Blame it on the Dorms?

Kevin Kiley’s article in today’s Inside Higher Ed examines a major new study of college cost sponsored by Virginia’s  Joint Legislative Audit and Review Commission (JLARC). Over the next two years, the commission will study how expenses at Virginia’s public universities have evolved. The goal, of course, is to stimulate thinking about new ways to control costs and tuition (two things that are quite different). The results could also be useful in the national discussion of college cost.

Here is the article in full: Blame it on the Dorms?

I post this here because the study promises to contribute to the public debate, and because at this point it is not at all clear that it will contribute more light than heat. Bob and I are quoted extensively in the story, so that’s another reason for me to blog about it as well.

Cost accounting, which is the breaking apart of the cost structure with an eye to identifying the source of potential problems, is itself a problematic exercise. As David Breneman has argued, separating out the individual strands of cost at a multi-product university is a questionable exercise, and one that is very easily politicized.

In the initial report, rising costs of auxiliary enterprises — things like dorms and food plans — seem to take up a bigger fraction of cost at some universities. To quote Captain Renault in Casablanca, “I’m shocked, shocked” to find that educational costs are a smaller share of overall cost at schools that are more residential in nature. I worry that simple numbers like this will feed the usual legislative tendency to try to set rules to govern maximum or minimum allowable percentages on particular types of cost. likewise, certain “costs” may add “revenues” that cover those costs. So an eagle-eye on a cost line item that rises “too fast” may focus on a non-problem.

On the other hand, there may indeed be some mileage in examining how different schools within the system operate. Sharing information among the state’s universities can offer opportunities for self-examination, and some of these numbers may not be widely known to the stakeholders at the state’s public higher education institutions.

 

Fixing the College Scorecard

I haven’t blogged for a while. Long story.

Bob and I wrote a story for the Chronicle of Higher Education highlighting the fundamental flaws  in the new College Scorecard that was released with much fanfare by the administration.

Here is the article: A Simple Fix for the Broken College Scorecard

Our financial aid system is very complex, as is the process a family goes through to identify and select a good university  that matches their budget and the best needs of the student.

We understand the desire to make information easier and more straightforward, but we are not fans of oversimplified accountability metrics and shopping guides. The article lays out the particular deficiencies in the new Scorecard. It relies on single numbers, like average net price and median debt, to convey real information to families. But virtually no family is the median. A single number for net price is systematically wrong for just about everyone. In addition, for poorer students the scary average net price can cause them to shy away from “pricey” private programs that would actively welcome such students, and which are actually much cheaper for low income families than local state universities.

In addition, the new statistics can be gamed by universities in socially unproductive ways. Schools can reduce their “average net price” by shying away from middle income students. The Scorecard actually rewards schools for hollowing out the middle class.

Three Dangerous Student Aid Myths

I’m very late in highlighting this piece by Justin Draeger, the president of NASFAA. But better late than never. This is especially true because the myths he highlights are at the heart of the systematic exaggeration inherent in much of modern reporting on higher education cost and student debt.

Three Dangerous Student Aid Myths

In brief …

Myth 1, student aid drives up cost.

This is hard to reconcile with broad trends. The real value of Pell Grants rose in the 1970s, as real college costs fell. The real value of Pell Grants fell in the 1980, 90s and 00s, yet college cost rose substantially.

Myth 2, If you liked the Mortgage Bubble, wait till the college debt bubble bursts.

I cannot fathom how people glibly compare investing in the earning-power asset called education with betting on profitably flipping real estate. The comparison should be suspicious to anyone who has examined the rising return to higher education. In fact, the carrying cost of student debt as a fraction of earning power has remained basically constant over time.

Myth 3, We’re in a debt crisis of over-borrowing for college.

As I have noted before, the work of Sarah Turner and Chris Avery offers a wealth of information about college borrowing. There is no evidence that borrowing for college is wildly out of control, despite the yellow-tinged journalism that focuses on anecdotal stories of students saddled with 120K in debt with little gain in marketable skills to show for it.

The real problem today is that the myths have acquired real power. They have become the common starting point for most discussions of higher education today, and thus they have become truly difficult to dislodge despite ample factual evidence to the contrary.

The Shame Lists

The Department of Education has released it’s annual shame list of the most expensive colleges and universities. The shame lists are a sham. Here is our take on this misleading exercise that really does not provide families with any useful information in determining which schools provide value for money:

Shame on the Shame List

The shame list calculates “net price” only for students receiving aid. This does two things. First it rewards schools that concentrate aid on a small number of students instead of spreading it around. Secondly, it gives schools a strong incentive to change their recruiting patterns to avoid students who qualify for small amounts of need-based aid, i.e. the middle class. What social purpose is served by increasing the incentives of schools to recruit full pay students in a very need-aware manner?

The Tyranny of Misleading Facts: or why I don’t care that college debt exceeds credit card debt

One factoid making the rounds of the punditry is the discovery that the total amount of college debt now exceeds the total amount of credit card debt. This is somehow supposed to demonstrate the dysfunction of higher education while showing us the next financial bubble that will burst in the US.

This little fact is an example of how irrelevant information can be used to reinforce a preconceived set of (and often highly politically charged) ideas about the condition of American higher education.

Let’s begin with this question. Would the US be better off if more people paid their college tuition by credit card? Sounds absurd, doesn’t it. Yet that would surely make the ratio of college debt to credit card debt go down. This points out why that ratio is an irrelevant measure. In general credit card debt is used for one purpose, and higher education loans for quite another. They rise and fall for quite different reasons. Credit card debt has been falling since the great de-leveraging of the US economy began, following the financial crisis of 2008. This reduction in credit card debt is arguably a good thing, since consumer debt is short term, carries very high interest rates, and generally is not used to buy long run productive assets of great private and social value (like an education). But as credit card debt falls, somehow this makes the world look deeply problematic because higher education debt is now higher than credit card debt. Come again?

Student loan debt has been rising over time, but much of this increase is because we have 40% more students trying to earn a degree than we did a decade ago. And many of the new entrants into higher education come precisely from families that are least able to afford the sticker price out of their current income. These are the families who must use credit to buy this lifetime asset. This is not a problem, unless the payoff to that asset does not justify the borrowing.

The asset, however, amply justifies the borrowing. Good evidence of this is here in a recent article in the Journal of Economic Perspectives, written by Sarah Turner and Christopher Avery, titled Do College Students Borrow Too Much — or Not Enough?

Anyone who wants to go beyond silly sound bites about credit card debt should read this article.

There is no evidence that the vast majority of student borrowers are getting into unreasonable and uneconomic debt. Instead, the expected lifetime earnings profile of someone with a degree has improved substantially over time. And there is little evidence that the burden of repayment relative to income has increased over time.

Unfortunately, facts like these get in the way of a good story of bubble and financial collapse.

Newsflash: in the NY Daily News

The New York Daily News ran a piece of mine this morning. I would have preferred a different title, but authors don’t get to choose that.

Newsflash: College is a Bargain

This was stimulated by recent stories about college graduates buried under 120K of debt. A good example is this account in the New York Times. The subtitle of this story is “A Generation Hobbled by Debt.” I guess I just couldn’t take the drumbeat of misleading generalization and overwrought prose. The average student debt of college finishers at private universities is $19,000. At public universities, the figure is $13,000. This is less than the price of an economy car. At two year schools, the median debt is …. zero! More than half of students who receive a two-year associates degree leave debt free.

Yet we are bombarded with anecdotes of students (like the one in the NY Times story at the University of Northern Iowa) who leave school with a 120K mountain of debt weighing them down. Anecdotes of this sort often substitute for real thinking based on real data. It’s a yellow shade of journalism that takes an example that is completely unrepresentative (perhaps one in a thousand) and turns that into a “generation hobbled.”

 

Myths and Realities about Rising College Tuition

That’s the title of a new article I wrote for NASFAA.

Myths and Realities about Rising College Tuition

For readers of WDCCSM, much of the argument will be familiar. The long term structural forces that drive college cost (and ultimately tuition) are dull, unsexy, and ultimately uninteresting if one is looking for clear villains to prosecute. It’s easier to latch onto supposed inefficiency, featherbedding, and resistance to productive change as the primary causes of “skyrocketing” tuition than it is to examine the data carefully and dispassionately. Our position on the major drivers of college cost often makes the policy community uncomfortable because the levers they can pull to effect productive change are so weak, and because the natural tendency is to use the tools of command and punishment in an era of tight budgets. The major causal forces for affordability problems over the last decade are shortfalls in state funding of higher education and rising income inequality in the United States, not frivolous amenity competitions among universities or wasteful faculty research. In this light, as policymakers consider their options, I would suggest that we adopt a higher education version of the Hippocratic Oath. First, do no harm.

It’s Not so Easy to Achieve Meaningful Reform

Garrison Walters has written a thoughtful essay about the debate over how to use public levers to improve educational outcomes.

Here is the full article: It’s Not so Easy: The Completion Agenda and the States

He criticizes the Complete College America agenda for its faith in simple performance measures and its reliance on a dollars-as-punishment incentive system.  Here is an important paragraph of his argument:

At the core of CCA’s strategy is a proposed shift to state-level performance funding: “Funding should shift from simply rewarding enrollment to valuing outcomes, such as credentials awarded or classes successfully completed. Funding is a powerful incentive, and rewarding performance allows states to align their fiscal policies with statewide goals for workforce development and economic prosperity.”1 This shift is necessary, CCA asserts, because “state appropriations typically are driven by enrollment with funding based on the number of students enrolled” and “as a result, colleges have a financial incentive to boost enrollment at the start of the term, rather than make sure students successfully complete classes and earn degrees.”2 In this context, “performance” is really a euphemism. The strategy would be more accurately described as “pressure-punitive funding,” because it is designed to force institutions to change and punish them if they do not.

For starters, this approach presumes that that the schools have no mission beyond collecting government subsidy, or that they are so hamstrung by internal constraints and inefficiency that they cannot implement productive changes that outsiders seemingly can see so clearly. Walters dissects both notions.

The problem with most performance based measures is that they can push schools to behave in socially counterproductive ways. Reward schools for graduation rates and you reward already selective programs whose well-qualified matriculants likely will succeed no matter what Selective U does with them. Take money away from schools whose graduation rates are below X percent and you may wind up punishing programs that work with the at-risk students who are often from underrepresented groups. Facing these incentives, many schools may lower the rigor of their programming or admit fewer students who might need some remediation in order to succeed. The Law of Unintended Consequences is always nearby when policy makers construct simple metrics and apply them to complex systems like the extraordinarily diverse array of higher education institutions that operate in the US.

This approach to higher education reform is somewhat akin to the zen of testing and measurement that has so transformed public K-12 education, and not always in particularly desirable ways. The Department of Education has also bought into the idea that easy productivity growth is attainable by setting measurable goals and punishing non-performance. As David Warren, the president of the National Association of Independent Colleges and Universities has tartly observed, there is a difference between the Department of Education and the Ministry of Education.

Walters saves his praise for more nuanced reforms undertaken by states like Maryland with its “Effectiveness and Efficiency Initiative” and Virginia’s “restructured Higher Education Financial and Administrative Operations Act.” These programs are not based on the notion that achieving meaningful productivity growth is as simple as adding more online classes. And they have not treated state universities as though they are homogeneous entities ready to embrace one-size-fits-all incentives.

 

 

More on Pell Grants and Tuition

Here is a little sheet that provides a summary of the evidence on potential links between the Pell program and college tuition setting. One interesting point: this is often presented as a left-right issue, but it’s not. The experts cited are not a politically monochrome group.

 

Pell Grants Not Linked to Higher Tuition

Do Pell Grants “cause” tuition inflation?

I spoke about this, and about trends in college affordability, at a recent NASFAA meeting in Washington. You can see my remarks in the video linked at the bottom of this post.

But let’s address the question directly. The idea that federal subsidy is the root of all evil — in this case a major cause of price inflation in higher education — is well established in the popular writing about higher education. Former Education Secretary William Bennett put the case very directly in his famous NY Times op-ed piece titled, Our Greedy Colleges. The thinking behind this proposition is simple supply and demand. Government subsidy pushes up demand, so up goes the price. Stories like this make the economics professor in me cringe. People armed with nothing more than Econ 101 in their toolkit often think they understand quite a bit more than their slender training allows. Why would one presume that the simple model of perfect competition, which presumes perfect information, a homogeneous product, and small, profit-maximizing firms engaged in atomistic competition, fully describes the market for higher education? Got me.

This is a “market” dominated by heavily subsidized non-profit organizations that do not maximize profit, or even revenue. Selective schools leave tons of revenue uncollected because they actually care, and care deeply, about the composition of the freshman class. The most selective schools actually charge a net price that is lower than the schools a bit below them in selectivity. The admission process is not about attracting more and more customers. It’s as much about culling customers down to the “right” ones. In that sense, admission is a two way street. Imagine Burger King rejecting business. Universities do it all the time. But I digress.

At the level of the college or university, cost per student is roughly constant as the school adds enrollment. For smaller schools, the cost per FTE student actually would fall if the school enlarged a bit, so growth is not a force for rising tuition. At the industry level, there is no evidence that the long run supply curve of seats for students is upward sloping. Places at Princeton may be fixed, but the numbers of seats in the university system as a whole is fairly elastic. In other words, the long run supply curve is flat. This suggests that tuition increases over the last generation are not driven by rising demand. They are driven by large economic forces that are buffeting the entire national and global economy. We spend a lot of time talking about those forces in our book.

When the Federal government raises the maximum Pell grant, this creates a lot of good options for universities.

  • Allow the increased Pell support to meet a greater portion of needy students’ needs.

Many schools do not fully meet need, and this forces students who wish to attend those programs to borrow more. If this is what schools do in response to higher Pell maximums then access improves. Note that this choice would have no effect on the list price tuition the school sets. And it would reduce the net price to needy students.

  • Reduce the school’s own need-based aid, and plow the extra funds into endowment for the future.

If a school made this unfortunate choice, the added Pell support would not improve access at all. But again, it wouldn’t lead to higher tuition either.

  • Reduce the school’s own need based aid, and plow the extra resources into improved programming.

Again, this choice wouldn’t do anything much for access, but it wouldn’t cause tuition to go up. This choice might help retention and graduation, if the programmatic improvements were targeted toward those goals.

  • Lastly, schools might respond to an increase in the Pell Maximum by reducing their overall tuition discount rate. Since discounting is a major force propelling the “list” price upward, anything that reins in discounting would tend to reduce tuition.
The empirical evidence on the Bennett Hypothesis is inconclusive. Using mostly panel data, the studies of the link between Pell Grants and tuition are all over the map. Bob and I are the only researchers we know who have tested the proposition using Granger Causality. We find that changes to the Pell maximum do “cause” an effect on tuition, but the link is contrary to Bennett’s assertion. Increases in the Pell maximum tend to reduce tuition in the years that follow.
Here’s the video: