higher education – Michael Sykuta

Race, College Admissions, Harvard & Opportunity Costs

Reading this article in the Chronicle of Higher Education about the on-going affirmative action lawsuit against Harvard, this line (buried deep in the article) jumped out at me:

An applicant’s race, they [Harvard admission officials] said, can help, but not hurt, his or her chances of admission.

Earlier in the article, the author pointed out that Harvard has 37,000 applicants for 2019, 8,200 with perfect GPAs, 2,700 with perfect verbal SAT scores, but only 1,700 spots to offer entering students.

If you’re a student of opportunity costs, you immediately see the problem: It is impossible for an applicant’s race to “help, but not hurt,” the applicant’s chance of admission to Harvard.

If one applicant’s race helps that student’s chance for admission, it reduces the number of slots remaining available for other applicants. If an applicant’s race does not help them, their chances of admission–all else equal–are lower because there are fewer slots available. In other words, it’s hurts the chances of “not helped” applicants because there is a limited number of total slots.

The Harvard admission officials’ comment could only be true if there was no limit on the number of students offered admission. With no admissions cap, admitting one more student with “Attribute A” would have no consequence for the admission of applicants without “Attribute A.” Capping admission makes slots a scarce resource, which means there is an opportunity cost of offering a slot to any one person in the form of fewer remaining slots for others. Consequently, any criteria that advantages one (group of) applicant(s) necessarily hurts the chances of an applicant not matching that criteria–including race.

So in Harvard’s case, if race helps anyone, it must hurt others. By definition. Because opportunity costs.

The Old College ROI

Today I ran across a graphic from The Economist in March 2015 that shows the return on investment (ROI) to different college majors by level of selectivity of the college the student attended. The charts show that while college pays, it does not pay the same for everyone. More specifically, it does not pay the same for every major. Engineering and math majors have high ROIs, followed by business and economics majors. Humanities and arts majors have lower ROIs on average.

If you’re underwhelmed by the realization, you should be. After all, it’s really common sense and something I’ve written about before here. But it’s a fact that seems incomprehensible to so many (for starters, count the number of votes Bernie Sanders has received). This is important because college education is subsidized not by degree, but by the expense of the school the student chooses. An arts major at Stanford is paying the same tuition as the engineering major–and likely borrowing just as much money–but their returns on investment for those educations are vastly different. Put another way, the value of those degrees are very different, even if the price of the degrees is the same.

Interestingly, though, the ROI by degree does not change much based on the selectivity of the school (typically a measure of quality). Looking at each of the degree types, there is very little obvious correlation between selectivity and ROI (taking into account financial aid; i.e., based on net-cost not listed tuition). While students from more selective schools may earn higher starting salaries, the higher cost of their education means they are getting no better return on their financial investment than students of similar majors at much less selective schools.

This suggests that the market for college graduates is actually working pretty darn well when you take into account students’ degrees (i.e., the value of the human capital they develop in college).

It also suggests we should reconsider federal policy for student loans. If we insist on continuing to subsidize higher education (and all the ills that creates), at least we could do it more intelligently by tying loan amounts to degree programs rather than tuition levels.

How Federal Student Loans Increase College Costs

A recent paper by researchers at the Federal Reserve Bank of New York shows how increases in federal student loan programs–intended to make college more affordable–actually increase the cost of college. As with other markets, when the supply of money available to pay tuition increases, the price of tuition rises. The abstract reads:

When students fund their education through loans, changes in student borrowing and tuition are interlinked. Higher tuition costs raise loan demand, but loan supply also affects equilibrium tuition costs—for example, by relaxing students’ funding constraints.To resolve this simultaneity problem, we exploit detailed student-level financial data and changes in federal student aid programs to identify the impact of increased student loan funding on tuition. We find that institutions more exposed to changes in the subsidized federal loan program increased their tuition disproportionately around these policy changes, with a sizable pass-through effect on tuition of about 65 percent. We also find that Pell Grant aid and the unsubsidized federal loan program have pass-through effects on tuition, although these are economically and statistically not as strong. The subsidized loan effect on tuition is most pronounced for expensive, private institutions that are somewhat, but not among the most, selective.

But the effects don’t stop with rising tuition. This increased demand for college education also exacerbates income inequality by inflating the supply of college graduates. (See this piece by George Leef for a full overview of both the NY Fed paper and the income inequality effects).

It’s not rocket science. It’s pretty simple supply-and-demand stuff, actually. No matter how good the intentions, policies that ignore these effects tend to do more harm than good. In this case, generous federal student loan programs not only lead to increases in tuition that result in even higher loans, but reduce the earning power of graduates (on average) and decrease their ability to repay those loans. A pretty perverse circle of effects indeed.

(Not-so) Public Higher Education

NPR reported yesterday on a Government Accountability Office (GAO) report which finds that as of Fiscal Year 2012 (the 2011-12 school year), more of public colleges’ revenues came from students’ tuition than from state (public) funding. The following graph from the GAO report shows the breakdown in revenue sources over the previous 10 years:

As a faculty member at Missouri’s flagship public university, all I can say is, “Welcome to the party! What took you so long?” At the University of Missouri, tuition topped State appropriations for the first time in 2004. According to the FY13 Budget Book for the University of Missouri System (which includes four autonomous campuses and two hospital systems), State appropriations constituted less than 15% of total revenue, with another 2% from State grants. The table to the right shows the breakdown by each “business segment” of the University system. For the flagship campus (MU), net tuition and fees were 40% more than State appropriations. The largest source of income for the University came from “sales and services of educational activities and auxiliary enterprises.” That includes things like Residential Life and Campus Dining (which are also paid by students), Parking & Transportation Services, the University Store (which is much more than just textbooks, but includes those as well), and Athletics (which proudly boasts that it is self-funding from ticket sales, radio and television revenues, licensing, etc.).

The neighboring graph from the University’s 2014 Budget Update shows the breakdown of MU’s Operating Budget revenue, which might be considered the heart of the direct educational expenses. It shows that over the past 25 years, State support has dropped from 70% to just 32% of operating revenue. Meanwhile, tuition has increased from just 27% to 62% of operating revenue. And this over a period of time that operating expenditures increased, so tuition is a much bigger slice of an even bigger pie. Looking at the University as a whole (not just operating), students foot the bill for about 33% of total revenues (including room and board) compared to just under 17% in State funding. And that doesn’t include parking fees or bookstore purchases.

Some complain about the cost of higher education skyrocketing, and total expenditures have increased substantially (largely a result of increased administrative expenses). However, when students complain about the costs of higher education, they are focused on their tuition bills. And tuition has gone up at public universities, no doubt. Since 2000, the average annual increase in tuition at MU is about 16% (much of that in the early 2000s), which is much higher than the rate of inflation. But students (and their parents) need to recognize that the reason tuition rates have grown so much is to offset the decline in State appropriations (which not coincidentally, started hitting hard in the early 2000s). Expenditures have gone up nowhere near what tuition has.

Which is all to say, the myth of “public higher education” is really just that; a myth. Yes, there is still some State funding for “public” universities, but it is an increasingly small percentage. Public universities are now much more dependent on tuition–just like private universities–than on State funds. And while that scale may have tipped just recently across the country as a whole, in Missouri it has been that way for quite some time.

The Blockbuster Lesson for Higher Education

I currently have the…pleasure?… of serving on a campus committee that’s charge ostensibly is “to advise the vice chancellor for Administrative Services on the facility needs of the campus.” This is my second year (of a three-year term) on the committee. At one of our meetings last year, as we were being briefed on several planned construction and remodeling projects, I raised the question, “Has anyone considered that we may be acting like Blockbuster in an age of Netflix? Given trends in higher education, with increasing use of online technology, does it make sense to continue investing so much in brick-and-mortar facilities?” Few seemed to understand (or appreciate) my question, and it went largely unaddressed.

Earlier this week, I ran across an article by Clayton Christiansen and Michael Horn in the New York Times arguing that online education is going to be an agent of transformation in higher education. They argue that most traditional higher education institutions are, at best, reacting to online education in the same way sailing ship companies reluctantly adopted steam engine technology by just supplementing their sailing vessels with a steam engine, rather than embracing the new technology and replacing their sailing ships with steamships. Yes, that is precisely the way most universities–including mine–seem to be reacting to online education. I sent a link to the article to my fellow committee members, reminding them of my comments last year about Blockbuster.

It seems that, in the minds of some at least, advising the vice chancellor on the facilities needs of the campus does not include taking into account the potential changing nature of higher education and its implications for the facilities needs of the campus. Such a “bigger picture” is beyond our pay grade. Not surprisingly, I suppose, those observations were shared by administrators who sit on the committee. I was referred to our University’s fairly fresh “strategic plan,” which itself ignores the external higher education environment in which we operate. Point made.

But then, the real irony of the story. Within hours of these email exchanges, DISH Network announced they are shuttering the remaining Blockbuster stores in the US and shutting down Blockbuster’s mail-order deliver service. The company that, in its heyday, revolutionized the video rental industry is now dead; a victim of ignoring what it perceived to be an inconsequential technological change. As Larry Downes and Paul Nunes share in their Harvard Business Review blog today, Blockbuster became a casualty of “Big Bang Disruption.”

I doubt my committee colleagues noticed the announcement. If they did, I’m sure most disregarded it as purely coincidental and not relevant to our work–if they even connected the dots. And yet the questions remain for traditional universities and colleges, including mine:

Are we ignoring a big bang, disruptive technology in online education? (For a nice piece arguing yes, see Alex Tabarrock’s “Why Online Education Works“)
Are we still investing in long-lived brick-and-mortar assets that are likely ill-suited to compete in the future market for higher education?
Do we recognize that our market niche, if we are to have one at all, will likely be less about selling higher education than about selling a collegiate experience?
What kind of facilities are best suited to serving that market?

But those aren’t questions for me or this committee. Above our pay grade. Not what the kind of question the facilities committee should be asking. I wonder who in Blockbuster was similarly dismissed?

Misguided Student Loan "Solutions"

ABC News is reporting that Congress is set to take up a student loan fix, but it’s difficult to fix a problem you have yet to define–much less understand. But when has that ever stopped Congress before?

What is the “student loan problem” to be fixed? The immediate issue is that the interest rate for new federally subsidized loans is set to double on July 1, from 3.4% to 6.8%. Republicans are offering a plan that would keep rates from going up as much in the short-term, but could potentially increase several years down the road (assuming Congress wouldn’t step in to stop it then…as they’re trying to now). Democrats, on the other hand, simply want to extend the current 3.4% rate…ostensibly for just two years, while working on a long-term fix (a familiar tune). Democrats believe that, by keeping the price of student loans artificially low, they are helping the average person or family better afford college.

And this is the point where economic reality (and the real student loan problem) is promptly ignored. Continue reading “Misguided Student Loan "Solutions"”

The Real Problem With Student Loans

Suppose you want to make an investment in a long-term asset that pays off over the next 45 years. You go to the bank and ask for a loan to pay the up-front cost of the investment with the promise to pay the funds back once the asset begins paying returns. The bank offers to loan you the funds at an interest rate of X% that reflects the risk-adjusted cost of making the loan based on the riskiness of the asset and your likelihood of repayment.

In any normal context, you would look at the interest rate, look at the expected payoff of the investment, and determine whether or not the investment still made sense given the cost of borrowing the money. If the cost of the loan to make the investment was higher than the expected payoff, then you would either seek a cheaper loan or you would forgo the investment.

That is, unless it’s a student loan. And THAT is why we have a student debt problem. Continue reading “The Real Problem With Student Loans”