Policy Makers Start to Question Merits of a College Education

Written by: Adam Rust and is a cross post from www.banktalk.org

The momentum against college enrollment spiked this week. Much of the fervor draws from Texas Governor Rick Perry’s State of the State address earlier in the year. Perry believes that college costs too much. He wants a new model that allows students to get a bachelor’s degree for less than $10,000. He also wants to address curriculum. He says that too many students graduate with a degree that does nothing to help their chances of participating in the workforce. Texas subsidizes the supply and demand sides of college education. Yet according to Perry, the benefits to Texas accrete through the training of a few students in a few disciplines.

Perry is probably overstating some of the costs to Texas. Federal Pell grants provide much of the tuition relief to lower-income students. They do make college accessible to more people. Student loans have gotten harder to get, particularly private student loans, because sales of student loan asset-based securities are much more difficult. They don’t attract investors in this environment.

Yet Perry does have a good point. College does cost too much. Some colleges now cost more than $50,000 a year. What share of the population can hope to attend a college with those costs? Many colleges do offer scholarships, cross-subsidized by the students that pay a full ride. But what about middle-class students? They can’t get Pell grants.

A lot of consumer advocates railed against mortage lenders five years ago when it wasn’t uncommon to see loans being made with a debt-to-income ratio of 45 or 50 percent. I had such a conversation with the lenders at Option One in 2005. They were insisting that 45 percent was a reasonable maximum. Look how that turned out! Sensible lending should hinge on a reasonable expectation that the customer has an ability to repay. Check out the numbers here, where the Department of Education reports that only one in four four-year private for-profit schools is able to pass more than 45 percent of its students within six years.

Obama has suggested that colleges demonstrate the value of the education that they offer through the gainful employment rule. Basically, gainful employment means that students can service the debt on their schooling with a job in the field that they pursued at university. The carrot offered to universities is the right to get student aid for your student. The stick is losing those funds. How simple.

The system creates thwarts competition. Colleges can up their costs with the benefit of demand-side subsidies. Everyone knows what has happened to the cost of medicine since the arrival of Medicare and Medicaid. Being a doctor used to be an upwardly mobile position, but one that presented significant training costs. Now doctors can start at $200,000. English majors don’t start at $200,000. Many start out waiting tables.  Then they go to graduate school.

That lack of competition means that for-profit schools can undercut private not-for-profit and state institutions and still generate a solid margin. It is a good business. Most of your customers are not paying. How great is that?

My own experience with for-profit schools is telling. Back in the early 90s, I worked for a small investment bank over the summer. I wasn’t making investments. I was answering phones and delivering files. The firm had made an early stage investment in a for-profit school. I had a chance to read the business plan. It went something like this:

Most of our students come with little or no academic training. They do have bright hopes. They want to be chefs, graphic designers, small business owners, or paralegals. Never mind that most of the jobs never pay much. The students don’t spend much time calculating their risks. This is because most don’t intend to pay for their education. If they do, they don’t pay until several years later. Most can get Pell grants and just about all of them can take out student loans. Our risk is minimal. Students pay up front. Our real customers is the Department of Education.

This was back when private not-for-profit schools didn’t cost that much, because college didn’t cost that much. I was paying between $8,000 and $10,000 per year. My school now charges tuition of over $30,000 a year. The total cost of attending exceeds $50,000 per year.

don’t want to say how much I was able to make with my history degree. Suffice to say that I was back in graduate school within 15 months. I paid the bills for graduate school by working as a research assistant. Tuition wasn’t that high in the first place. It was a well-regarded Midwestern state university – the University of Missouri-Columbia. I took coursework in a skills-based subject. The school had many connections to private employers. I was able to spend my summers working on paid positions. I returned to school having advanced my skill set.

Rick Perry wants colleges to focus on jobs that deliver skills that have value in the marketplace. His pet target is a paper that researched the history of Texas barbecue. I can understand the appeal of Texas barbecue, but we had no such class at the University of Missouri. Certainly, it wasn’t for a lack of material. Missouri is a state with a venerable tradition in barbecue.

Many English majors can help you with selecting fries. Sadly, it is hard to get an AC repairman from May to July, and it isn’t easy to get your furnace fixed in December.


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