
The College-Cost Calamity - synacksynack
http://www.economist.com/node/21559936
======
_delirium
One thing missing in this analysis is the contribution of more stingy state
funding to the decrease in affordability of public universities. For example,
the University of California is actually cheaper per-student now to operate
than it was in 1990, by about 25%: if you take the total budget, divide by
total students, and adjust both numbers for inflation, the result now
considerably lower. And that increased overall efficiency comes even despite
an increase in administrators.

So if the per-student budget is lower, why are per-student fees much higher,
rather than 25% lower? Well, the state portion of the funding has declined
even faster: from $16,500 per student to somewhere in the $8-9k range in the
upcoming budget (inflation-adjusted). So tuition has gone up to compensate.

The situation differs at different universities, but in the UC system it's
close to being a dollar-for-dollar replacement of declining state funding by
increased tuition.

------
mcherm
College tuition is too high and rising too fast -- that's nothing new. But
this article wasn't (primarily) about that, this article was about how
borrowing by colleges and universities is shooting up.

In their defense, I want to say that I think it is an example of wise
financial management with a long-term view. Most institutions struggle to
consider any time horizon beyond the current year (if not just the current
quarter), but often schools can take a longer view. And right now, interest
rates are hitting a once-a-century record low. I contend that an institution
would be WISE to borrow as much as possible on a long-term basis. In a few
years that 2% loan may be LESS than they are making on their investments (if
their investments were locked in years ago, it may be less right now). Do all
the building possible right now, then plan to ride out a couple of decades.

The article suggested that taking on this debt wasa sign of mismanagement and
recklessness, but it seems to me like a sign of long-term vision. What do you
think?

~~~
hollerith
The problem with your analysis is that eventually the loan comes due, and
there's no guarantee that interest rates will still be low at that time.

~~~
maxerickson
Who knows what restrictions are placed upon it, but the spendthrift example
from the article, the University of Chicago, has a $6.5 billion endowment.
Lots of bigger private and public universities have similarly large financial
resources.

I haven't looked, but I doubt U of Chicago have that much debt. I would guess
that they can mostly service their debt on income from the endowment.

To the extent that individuals and businesses are using college degrees as
signals, it does seem reasonable to expect lots of attempts at cheaper
alternatives.

------
tsotha
What can't go on, won't. There's no reason a college needs to charge $40k to
an undergraduate. What's changed in the US over the last few decades is the
ratio of administrators to students. I don't remember the exact numbers, but
it went from something like 1 in 9 to 1 in 3. Colleges will simply have to
make due without the third assistant to the vice dean in charge of diversity
and lower the tuition they charge to new students.

Fewer people will get degrees, of course. Some courses of study are
investment, and some courses of study are consumption. You'll see a drop in
the consumption degrees, since those people could only get jobs by continuing
on to get a law degree. There aren't any jobs for newly minted lawyers right
now.

I would like to see the law changed so colleges can't ask about your family's
finances. The kind of perfect price discrimination they practice would be
flatly illegal in any other industry. Imagine going to a car dealer and having
him tell you "Well, the list price for a new car is $100k. But if you turn
over all your financial information, you know, how much your family's house is
worth and how much your parents make, we'll adjust the price of the car so you
can just barely afford it."

~~~
arethuza
"The kind of perfect price discrimination they practice would be flatly
illegal in any other industry."

Sounds awfully like "value based pricing" - which is a pretty common strategy
in enterprise software sales.

~~~
tsotha
It doesn't sound anything like enterprise software to me. I work for a company
that's pretty high up on the F500 list, and believe me, we don't let vendors
charge us based on what we can afford.

------
stevencorona
The craziest part, IMO, is that I had to make a decision whether or not to
take on $175,000 in debt (I went to RIT, it costs $44,000 per year) when I was
18 years old and had never handled more than $300. Sure! Sign me up! I
couldn't even imagine what that much money would look like, let alone feel
like to pay back- at that time, it was as equally mysterious as $10,000 or
$1,000,000.

Luckily, I left after my 2nd year and only walked away with $50k in student
loans. It was one of the best decisions I've ever made.

~~~
dfc
Why did two years cost $50k but four years costs $175k? (2/4 != 50/175)

As far as the $300 goes I take it you never worked in high school?

~~~
stevencorona
No one really pays sticker price for college. I had some grants, financial
aid, and (like someone else mentioned), the co-op program helped pay for some
of my tuition.

I did work, at Target, making minimum wage. One full-time paycheck was about
300 bucks, give or take. Since I supported myself, that money was used on
car/food/gas. So, 300 bucks was the most I'd ever seen.

~~~
dfc
If nobody pays sticker price for college why did you use the sticker price
when discussing how much debt you chose not to accept?

------
trop
I have a hard time imaging a world is with a huge crash in education. Does
this mean fewer colleges and more students going into trades? Radically lower
tuition? Fewer tenured professors, and more adjuncts and visiting professors
with three-year contracts?

Speaking of the latter, there is the disruption of online course offerings.
These are creeping in from the bottom, replacing introductory lectures, and
working their way up. Online classes allow schools to take the already
squeezed adjuncts and grad students and pay them even less to help
grade/moderate the online variants. Meanwhile eating away at the consensus
that education is a series of seminars amongst the wise.

~~~
redwood
It's very easy for me to imagine a massive societal shift from traditional
ivory tower education toward self-learning and online education and a skills-
focused employment race. Of course there will always be ivory towers that
provide elites with a way of distinguishing themselves for a very small,
reserved portion of the population. Harvard et al's degrees will always set
you apart... but for the bulk of the middle class there will need to be
something else.

The way everyone today feels they _need_ a masters reminds me of the way
everyone used to say you _need_ a credit card to get a good credit score. It's
called drinking the kool-aid.

~~~
TimGebhardt
Or you "need" to buy a house now (circa 2006) before all the good ones are
bought up and you're out of the housing market boom.

Man, if I could go back in time...

------
roarktoohey
Indentured servitude is a pesky problem that keeps resurfacing in various
forms though modern history.

~~~
pbiggar
Indentured servitude (defined by the UN to be slavery) is nothing like taking
on debt to go to college.

Two components of indentured servitude is that they do not permit you to leave
your work until you have paid the debt, and secondly that they charge you so
that you can never escape your debt. A final onerous part of real indentured
servitude is that debt can be passed to your children, and many generations
can be born into slavery and never leave it. [Source: Disposable People]

[edited to remove bankruptcy reference. Apparently it doesnt help]

~~~
HCIdivision17
While I certainly don't think college debt is quite indentured servitude (you
certainly can leave work while still in debt), it's worth noting that US
bankruptcy laws are specifically not generous with student loan debt. It's
very rare to have it forgiven. Worse, if the loans have a cosigner, the debt
can continue to harass them, and they'll typically be a family member.

Of course, it's not going to follow for generations, so you're right about the
situation being substantially better than indentured servitude. But the
metaphor isn't too far off the mark if its context is toned down a bit.

~~~
pbiggar
To say that it's the same is to say that any debt is indentured servitude.

Prisons making you borrow money would be indentured servitude. College loans
is taking a loan.

There could be a case made for credit cards being indentured servitude, due to
their unreasonably high interest rate and the fact that they entrap you by
just issuing them. Far more so than college loans.

~~~
stephencanon
Credit card debt is dischargeable.

------
cafard
Back when Mark Edmundson wrote a piece for the NY Times saying that one should
attend college for the joy of it, not as a vocational school, I had a look at
the University of Virginia tuition about the time he started teaching there,
and at the minimum wage. At the end of the 1970s, a summer of minimum wage
work would pretty much cover U.Va. tuition and fees, though not room and
board. At the moment, the equivalent number of hours falls far short.

A sort of institutional will has taken over the universities, one that leads
them to expand at all costs. The area occupied by George Washington University
in Washington, DC, has considerably increased over the years, and they have
campuses in Alexandria and along Foxhall Road. AU, Catholic, and Georgetown
have all expanded--the last, which is hemmed in with expensive real estate, is
looking to open a campus several miles away across town. And they all seem to
have Schools of Professional Studies (or some such name) where one can earn a
credential by the investment of a couple of years of evenings and money that
one's employer might pay for.

~~~
TimGebhardt
I remember reading an article (can't find a link, it was the local paper) that
highlighted that when my mom and dad when to college (1975) the average
college student could pay approximately 44% of all their college costs by
working part time and during the summer. That figure has dropped to 17% now,
and that's why students are taking on more and more debt.

The problem is that colleges know that magic statistic that on average people
with a college degree earn about 1 million dollars more than those without. So
they can raise costs because it still pays to go to college and they're taking
a bigger share of that future 1 million dollars in income.

------
raverbashing
Never underestimate the power of easy lending to the population.

Especially if this lending will _allegedly_ give more status/money to the
person

Housing bubble, Education bubble, Healthcare bubble

~~~
scottkduncan
...VC bubble.

Ok, so I don't actually think it's a sector-wide bubble but I do think near-
zero real interest rates and excess capital looking for a return can explain
some of the excessive funding rounds and valuations that have at least
temporarily prevailed in the last year.

------
BadassFractal
Fewer jobs, more education required to fill those positions, education
becoming more expensive and debt unavoidable. What will make this bubble
finally burst?

~~~
lsc
>Fewer jobs, more education required to fill those positions

I'm not seeing this. I mean, fewer jobs, sure, but If by education, you mean
'formal education' I mean, other than as a class marker (try getting a barista
job post-college age without a degree) a huge number of employed people I know
do not have a degree relivant to their career. Perhaps most. I know a fair
number of people in my industry (including myself) without degrees at all.

I mean, as a class marker it shouldn't be underestimated, but as for actual
instruction? a degree in history... does not teach you skills that make you
significantly more employable.

Really, I think that article's complaint (that is, colleges are spending on
classing the place up rather than on instruction) is a good one, but I think
it's unavoidable. I mean, right now education is a class marker, and that is
the problem. We don't have enough class-based jobs for all the people
graduating with arts degrees.

In many ways, I think this is good; Maybe people will be judged more on merit
than on familial background. Or maybe some other proxy for class will come
into vouge.

Either way, the real problem isn't education, its that we haven't figured out
enough jobs for people that need to be told what to do.

Personally? I think the next frontier is monitizing more of traditional
'women's work' - I mean, I know a lot of couples where both people earn six
figures (and both work brutal hours) - sometimes those people even have kids.
Usually it's the woman who is expected to do most of the traditional women's
work while still working, but whichever way you slice it, it's crazy to work a
bunch of hours a week outside the house for really good pay, then come home
and spend a bunch more hours doing work the unemployed person down the way
would be happy to do for cheap. Why not monitize that?

I mean, in my price range, though, there's not a lot of room for a middleman.
Sure, people even in silicon valley are happy to work for those rates, but if
you have a middleman, you essentially double those numbers. People like me? we
don't care; we prefer going direct anyhow. But most people feel more
comfortable with the legitimacy of a middleman.

There's a business idea; a low-overhead domestic services agency. You'll
either be able to lower prices to end-customers, vastly expanding your
customer base, or pay your workers more, which likely will net you better
service.

That, and I think many people need to be told what to do not because they
can't run a business but because they have been told it is hard. And some of
it, especially when you don't have the cash for an accountant, really is hard.
So I think there is a lot of room for low-cost franchise operations that take
the accounting/legal bs out of starting a company.

Heck, some kind of 'ycombinator for lifestyle businesses' would be pretty
great, though the business model isn't really there. I guess the business
model is that if someone comes up with a business model you franchise it out.

Yeah, that's a pretty good idea, I think. Some kind of incubator for new
service businesses; instead of exiting through VC, you turn the successful
ones into franchises.

(It's possible that 'service' isn't the right sector, and we need to come up
with an entirely new means of economic production... but I'm not the man to
make that jump, and I think there is still a lot of room for 'service'
industry growth, especially now while labour is inexpensive.)

~~~
rdl
Outside of startups and operations, college degrees still seem to be pretty
mandatory, and even more so outside the US.

I suspect, for instance, a rural Idaho government agency hiring a sysadmin
will expect a 2 or 4 year degree.

~~~
lsc
Rural California government agencies don't... I know that from experience.

I mean, outside of the computer industry, you may very well be correct, I
don't know. But for SysAdmins, at least? even in government, a degree is
demonstrably not required if you have the requisite experience and knowledge.

Hell, 30 years ago when my dad got a computer operator job at the university
of california, such things weren't required. I mean, he ended up getting a
degree, and it no doubt helped make the jump from SysAdmin to IT manager, but
it wasn't required for the SysAdmin position.

------
cpunks
My hope is that programs like Khan, edX, and Udacity will address this.

~~~
SideburnsOfDoom
The article hardly even mentions a very real risk to Ivy league Universities -
that they will be challenged from below by Khan, Coursera, and Udacity and the
like. Ivy-covered buildings and in-person lectures cost a lot to keep going.
As the article states, Universities are typically in debt and student fees are
rising.

"Disruption" is an overused buzzword but it may apply in this case.
Universities trade of the fact that their expensive product is important and
exclusive. What happens when it isn't exclusive or expensive any more?

~~~
tom_b
The Ivies are actually selling exclusivity by attendance along with acting a
filter for employers: only the absolute top students have any chance of being
admitted and physically attending.

The quality of education obtained at the Ivies is not part of that.

An interesting question to consider is whether admissions to Ivies followed by
independent, autodidact study can work around the actual attendance. "Here is
my online coursework portfolio, research, and my admission acceptance letters
to Yale and MIT . . . "

~~~
SideburnsOfDoom
Disruption happens from the low end up. MP3 players supplemented but didn't
challenge CDs because they didn't have the same sound quality ... until they
did challenge CDs, and now CD sales are in steep decline. It turns out that
people valued having 10 000 tunes in their pocket more than the audio quality,
and the audiophiles could use FLAC or high-bitrate MP3.

There's nothing stopping the online-U's from eventually working on reproducing
or circumventing the Ivies' specific advantages.

Another outcome to look out for would be for cash-strapped Ivies to be
hollowed out. i.e. become a cluster of buildings where students log on and do
work online in exchange for an attendance certificate. That would preserve the
quality of education and the social advantages of the university, while
costing less. It would work, at least for a while until the next generation
sees through the archaic model.

------
16s
My advice is to go to a college that you can afford. I spent my first two
years at a local community college and transferred 60 credit hours (about half
of what's needed to graduate) to a large state university where I graduated
Phi Beta Kappa with honors and I only had about 15K in student loan debt. I
could have avoided the loans entirely if I had worked a few more part time
jobs.

You don't have to go to a high-priced private university for four years to
have a good career (that you enjoy) and live a nice life.

~~~
tzs
That $15k in student loan debt is higher than the average loan debt at
graduation at many high-priced private universities. Harvard, Yale, Princeton,
Caltech all average $10k or under, and MIT and Stanford average under $15k.

The averages are the averages of those who borrowed, which for most of those
schools is about 50% of the students (about 25% at Princeton), so half the
students at these high-priced private schools are graduating without any debt.

These are 2010 numbers. The numbers are probably lower now at some of them.
Stanford, for instance, waives tuition completely for students whose families
make under $100k.

By all means consider affordability when choosing a school--but don't assume
that you can't easily afford a high-priced private university just because the
sticker price is in the stratosphere.

------
Quizzy
The most relevant question is "whether the college experience (including life
experiences and consequent employment value) is worth the attached price tag?"
It's one thing when you are paying $5,000 per semester, but at $40,000 per
year for 4 years? Unless those 4 years leads to an positive cash flow of
$10,000 per year thereafter to repay this debt, I just don't see the
rationality of paying so much for non-incoming producing B.S./B.A. degrees
(biology, psychology, sociology, languages, etc.).

------
ninguem2
Anybody knows a good way of short selling Universities?

~~~
jbarham
You could try shorting APOL (owner of University of Phoenix), DV (DeVry) and
similar stocks of private education companies, although a lot of them are
already down substantially from ~2009 highs.

Student loan ABS are harder to short unless you're an institutional investor
or hedge fund (in which case you wouldn't be asking ;), but if things get
nasty again in the financial markets people tend to pile into treasuries and
USD as relative safe havens.

------
taligent
I would be curious to know the costs and implications for adopting an
Australian solution.

Here in Australia everyone can go to college and what happens is that the tax
office keeps track of the money you owe and then as you start earning money
they pay the loan back through a tax increase. You also get a discount if you
have the loan back quicker. It's all seamless and you can also add
books/computer to the loan as well.

~~~
wisty
Because it's effectively a price control, and price controls are bad and
communist and evil.

~~~
netcan
Sarcasm aside, yes.

The Aussie HECS system is more like the European style systems than american
ones where universities compete in a semi-free market. Unis get paid a set
amount per student. Student contributions are a fixed _contribution_ to the
total. Including the subsidized loans but not including founding & research
grants to Universities, they account for about 25% of total costs, an
incentive to take it seriously but not a pay-you-own-way system. Very far from
a free market.

The interesting element of the Aussie system is that they have maintained
competitiveness and a steep quality curve more similar to the American
environment with the best Unis (eg ANU & Melbourne) ranked much high
internationally than the those just a step down locally. Australia has more
highly ranked Unis than most European countries with larger populations.

But.. Judging by inflation in international & (the less subsidized) "full fee
place" tuition, fees are rising fast down under too.

~~~
brazzy
It seems to me that the bizarre excesses of the "education bubble" are the
direct result of a free market in education and prove that it's a bad idea.

Education is not something where there should _ever_ be an attempt to capture
the consumer surplus.

~~~
hackinthebochs
The education bubble is in fact caused by the opposite of the free market. On
one end you have government subsidies and no corresponding price controls
which inflate demand and drive up prices. On the other end you have no
negative feedback mechanism in terms of shedding the debt in bankruptcy for
degrees that turn out to be worthless.

There is no downside for institutions to continually inflate prices, so they
do. Incentives run the world.

