Vincent Yu, Associated Press
Significant personal borrowing for higher education has been justified using the logic of financial investment. The basic idea is that higher education improves the capacity of a student to be more economically productive in the long run. According to this logic, borrowing to pay for higher education at reasonable rates makes sense.
But many families are discovering the limits of this logic, even when the borrowing is subsidized. Unacceptably low rates of college completion mean that too many borrow for college without gaining the benefit of a credential. And even if a student-debtor completes a degree, many are learning through hard-knocks that not all college credentials lead directly to jobs, especially in this economy. More and more families are legitimately questioning the student loan premise that enrollment in college leads to the kind of improved earning capacity that one can bank on.
Moreover, there are some basic limits to just how much families can afford to pay. Adjusting for inflation, the average tuition at four-year colleges has more than doubled since 1985. But over the past five years, the median annual earnings and the median net worth of Americans has plunged. According to analysis done by Jeff Denneen and Tom Dretler at the consulting firms Bain & Company and Sterling Partners, average tuition as a percentage of median annual earnings has increased from 23.2 percent in 2001 to 37.7 percent in 2010.
There are also real limits to how much government can afford to pay for higher education. Dennenn and Dretler note that cash-strapped states have, in recent years, consistently cut appropriations to higher education on a per-student basis.
The social impact of runaway college costs is now beginning to emerge. In states like California, where tuition and fees at state universities have risen nearly 50 percent in the past three years, the rising generation, for the first time, has less formal education than their elders.
The cost-consciousness of families and governments with regard to college tuition and student loans might influence how colleges manage costs. Current economic conditions have "created the stiffest tuition price resistance that colleges have faced in decades," according to a recent report from Moody's Investors. As a result, nonelite institutions that have not reined in costs are themselves now so reliant on debt that Denneen and Dretler categorize a full third of America's colleges at significant financial risk.
Even the most elite universities — universities that enjoy tuition pricing power because of the high demand for their service — find that they have to cut operating costs. The Wall Street Journal reported last week on how Harvard is restructuring many of its operations to cope with hits to its endowment.
The newly felt pressures on college costs and the responses by college that we observe, however, don't seem to be driving the kind of disruptive innovations in higher education that would increase the output of highly-trained graduates at dramatically lower costs. We see temporary cost containment and implementation of operational efficiencies on the margins. We see policymakers tinkering with interest rates for student loans.
What we don't see is significant rethinking of how to provide superb post-secondary training at prices families can afford.
For example, fewer than half of surveyed college leaders indicated that online education was a part of their strategic planning. Given all that well-designed online courses have shown they can do to lower fixed costs, provide needed flexibility, standardize assessment and improve student outcomes, it seems irresponsible for more than half of colleges to ignore investments in online instruction. And yet those same ostrich-like colleges are often increasing their spending on plant, interest costs and administration.
In most industries we can observe rapid entry and exit of firms into the marketplace as they compete to provide customer-serving specialization and differentiation at lower cost. In higher education, however, indistinct, conglomerated, low-output, low-quality, high-cost institutions persist year after year. There is almost no organizational entry and exit into this huge market.
Industries that are so unresponsive to their consumers tend to have structural flaws. We would argue that subsidized student loans (meant to make college affordable) and the accompanying accreditation system (meant to protect student debtors from unscrupulous degree mills) have, ironically, worked in tandem to increase college costs and decrease college quality by creating a bloated industry impervious to competition and innovation.
Perhaps the emerging collective resistance to tuition increases will spur needed cost-cutting innovation. But where the deck is stacked against the consumer, policymakers need to reshuffle the deck. They need to scrutinize and obliterate the structural flaws within higher education that reward enrollment instead of graduation, conformity instead of innovation, administration instead of instruction and process instead of achievement. Only then can we expect to see sustained investment in the type of innovations that will make quality higher education accessible and affordable.