Middle Income Students

The College Board has a new report: "Paying for College: Students from Middle-Income Backgrounds."

"Families at the upper end of the broad middle-income range have seen their incomes increase slightly, while those at the lower end of this range have seen their incomes decline."

This is a very short, bullet-point type report, and worth taking a look at. Particularly if you're trying to figure out financial aid strategies.

Cheap is Good, Free is Better

As I mentioned in a previous post, the book Predictably Irrational by Dan Ariely [amazon], people overestimate the value of free. At the same time, students and parents have a keen sense of prices that are too high. For example, textbook prices come to mind. In some cases, fees for college do too--if the student can't see the benefit.

In a staff meeting recently, the issue of textbook costs came up, so I was interested to see this article in Inside Higher Ed, which talks about the experiments at Northwest Missouri State University in reducing costs. They currently rent textbooks for cheap, and are transitioning to an online textbook system. This isn't free, but is at least cheap. And it's high-tech, which may be a selling point.

Can you do free? As a thought experiment, consider how many textbooks your students buy annually. Let's take a nominal population of 1000 undergraduates, each purchasing $1000 in books per year: 10 courses at $100 for each textbook. This is an implicit $1,000,000 investment that the institution makes each year. That is, if that money were not going to textbooks, it could as easily go toward a technology fee or financial aid (cost reduction). At a large institution, this scales up linearly: 30,000 students = about $30M per year. No wonder the textbook companies can afford to send professors free review copies. I used to sell them back to the book weasel (they guy who comes around buying them), and then use the cash as rewards for math problems given to my students. [As an interesting aside, I noticed it was hard to give the money away. If I made the prize too high, most students assumed the problem was too hard for their ability to solve and didn't even try!].

But back to the idea of free. In some evening programs particularly, adult students learn that they can take out more loans than they actually need for college (at least before the recession hit). The word on the street is "go to college at night and they give you free money!". Of course, it isn't really free, nor would textbooks be free, but they could be paid for out of tuition or anonymous fees, so it's a normal operational expense. Free textbooks at Your College.

How many of these texts do you think are actually being used at any one time? If we assumed we could eliminate the need for textbooks in class (using electronic editions projected onto screens or something), what is the maximum number that would be used at any one time? This is a typical IT kind of question. How many simultaneous phone calls need to be made at peak periods? How many wireless connections? Except in this case, we could circulate physical textbooks in the library as a low-tech solution. The most practical version of this is to buy a couple of textbooks for each type in the bookstore (used if you can) and circulate them in the library. Many students would opt to buy their own books, but not all. As demand increases, increase the number of texts. The electronic version is much cleaner, of course. Physically buying and circulating books is not attractive. Much nicer is having a set number of electronic copies that can be simultaneously accessed. Then all that's required is the infrastructure to deliver them to the students. "Free" textbooks plus high tech access is a winner.

We can't afford to miss a trick in this economy. Reducing cost and increasing customer satisfaction are paramount. I predict more institutions starting to use Customer Relations Management systems...

The Common Application

According to this New York Times article, there are about 350 college and universities currently using the common application at www.commonapp.org. According to the site's "exclusive users" page, there are 125 institutions that only use this site for applications. The list includes very presigious institutions, but only a handful of publics. The full list is actually 346 members in 45 states plus D.C., and includes 21 publics (including the SUNY system). The site's mission statement reads:

The Common Application is a not-for-profit membership organization that, since its founding over 30 years ago, has been committed to providing reliable services that promote equity, access, and integrity in the college application process. We serve students, member institutions, and secondary schools by providing applications – online and in print – that students and school officials may submit to any of our nearly 350 members. Membership is open to colleges and universities that promote access by evaluating students using a holistic selection process.

The student application form is short. You can download it as a .pdf, but they naturally encourage an online application. There is a personal essay required. To apply online, you need to create an account.

Adding your institution to this list puts it in good company. Neither of the institutions I'm working for currently is on there, but I'll get that changed. There are positives and negatives to using this site exclusively for applications. On one hand, it simplifies your life, but on the other you give up some control. For example, if you want to route applicants to information about a particular major, based on their preferences, I don't see how that's possible with the common application. There may be some programming API that allows such things, but it's not obvious from the menus.

The Times article cites comment site College Confidential as a portal into the souls of prospective applicants. Browsing through the comments, it seems like the type of student who uses these two sites is pro-active and ambitious. Just the kind of market many institutions would like to tap into. The number of college-bound sites seems to proliferate daily. It will be interesting to see if one, like facebook, takes over as the premier place to go. The common application seems to have a head start on signing up some of the best schools in the nation, and are no doubt attracting high quality applications. The article is actually about network congestion that panicked some students doing last-minute applications. Not a bad problem to have, as long as it's fixed quickly.

Gloom and Doom for Traditional Universities?

There's an interesting article at WebWire that I found linked to U. Bus. predicting the end of the traditional model of universities. This is predicated on the existence of disruptive technologies, that the higher ed industry is mature and incapable of much innovation, and that it is currently overpriced. The following quote attributed to Peter Druckeris is cited from Forbes:

Thirty years from now the big university campuses will be relics. Universities won’t survive. It’s [Internet technology] as large a change as when we first got the printed book…The cost of education has risen as fast as the cost of health care…Such totally uncontrollable expenditures, without any visible improvement in either the content or quality of education, means that the system is rapidly becoming untenable. Higher education is in deep crisis.

As an example of things to come, the author gives us Andrew Jackson University's 'sponsored tuition' program. It's a fascinating idea--pay for the marginal cost of instruction for those students through commercial sponsorship. Here's a quote from AJU President Don Kassner, taken from Wikipedia:

Most universities spend a tremendous amount of money to recruit students. Many spend as much as thirty-five percent of their revenue on marketing and advertising. They have to keep their tuition high to recover these costs. We eliminated these costs by structuring relationships with strategic partners that refer potential students to us. Therefore, we can operate a quality, degree granting institution without the escalating tuition and excessive fees deemed necessary by many schools.

That's a glimpse of the disruptive technologies part. What about inflexibility of the current system?

Anyone who's ever served on a committee will not find it hard to believe that higher education as an industry is not going to change overnight. A study from The National Center for Public Policy and Higher Education and Public Agenda called The Iron Triangle (pdf), which seeks to illuminate the gearworks of change in higher education. The authors quickly get to a central problem: "The various stakeholders must agree on the definition of the problem." Moreover, principles (according to the article) are locked into a mentality of thinking of cost, access, and quality as forming what mathematicians would call a partition--improving one variable necessarily has adverse effects for the other two. It's a zero-sum game, in other words. The stakeholders do not necessarily hold the same view--the industry is seen as bloated an unresponsive. Within the report are found comments by presidents on the subject of cost, access, and quality. These are very interesting and highly recommended for reading in detail.

Not all presidents bought the premis of the iron triangle. Here's a quote from one president, which resonates in light of current events in the auto industry:

Years ago I heard a speaker from the auto industry who asked, ‘What
happened to the auto industry in the 1970s? It wasn’t bad design. It wasn’t
planned obsolescence. It wasn’t unions. Fundamentally, it was hubris. It was
a belief that the American automobile industry had always built the best
vehicles, always would, and that the public would buy whatever we built.
We saw our problem not as a product problem, but as a marketing problem.

Maybe. I think it's a little more complicated than that. Here's one idea to consider.

What if the market for the best students has become more liquid, driving up their price? That would mean that for the same cohort of talented students, universities generate less revenue from them because they're bidding against each other. Who makes up the short-fall? Costs can get pushed down to the need-based crowd, which is what's been happening (see practically any issue of Opportunity for such an argument). This has been enabled by cheap money. So the combination of aid leveraging for talent and easy money could be part of the answer. It would be very interesting to see the financial aid matrices for various institutions over the last ten years, to see how they've evolved.

Virtual Loans

I mentioned an idea in the last post about institutional loans. A better word might be virtual loans because the money doesn't really exist until it comes due. That is, it's a loan with no capital at risk. You'd think this would get the attention of a bank or two, but in these times who knows.

Direct loans from the government are limited in amount, and subject to other kinds of restrictions. Loans in general are likely to be harder to get for students in the current climate. I've argued that the easy money of the last decade has allowed tuition to rise in its own bubble along with housing, and that there will be a return to Earth in short order. Virtual loans are possibly a way to ease this pain.

Here's how it works. Most institutions give out institutional aid that is a simple discount from tuition. We don't ask anything in return for this discount, and it's used to get students with the kind of ability we want to attend, or (to a lesser extent) help students who can't afford the cost. For the latter group particularly, it's probably a good idea to tie the aid to student work. This helps alleviate the need for part-time workers, and gives the students a point of engagement with the institution that should help with their retention. But I digress.

Instead of a no-strings grant from the institution, why not ask for something? Work study is one idea, but there are lots of others. Future participation in alumni activities, recruiting, etc. are some ideas that could be the strings attached. Another one is repayment for a part of the total aid. That is, the institution "loans" the student money to make up part of the tuition instead of granting it directly. Since this money never really exists, the terms of what I'm calling a virtual loan could be quite generous. How about a zero-percent loan, deferrable two years after graduation, and paid out over 10 years? Even if many of these default, this program only has to pay for its own administration in order to break even, since there's no real capital at risk. The goal would be to provide a future revenue stream with no present capital outlay.

Even better would be to involve a bank in the processing of the virtual loan. Banks do loans all the time (well, they used to, and this will give them something to do). They have the regulatory infrastructure in place, and are set up to receive payment with no additional bureaucracy needed. This should lower the administration cost. If you know a banker, ask him or her on what terms would he or she loan money at no risk.

There may be some legal reason why this all can't happen. I should have opportunity in the near future to explore this idea with people who know more about the regulations than I, and I'll find out if this idea is feasible. Maybe someone is already doing it. The virtual loans wouldn't do anything to alleviate the current financial woes, but would start to create a new long-term revenue stream that would start to pay off in a few years. With judicious planning, an institution could be audacious enough to eventually offer these kinds of loans to the extent that they replace traditional loans, and thus secure a favored place in the market. That is, if the virtual loans were managed so that they push out more traditional loans, it would be very attractive to students because of the much lower interest rates. This could only happen by institutions weening themselves off of the interest-bearing loans over time, but in principle there's no reason for that to be impossible.

The fact that virtual loans are not ubiquitous seems to me to be an inefficiency in the marketplace. But it may be that the conditions for such loans are not favorable enough to warrant the administrative costs. If the default rate is near 100%, for example, it might create more problems with alumni (who often voluntarily give money) than it is worth.