Shorting Higher Ed

There are stirrings lately that the Edu-bubble--putative over-leveraging of higher ed--is about to burst. For some time, the narrative in the press has been that a four-year degree is overpriced, typically with graphs that show average tuition and fees. Here's one from Money magazine last year (graph on left).

This one was cited byt Glenn Reynolds in a Washington Examiner article "Higher education's bubble is about to burst":

College has gotten a lot more expensive. A recent Money magazine report notes: "After adjusting for financial aid, the amount families pay for college has skyrocketed 439 percent since 1982. ... Normal supply and demand can't begin to explain cost increases of this magnitude."

I'm not sure he noticed the Money article was a year old. He gives no proximate cause for thinking the bubble is pop-worthy.

There have been others, for example in the New York Times. I summarized and commented on some of these in this post in November 2009.  It's a popular sport to find examples of recent graduates with mountains of debt and figure out where the blame goes. For example, this article in the New York Times:

[...] Ms. Munna, a 26-year-old graduate of New York University, has nearly $100,000 in student loan debt from her four years in college, and affording the full monthly payments would be a struggle. For much of the time since her 2005 graduation, she’s been enrolled in night school, which allows her to defer loan payments. This is not a long-term solution, because the interest on the loans continues to pile up. So in an eerie echo of the mortgage crisis, tens of thousands of people like Ms. Munna are facing a reckoning.

I speculated that at some point we'd start to see discount online colleges, and compared it to a merger of University of Phoenix and Wal*Mart. That doesn't seem to have happened yet, but Wal*Mart has bought into the current prices in bulk. In The Washington Post article "Wal-Mart partners with online school to offer college credit to workers" Ylan Mui writes that " [I]n classic Wal-Mart fashion, the company negotiated a 15 percent tuition reduction on other courses at APU in exchange for handling some administrative and marketing duties." This is from American Public University, where their website quotes prices up to $300/credit, which is about the going rate for coursework.

Is this too high? If you imagine a three-credit course with 20 students enrolled, each paying the $300 per credit, that's a total revenue of $18,000 for the course. The instructor may cost $3000, and the infrastructure a few hundred. A large amount goes to advertising, and there's some administrative overhead. The rest is profit. From the article:

American Public University is one of a growing number of so-called career colleges that operate on a for-profit model, rather than as state institutions or private foundations. APU's parent company is publicly traded and its reported revenue jumped 43 percent to $47.3 million during the most recent quarter, while profit rose 46 percent to $7.6 million.

A large part of this profit comes from the federal government in the form of grants and guaranteed loans. (See this article for details.) There is noise now about changing the rules to cut off this geyser of public money going into the pockets of shareholders. Steve Eisman, who bet against the mortgage industry and won, is quoted in Mother Jones in "Steve Eisman's Next Big Short: For-Profit Colleges":

In a speech titled "Subprime Goes to College," delivered Wednesday at the Ira Sohn Investment Research Conference, Eisman blasted the for-profit education industry, likening these companies to the seamy mortgage brokers who peddled explosive subprime loans over the past two decades.

This is political, of course. The for-profits seem to have enamored themselves to the Republicans, who are perhaps hoping to privatize all of education. The Chronicle has an article about a review panel of 18 individuals...

[...] that reviews accrediting groups. And the stark divisions among those named to the panel does not bode well for a unified or harmonious approach to its task when it begins meeting again this year after a two-year hiatus.

Agendas are clear from the nominations:

Congressional Republicans, naming a third of the committee's members, mostly chose panelists from the business world or for-profit colleges but no one currently serving at a traditional nonprofit institution. The GOP appointments include Anne D. Neal, president of the American Council of Trustees and Alumni, who served on a previous version of Naciqi and was one of the most outspoken advocates for colleges to show greater evidence of student achievement and for accreditors to require such evidence in their standards.

Republicans also named two leaders of proprietary colleges to the committee: Arthur E. Keiser, chancellor of Keiser University, and William J. Pepicello, president of the University of Phoenix.

Congressional Democrats, by contrast, chose four of their six members from the ranks of public colleges, along with the former chancellor of the University of California at Davis.

So Republicans are for private, for-profit education and for standardized testing. Democrats are supporting the old creaky model of higher education. This doesn't bode well for reasoned debate. 


The Dept of Ed is casting about for new models.  In this article in The Chronicle, Secretary Duncan is quoted as saying that

his hope is to reallocate money from other federal programs, which he didn't name, and use it to offer financial incentives to colleges that show creativity in containing costs and improving their graduation rates.

Huffington Post article lists one possible remedy:

In January, the Education Department suggested one answer: for a program to be eligible [for public money], a majority of its graduates' annual student loan payments under a 10-year repayment plan must be no more than 8 percent of the incomes of those in the lowest quarter of their respective professions. The earnings data would come from the Bureau of Labor Statistics.

This is the kind of measure I've been asking for for years--actual data on how students do in the marketplace after graduation.  This would do more than anything to illuminate the debate about the worth of education.