of the week: Tom Holland
Until next week,