Grassroots Commentary

Is College Worth It?

Bill Franklin · Oct. 7, 2013

Failure to Launch, a report just out from the Georgetown University Center on Education and the Workforce, is worthwhile reading for parents and grandparents whose children and grandchildren are facing critical decisions about college and careers.

Among its several observations, the report quotes a shift in an important statistic. The median income, the division of the upper and lower halves of American incomes, is a major milestone marker for young people to pass in their march toward financial independence. But they aren’t reaching it until age 30 now compared with age 26 three decades ago when the data point was first tracked.

So what? This shift is important for several reasons. Passing the median income later reduces lifetime income which can only be made up by working for more years than past generations. It also means that at any year during a person’s income-earning years consumption is likely to be less. On a broader front it means a smaller future economy.

Arriving late to financial independence has no doubt been impacted by the recession and tepid recovery. But the labor participation rate for 20 to 24 year olds has been falling since the mid-1980s and is now at a level not seen since 1971. Over that 40-year period the number of jobs requiring more education than high school has grown from 28% to 59% and is projected to grow to 65% by the end of this decade. And while more people as a percent of population are in college than 40 years ago, they aren’t graduating fast enough to keep up with the demand as evidenced by the growing wage premium paid to undergraduate and graduate degree-holders – now 80% more than high school diploma-holders, double the figure 40 years ago.

Notwithstanding these long term trends, many college graduates currently have difficulty finding good paying jobs and are underemployed in jobs that don’t require college degrees. Whether it is true or not, it’s commonly asserted that 80,000 bartenders, waiters, and cab drivers and an additional 155,000 janitors have college degrees. Never mentioned is how many of them are educated in science, technology, engineering, or math. Still, the careers for which they were educated, whatever they are, remain on hold but their education loans aren’t.

Others in college saw the career fates their friends were experiencing and dropped out to get a job and begin to pay down college debt. About 40% of college students fail to get a four-year degree even in six years. While graduation rates are highest at private colleges, still a third of those students fail to graduate. The dropout rate is 45% at public colleges. And it is almost 80% at for-profit colleges like University of Phoenix, DeVry, and Strayer which cater to working adults you’d expect are motivated to complete.

Dropouts often get on with their lives, marry, have children, and find it difficult to later resume their education. Yet we know from experience that families whose breadwinner is less educated are also less mobile, less stable, and may perpetuate under-education to later generations.

Despite the short term outlook for college graduates, tuition has continued to rise faster than the general inflation rate and faster than beginning salaries, forcing students or their families to go into debt. If student debt at the time of graduation were rank ordered, the lower two-thirds would owe $25,000 or less. Since the top third has no cap it contains figures from $25,000 up, and “up” can be some truly astronomical six figures. The amount owed by all students for college loans totals $1 trillion.

The cost for attending a public college in real (inflation-adjusted) dollars is twice what it cost since data began being kept 45 years ago. The cost for attending a private college is more – up 137%. Nevertheless, college enrollment as a percentage of the population has grown during the period from 2.2% to 3.7%.

What’s going on here? Shouldn’t enrollment be going down? Should we be questioning whether college is worth the time and money it consumes? Some critics are. But if the jobs of the future will require college and perhaps post-graduate education, what can be done to control cost and access? Should colleges be required to inform students their job prospects if they major in, say, sociology? Those are the questions students, parents, and grandparents should be considering as they go on the hook for the expense of college education.

Historically, education has been a good investment. The average college graduate today will earn $600,000 more than a high school graduate over a typical career. The ROI on an investment in a college education beats the ROI of most financial investments – about 15% over the past 40 years.

But there’s little evidence to substantiate that the added cost of top brand schools is returned in career earnings. Obviously, the field of study is more important than the college that granted it. And any attendance in college study helps. People with some college earn more than those with none and people with advanced and professional degrees earn more than those with only undergraduate degrees.

If history is an indication a college degree will continue to be a good investment of time and money. And it’s a given that complexity has a bright future in the world and will require bright people to solve the problems it creates.

What, then, can be done to control the cost of college so that it is accessible to qualified students, not just those who can afford it? And what is driving up the cost of college?

The main public college cost driver is state budgets. As they are squeezed, less money is available to subsidize the state’s public colleges and more cost is shifted to students. Private colleges are subsidized by endowment income, which suffers in slow economic times.

Costs and cost shifting are different depending on the tier in which a college is classified – private, public, and community. Additionally private and public colleges are either research-focused or teaching-focused. Private colleges are usually more expensive than public; research-focused (about a third of colleges) are more expensive than teaching-focused (about two-thirds of colleges). Community colleges are often the least cost but not always the best value in terms of cost and quality. In the competition for students, more than a small percentage of spending by college administrators in all tiers is for resources that don’t improve education quality – amenities, sports, and dorms, to mention a few.

The fact that college costs have exceeded the general inflation rates has been blamed by college dons on the formidably-sounding affliction known as Baumol’s cost disease. Proponents argue that teaching is labor-intensive and therefore not amenable to productivity improvements that leverage skills and know-how and reduce cost. Professors who have become brand names in academic circles are sought after by competitive colleges anxious to have the brand associated with their institution. Competition bids up salaries and perks, at least for the brand names, increasing education cost. This, it’s argued, is truer in research colleges than teaching colleges.

It’s a nice theory but largely specious because, as anyone who has taught in college or university knows, big brand professors spend most of the time in research and publication and use teaching assistants to meet their classes. Oh, sure, a doctoral class may see the old prof in class occasionally but rarely the undergrad students. The big brand professors can’t burnish their brands in the classrooms. They burnish them in the refereed academic journals. Journals are where research findings are reported and are the arena of big brand competitors and big brand wannabees. And they are not a bad place to market themselves to potential colleagues who can prevail upon their department chairman to put a bid in for a big brand and lure Professor Whatzizname away from the current employer.

Baumol’s notwithstanding, big brand professors are not the cause of tuition cost inflation. There aren’t enough of them. But there’s a glut of Ph.Ds chasing a limited number of tenure slots, which has driven down their salaries and forced many into adjunct instructor roles, lower tier colleges, and private prep schools. Moreover, the cost of instruction delivery is only about 15% of college spending.

Two Wall Street Journal reporters last year published an eye-opener about where the costs are in college spending – administrators. While the article focused on the University of Minnesota – a public research-focused university – as a former university professor, I can attest to the fact that Minnesota is not an outlier. There are too many deans, assistant deans, directors, and non-teaching staff, mostly Ph.Ds who don’t want to teach. Minnesota has one employee for each 3 ½ students – 19,000 employees in all. The growth in administrative staff outstripped the growth of faculty there by 51% over the previous decade. 

And it isn’t just the number of administrators that increase tuition costs, it’s what they are paid. At Minnesota 353 administrators make over $200,000. Seventeen make over $300,000, up from just seven who earned that much in inflation-adjusted dollars a decade earlier. University of Florida executives got five-figure raises last year and the students got higher tuitions. The presidents of Ohio State University and Texas A&M earned $2 million each, even as OSU is selling off property to offset reductions in state subsidies. The former president of Penn State University, Graham Spanier, who was forced out in the Sandusky sex scandal, was the highest paid public university president last year. Spanier’s compensation for the 2011-2012 academic year was $2.9 million, including $1.2 million in severance and $1.2 million in deferred compensation.

The arcane accounting systems of universities and colleges are not structured in a manner that allows cost to be managed. Therefore, even when a reformer like Eric Kaler, who assumed the presidency of the University of Minnesota last year, attempts to rein in tuition by cutting administrative costs, he couldn’t find out what it cost to run the place.

Out of control spending is compounded by the fact that universities are non-profit organizations. There is no incentive to save; in fact there are disincentives in many cases because unspent funds are lost by public colleges and return to the funding source. Absence mechanisms for allocating costs in terms of benefits, as exists in businesses, colleges and universities are woefully inefficient in educational content delivery. They are also unlike many other labor-intensive professions – medicine, law, and accounting come to mind – in which profit motivation forces innovation into the delivery of professional skills.  Mid-level staff and technology in labor-intensive business organizations leverage highly skilled people and confine their work to activities that yield the highest value.

As the Wall Journal reporters noted in their article, hikes in tuition pose a real economic hardship on students whose parents aren’t able to help them. In 1975, a Minnesota undergraduate could work six hours a week at minimum wage throughout the year and cover tuition. Today 32 hours at minimum wage would be required to cover tuition.  That’s almost a full-time job. It explains why many university night programs are growing rapidly even as their day programs are shrinking.

I’ll mention one more dimension of a college education that makes its costs hard to contain. It’s not a “normal good.” When the price of normal goods goes up, consumption goes down. In education higher prices may actually cause increases in consumption. There is a false perception that a quality education must be expensive. Not so. But hard to prove.

Because it’s not a normal good, it’s impossible to experience an education before consuming it, and dissatisfied customers can’t return it for a refund. We can test drive multiple cars, tour multiple houses, try on multiple outfits, and then pick the one that seems to be the best value – the best quality for the price. No way to do that with education.

The way most students and their families pick a college is the way they pick a bank or lawyer – the sizzle, not the steak. Go into a bank lobby or the trappings of a law firm and what you see is the wrapper around an intangible service. If the cosmetics look good, the quality of banking or law delivered there must also be good. Or at least that’s what the consumer thinks. It’s a flawed measure, but it works. If it didn’t, profit-motivated banks and law firms wouldn’t spend money on image creation. College administrators do the same thing. More spending goes into non-educational experiential resources than into educational resources, including instruction quality and content delivery productivity.

Don’t get me wrong. I think the college experience is important – probably more so at the undergraduate level than the graduate level. I collected four degrees and attended four colleges – two traditional campuses (one private and one public) and two concrete campuses (one private and one public.) The traditional campuses were a better experience – gyms, glee clubs, sports facilities, several grills to choose from, on-campus playhouse theater, nearby parking decks almost anywhere on campus. The traditional campus colleges were also more expensive and the quality of education was no different. Was the experience worth what it apparently added in tuition cost? Not to me.

Here are suggestions I would make to the parents and grandparents facing the prospect of college choices and costs. The most important choice is to get a marketable education. That would exclude majoring in sociology, history, literature, music, philosophy and religion – even business administration. These are not rigorous disciplines. I taught graduate students in the College of Business Administration of a major university and considered undergraduate degrees in business to be useless. Harvard, which has one of the top graduate business programs in the country has no undergraduate business degree. None of the soft majors I’ve listed (and lots of others) prepares a person to do anything in the world of work. Look around at the industries that are booming. They employ people educated in rigorous disciplines – science, technology, engineering, and math – and all of their derivative subsets – healthcare, computer sciences, energy development, biochemical and biotechnology development, programming, data management.

Don’t get hung up on making the “right choice” of a major out of the gate. Most people make multiple career changes. Mine changed four times. The most important thing is to keep the most important thing the most important thing. And the most important thing is for the graduate to get started in a career. With maturity and experience he or she will see new opportunities that invariably lead in different directions and careers.

The second most important choice is the college. Don’t get snookered by brand name colleges. Very few companies recruit on the basis of undergraduate college attended. People change jobs many times. After the first one, no one really cares where the undergraduate degree was earned. I would pick a public college over private and a teaching focus over research. The cost is usually less in both cases and the education quality is no different.

These two choices have the greatest impact on getting the best value for the education dollar. If student aid – grants and scholarships – is available it could slant the public-private choice because they don’t have to be repaid. Loans do.

The third choice is this: if in doubt, start at a community college. Some people aren’t ready for college, and the best way to test the water is to get a two-year Associate degree. It’s better than no degree, it’s a mark of achievement, and it’s a ticket into a major college later if the student wants it and has the grades. And in most states, community colleges have to admit students by law. Not so with four year public state colleges.

Here’s to choosing well!

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