Higher Ed is Broken!
I keep hearing that Higher Ed is broken. The consistent theme is that the price of Higher Ed is going through the roof, while it no longer guarantees you a good job when you graduate. Students are taking out student loans that will create a financial burden that they may not be able handle. The facts are clear… This is happening.
Why has this happened?
College was Oversold!
First, we have been fed a mantra that going to college and graduating guarantees you a better life. This is backed up by study after study showing that the average earnings of a college graduate, or even someone who attended some college are much higher than the earnings of a high school graduate.
However, we all know that averages distort the reality of the individual outcomes. Averages hide the variation in population. Lately, we have been getting more studies breaking down the incomes of graduates by school and by major and we are seeing that the average was hiding a harsh reality. Those in STEM related fields were far outperforming the average. In contrast, those in the arts and humanities were far underperforming the average.
Meanwhile, there is very little differentiation of tuition (price tag) by major at any given school, so the ROI is dramatically different. We have some graduates making out like bandits while others are disillusioned by their prospects when they graduate.
Easy Money Stimulates Demand
The next issue contributing factor is “easy money”. Based on the belief that a college degree will rise all boats, the federal government made it extremely easy to get federally backed loans to fund education. The federal government’s backing didn’t differentiate the type of major or institution you pursued. The funds are there for any accredited school no matter the major you are pursuing. A bank would never make this kind of blanket loan because they would see the differing outcomes and recognize that some majors didn’t create the return required to pay back the loan. So, there is excess capital going into schools and majors that create no Return on the Investment.
It would be like the federal government backing a $1 million loan for a house that was worth $100,000. Builders would be happy to build these houses. Banks would be happy to lend the money with the federal backing. And home owners who dreamed of a home would be happy to buy this home, not recognizing that they over paid. We saw this happen in the real estate market… and its about to happen in higher ed.
Rising Demand Increases Prices
Since it became universal belief that education would improve your lifetime earnings and financial aid was easy to get, it drove increased demand for a college education. Everyone should get a college degree. As we all know from basic economics, when demand increases, two things happen – the price goes up and supply increases. We have seen both of these things happen in amazing scale.
The number of institutions of higher ed and the number of majors offered has exploded over the last 20 years. Between 2001 and 2011, the number of 18- to 24-year-olds increased from 28.0 million to 31.1 million, an increase of 11 percent, and the percentage of 18- to 24-year-olds enrolled in college rose from 36 percent in 2001 to 42 percent in 2011. The most notable area of growth has been the private for-profit institutions which makes complete sense. When there are exorbitant economic gains to be made, competition comes in.
Likewise, we have seen the cost of education sky rocket. As can be seen in this graph by the New York Times that has circulated the web, the rising cost of Tuition has far outpaced all other goods in the last quarter century.
It’s clear that this is a demand side problem. We have consumers making irrational decisions because they lack the information necessary to make a rational decision. They act completely rationally given the data they have. They are told by society that a college education will provide you a better future. You are a loser if you don’t get a college degree. Also, Society offers to loan them the money to attend college. On the face of it, it makes sense. College graduates make significantly more over their lifetime on average.
This national mantra has led us to miss the differences by school and degree.
How do we fix it?
It’s simple. Create transparency of outcomes by school and by degree. Require schools to disclose outcomes for first year graduates, graduates after 5 years and after 10 years. For first year graduates, make them disclose the percentage that are employed in their field of study. Make them share the employers that are hiring their graduates. Make them share the average salary, median, and distribution by major by school for each of these time horizons, 1 year out, 5 years and 10 years.
The problem is that the consumer is making a large investment without any idea of the return. We have faced similar problems in other areas. This is comparable to the requirement we have on food manufacturers that they must disclose ingredients and nutritional information or drug manufactures who must disclose side effects or the banks being required to disclose payment terms for a loan. In each case, there are very formal, consistent, transparent and prominent ways that the providers are required to disclose critical consumer information that is critical to the purchase decision.
This is common place in graduate schools of business. There is amazing transparency around the percent that are employed at graduation, the starting salaries (including mean, median and distribution), employers, etc. This makes it easy to compare graduate schools of business.
When I decided I wanted to go back to school full time and get an MBA, I turned to the various rankings and this data was abundantly available. Each school had a brag sheet that cut the data eight ways till Sunday. Through this data, it became extremely clear that if you wanted to get a return on your investment, you had to go to a top 15 school. Actually, the top 1o were where the ROI was almost guaranteed. There were a few like my school, Darden, that bounce in and out of the top 10 that fit that category as well. At that point, I came to the conclusion that going full time for an MBA only made sense if I got into one of these top schools. Otherwise, it would be better to stay in my job and go part time. Luckily, I did get into one of these schools and the ROI was realized.
If you want to get a flavor of what I am talking about, look at Harvard Business Schools data on Employment Statistics:
There is no doubt about the ROI of an MBA from Harvard.
Now, translate that to undergrad. Imagine, if a student and their family could see how graduates do the first year, the 5th year and the 10th year after graduation by school and by major. Imagine the student was required to sign a document saying they had seen this data before they could accept enrollment and accept financial aid. They would make very rational decisions.
How do we get the data?
Isn’t this data really hard to get? I have heard career placement officers say the data is really hard to get.
Go to the ultimate source – IRS data
Let’s take it out of the schools hands. This is where our Department of Education should be doing a better job. They should be collaborating with the IRS. They could combine their student loan data with the IRS income data and provide a great deal of insight into outcomes. They could then use the data as part of their standard Entrance Counseling. The student would be required to review the expected outcomes vs. the loan payments they would have to make to get an idea of what their finances could look like over the next 10 years. This would be eye opening and I am sure would cause many to question their decision.
Higher Ed institutions won’t like this because it will create accountability. As a result, demand will initially decrease and there will be significant price pressure on tuition. Hard times will befall Higher Ed until the point at which they have improved outcomes to justify the investment.
This could be the biggest contribution the Obama administration makes before they leave office and they could do it unilaterally.