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.

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.

Cost of College

There's an article in the New York Times about the decades-long rapid increase in the cost of higher education. Another one is on cnn's website. Both refer Measuring Up 2008, The National Report Card on Higher Education (pdf) from the National Center for Public Policy and Higher Education. In the Times article, the Center's President is quoted saying:

The report, “Measuring Up 2008,” is one of the few to compare net college costs — that is, a year’s tuition, fees, room and board, minus financial aid — against median family income. Those findings are stark. Last year, the net cost at a four-year public university amounted to 28 percent of the median family income, while a four-year private university cost 76 percent of the median family income.

I found median family incomes by state here, and looked up our state to find that it's about $53,000. According to the statement above, a private university would have a net cost of around $40,000. We're nowhere near that. In fact, family contributions are less than a quarter of that figure. But we have also not raised tuition much in the last decade--certainly nothing like the graph shown in the article (reproduced from the original report below).

In 1995 our tuition was $10,488. Now it's $18,792, but discount rates have increased too. Leaving that detail aside, it would be an increase of around 79%, or 4.6% per year average. The graph shows an increase of about 293% in the same period, or 8.6% per year. The point of this is that the averages conceal considerable variety.

Loans increased by over 100% in the last decade, according to the report (Stafford Loan borrowers increased by 50%). This leads naturally to the speculation that tuition prices have been inflated by the credit bubble along with housing. With loans harder to get, the grim calculus isn't hard to compute: some combination of fewer students enrolled and lower net tuition paid. This will reduce net revenue to many institutions.

What to do? Undoubtedly, there are efficiencies to be found at any institution. The luxury of NCAA division II (scholarship athletes) will be under pressure. Division III nominally has no athletic awards, which adds up to a lot of money quickly. Other ideas include:

• Instead of direct institutional aid, require some work-study for the money. This saves on part-time employees.
• Instead of direct institutional aid, make institutional loans. I don't know of anyone who does this, but it worked well for GM for a long time. Small institutions could form a consortium for this. The way it would work is to loan students money with repayment starting at some point after graduation. The money loaned isn't real--it's just discounted tuition, so no real money changes hands until repayment. There are probably legal issues here I'm not aware of, but it would alleviate the loan crunch and also let colleges eventually generate interest from these loans. Maybe later on they can divide them up into tranches and sell credit swaps (just kidding).
• Add or increase after-work classes for working adults. The infrastructure for a college or university is large and expensive. Using classrooms at night and hiring instructors is a small additional cost for the additional revenue generated. Flexibility in tuition structure can make it easy to meet demand with supply.
• Online classes are trickier because of the competition. This may or may not be a good investment for the institution, but even traditional or evening classes can be made more efficient by using a hybrid approach. If some of the class meetings are online, there are additional types of learning opportunities, as well as the potential to reduce some costs and make it more convenient for commuters.

In any event, I predict a growth industry in education consultants to come and tell you how to make your operation more efficient. This give the administration someone to blame when they eliminate positions.