January 10 2012
by John Backus

Part 1 – The Rise of the College Cartel

I wrote an article yesterday that appeared here in the Washington Post’s Capital Business magazine. I have had some tremendous feedback about this article, and many of you have asked me to expand on my ideas about how to reform the College and University system in America. This is the first of three posts I will do on the subject.

Over the last thirty years, health care costs have risen at almost twice the rate of inflation. $100 in groceries from 1978 will cost you $300 today. A $100 doctor’s visit from 1978 will cost you $575 today. All across America, we are up in arms about the ability of our health care system to control costs. The national debate about health care these past few years resulted in sweeping Federal legislation aimed at lowering the cost of health care.

Yet there is a more sinister problem out there – an industry where costs are spiraling out of control faster than health care – college costs. That same $100 spent on a college education in 1978 will cost you almost $900 today. You read that right. College costs have increased three times faster than inflation for more than a generation. And that have increased almost twice as fast as health care costs. The chart below is worth 1000 words:

While disorganized as a movement, and lacking a cohesive message, the Occupy Wall Street protesters may be on to something here. Let me help them out with their message: College costs too much, and something needs to be done about it!

At a record $750 Billion, student loan debt now exceeds total credit card debt in America. 2010 college graduates faced a record $25,350 in student loan debt each, against a 9.1% unemployment rate. It should be no surprise that student loan defaults jumped 25% in the last year (from 7% to 8.8%.)

President Obama summoned a dozen college presidents to the White House in December for an urgent meeting on this topic. It is rapidly becoming a political problem. Unfortunately, I don’t sense any desire on behalf of educators or legislators to seriously address this issue. Beyond some waving of hands and empty promises – much as we received from health care reform, don’t expect the rising cost of college to slow down any time soon. To truly “bend the cost curve,” we need to actually change the way we educate our children at college. And I don’t expect that change to come from within today’s College Cartel. Fundamental change almost always happens from the outside.

Lets look at part of the problem. According to the College Board, from their 2011 Trends in College Pricing study:

In 2008, only 2% of four-year degree-granting colleges and universities in the U.S. (53 out of 2,401) accepted less than 25% of their applicants. Almost half of all four-year institutions (1,144 out of 2,401) were open admission or accepted at least 75% of their applicants.

Most kids going to College do so because it is “what comes after high school.” As parents, we see a college education as the path to prosperity. And facts back this up. In 2010, median family income for those with a bachelor’s degree was $99,716 vs $48,332 for those with only a high school diploma. We want our kids to go to college – and as parents we will do anything to give them a leg up. We have turned a blind eye to rising college costs, because we are buying “hope” for our children and their future.

Yet with the rise in importance of the technology economy in the United States, 95% of our college graduates continue to be Liberal Arts majors. They are graduating with degrees in History. Economics. Philosophy. Political Science. Communications. But that is decreasingly interesting to employers, who need workers to be facile with technology, beyond knowing how to make a post on someone’s Facebook Wall.

Astonishingly, our colleges can’t seem to graduate more students with STEM (Science, Technology, Engineering, Math) degrees. As a country, our College Cartel has been stuck at awarding around 5% of our college graduates with STEM degrees. Yet this is where the jobs are. Especially the high paying jobs.

So, while Colleges have expanded costly tenure programs, bid up salaries for top research professors by competing with each other, and begun expansive building programs to add new facilities to their campuses, we continue to graduate students with the same basic education as they had 100 years ago. And we teach them the same way Socrates once did.

Imagine the beginning of Fall Semester. At 2,401 colleges, millions of students are sitting in lecture halls seating 100 – 1000 of our kids, all learning Introduction to Economics, or American History 101, or any number of introductory courses. Most of these courses chose from a very small number of very expensive textbooks, and students learn the same material no matter the school. All that varies is the professor, the classroom and the fellow students.

And what do our kids really take away from 4-5 years of college – at a $250,000 “retail price” for the best private schools? Let me be provocative and suggest four things:
1. They grow up and learn to become independent, especially if living away from home. A 22 year old is much more emotionally mature than an 18 year old.
2. They learn how to learn. Since most of the 95% of Liberal Arts graduates are not becoming economists or political scientists or historians or philosophers, they are clearly using the skills they learned to earn their degrees much more than the content of the degrees themselves
3. They meet a cohort of classmates, many of whom they will stay in touch with for life. The “better” the college, the higher the likelihood that these peers will help each other out across their careers.
4. They receive a diploma with a brand. This diploma means a lot if it is from one of the 53 selective schools. It means much less if from one of the other 2,348 schools.

There must be a better way. And there is. In my next installment I will offer some provocative things that students, colleges, and the Federal Government should do to fundamentally improve education.


January 11 2012
by Todd Hixon

Right on! Two additional observations about the higher ed bubble:

– It is fueled by cheap federal debt, like the housing bubble. If all that fed money were not flowing, higher ed would need to be much more pragmatic.

– The household income numbers you quote need to be examined more closely. People who go to college are generally more able, so we need to separate the value of ability from that of education. How much do similarly able people make without a college degree? And, what does the ROI look for if you are in the bottom quartile of college graduates? I’ve seen data for business schools that says that, if you are in to bottom half of the distribution, the ROI on an MBA is about zero.

Top of the page