By Richard Vedder
The Education Sector is one of the better research organizations dealing with higher education issues—I’m told it is tied, loosely, with the Democratic Party, which, if true, speaks highly of that group, something you will seldom hear from me. As my sidekick, Bryan O'Keefe, pointed out in his recent blog, the Democrats seem more engaged in higher education issues than the Republicans -- which is a shame for both the GOP and the country.
A recent analysis by Erin Dillon of the Education Sector explodes the myth that loans are not a big deal --a myth strengthened by Department of Education data, which reports the overall student loan default rate is under 5 percent. That number is simply baloney --worse than worthless. The Education Department looks at two year default rates --and most persons default after the second year.
Ms. Dillon looks at extended longitudinal data reaching back into the 1990s and finds much higher default rates -- rates that vary enormously depending on race/ethnicity, size of loan obligations, and post-college earnings. For example, the long term black (non-Hispanic) default rate appears to be around 39 percent, roughly ten times as great as that for Asians (4 percent) --the white non-Hispanic rate is about 7 percent. Similarly, those with $15,000 or more in loans had well over double the default rate (19 vs. 7 percent) of those with $5,000 or less in loans.
Moreover, with rising loan obligations, the default problem is almost certainly going to rise. This is aggravated by another trend that college presidents should be frightened about -- the college-high school earnings differential is NOT growing for women (for a decade), and may be slowing for men. The ability to pay off loans is directly related to post-college earnings, as the Education Sector study makes amply clear.
Here is my read on things. The unsustainable tuition fee explosion has been sustained for longer than expected by the introduction of student loans of ever greater magnitude. The notion, previously novel and suspect, is now conventional wisdom: college is a financial investment, and borrowing to pay for that investment is acceptable and prudent. However, as loan obligations rise relative to post-college incomes, the whole go-go financing becomes more suspect and potentially destabilizing, not only to individual borrowers, but to the American economy at large. The solution is to curb both student loans and the rate of tuition inflation. Until the colleges change their ways and governmental subsidies become more moderate, things are likely to get worse rather than better. We are paying a price for the inefficiencies of colleges that may become glaringly more obvious as the student loan repayment problem grows.
Tuesday, October 30, 2007
Sunday, October 28, 2007
We Are All College Dropouts
By Richard Vedder
Everyone who enters college ultimately drops out. My wife and I did --but only after receiving three degrees (our son did us one better--he earned four). The question is one of timing. Using the framework of modern economics, we can predict that people will stay in college as long as the expected future marginal benefits of college attendance equal or exceed the expected marginal costs. When the marginal costs of attendance rise above the marginal benefits, college attendance lowers satisfaction, and so people drop out. In calculating benefits, however, people estimate the expected benefits of continued attendance even if at the moment the benefits are low relative to current costs; the lure of a diploma months or years ahead raises the perceived future benefits, and keeps people attending school.
In reality, the learning benefits of college probably decline slightly as one proceeds through school--the latter doses of knowledge obtained are probably a little less vital than those earned early on. Nevertheless, the financial benefits from attending college are modest and low for several years of attendance ---and then soar when the piece of paper is given out certifying "graduation." At that point, most people "drop out."
The actual marginal financial benefits are very low through most of the college career but become huge at certification points --getting an associate’s degree, bachelor’s degree, master’s degree, etc. The same is true of law school. Those going for two years do not get two-thirds of the financial benefits of completing a three year program and passing the bar exam. This is because information costs to employers are high, so they allow the certification (diplomas) to guide their hiring decisions, when in reality there are students who have earned 97 percent of a bachelor's degree who are almost as well trained as those with 100 percent.
Maybe we should tell employers –“Joe (or Joanna) has earned 82 percent of a bachelor's degree.” Instead, it is a binary situation --you either graduated from college or you are a college dropout. Maybe we should increase the certification points --all students at four years colleges would get an associate’s degree after two years of satisfactory work, a normal bachelor’s degree after three years, and a super-bachelor’s after four years. If employers are educated in such a system, we probably would have fewer students lingering around waiting for a degree which has huge financial value. In redefining student progress, we should consider making the three year degree the bachelor norm, as in Europe, maybe giving a master's degree after 4 or 4.5 years of work. I think this might reduce the dropout rate, and increase the welfare of students and society alike.
Everyone who enters college ultimately drops out. My wife and I did --but only after receiving three degrees (our son did us one better--he earned four). The question is one of timing. Using the framework of modern economics, we can predict that people will stay in college as long as the expected future marginal benefits of college attendance equal or exceed the expected marginal costs. When the marginal costs of attendance rise above the marginal benefits, college attendance lowers satisfaction, and so people drop out. In calculating benefits, however, people estimate the expected benefits of continued attendance even if at the moment the benefits are low relative to current costs; the lure of a diploma months or years ahead raises the perceived future benefits, and keeps people attending school.
In reality, the learning benefits of college probably decline slightly as one proceeds through school--the latter doses of knowledge obtained are probably a little less vital than those earned early on. Nevertheless, the financial benefits from attending college are modest and low for several years of attendance ---and then soar when the piece of paper is given out certifying "graduation." At that point, most people "drop out."
The actual marginal financial benefits are very low through most of the college career but become huge at certification points --getting an associate’s degree, bachelor’s degree, master’s degree, etc. The same is true of law school. Those going for two years do not get two-thirds of the financial benefits of completing a three year program and passing the bar exam. This is because information costs to employers are high, so they allow the certification (diplomas) to guide their hiring decisions, when in reality there are students who have earned 97 percent of a bachelor's degree who are almost as well trained as those with 100 percent.
Maybe we should tell employers –“Joe (or Joanna) has earned 82 percent of a bachelor's degree.” Instead, it is a binary situation --you either graduated from college or you are a college dropout. Maybe we should increase the certification points --all students at four years colleges would get an associate’s degree after two years of satisfactory work, a normal bachelor’s degree after three years, and a super-bachelor’s after four years. If employers are educated in such a system, we probably would have fewer students lingering around waiting for a degree which has huge financial value. In redefining student progress, we should consider making the three year degree the bachelor norm, as in Europe, maybe giving a master's degree after 4 or 4.5 years of work. I think this might reduce the dropout rate, and increase the welfare of students and society alike.
Friday, October 26, 2007
The GOP is MIA
By Bryan O’Keefe
The Wall Street Journal had an excellent story yesterday detailing the Democratic Presidential nominee’s positions on government student loan programs. For the most part, the Democrats want to tinker with the student loan programs in a way that would cut out private companies and force students and families to rely solely on the government for these programs. While it’s a good idea to tinker with the program, this type of tinkering is probably in the wrong direction. Instead of taking the private companies out of the equation, we should be moving more and more to a system that takes advantage of the services that private companies offer, not just the government.
But hey, even if the idea is bad, at least the Democrats have some ideas. We can not say the same thing for the Republican nominees. The GOP gets short mention at the end of the story and it’s fairly obvious that none of the candidates have seriously thought about student loans or probably even higher education in general. None of them offer their own plans or much in the way of blowback against the Democrats proposal.
Of course, we all know that higher ed is not going to decide the next election. But the issue is hot and it’s something that many families across America are facing. It seems foolish that the GOP would ignore the issue entirely or only develop a half-hearted response. There is probably some thinking that “higher ed is a Democratic issue” and that’s also silly. There are plenty of free-market reforms (that GOP candidates traditionally favor or at least used to favor) that could be implemented in higher ed, if somebody had the actual courage to propose them (Any candidate or staffer – Dem or GOP – that is interested in these types of reforms can pick up a copy of Going Broke by Degree: Why College Costs Too Much as a starting point).
Here’s also another idea that some intrepid candidate (again Dem or GOP) might want to examine – what role do college endowments play in the ever rising cost of higher education? Our friend Lynne Munson has provided everyone with tremendous congressional testimony and op-eds on this issue. Instead of just more money, more money, more money and cutting out private companies whenever possible, maybe we should start asking college endowments to start footing some of these bills? The richest colleges and universities have more money than everybody realizes and right now they can just sit upon their piles of cash, without the same payout requirements that other non-profits must adhere to. This is on top of the favored tax treatment that colleges and universities receive. Why do we let these endowments escape without paying any taxes and without having any obligations to taxpayers, students, families? It’s an issue that might resonate with voters, especially since higher ed is viewed (rightly or wrongly) as being arrogant and aloof by most “regular” people.
Like I said, this isn’t necessarily a Democratic or Republican issue and in fact I think there is a strong non-partisan element to it. But the Republicans look like they are out of ideas right now, so maybe they would benefit most from it. Like it or not, there is no doubt that the Democratic Party and their candidates are thinking much more about higher education and student loans these days.
The Wall Street Journal had an excellent story yesterday detailing the Democratic Presidential nominee’s positions on government student loan programs. For the most part, the Democrats want to tinker with the student loan programs in a way that would cut out private companies and force students and families to rely solely on the government for these programs. While it’s a good idea to tinker with the program, this type of tinkering is probably in the wrong direction. Instead of taking the private companies out of the equation, we should be moving more and more to a system that takes advantage of the services that private companies offer, not just the government.
But hey, even if the idea is bad, at least the Democrats have some ideas. We can not say the same thing for the Republican nominees. The GOP gets short mention at the end of the story and it’s fairly obvious that none of the candidates have seriously thought about student loans or probably even higher education in general. None of them offer their own plans or much in the way of blowback against the Democrats proposal.
Of course, we all know that higher ed is not going to decide the next election. But the issue is hot and it’s something that many families across America are facing. It seems foolish that the GOP would ignore the issue entirely or only develop a half-hearted response. There is probably some thinking that “higher ed is a Democratic issue” and that’s also silly. There are plenty of free-market reforms (that GOP candidates traditionally favor or at least used to favor) that could be implemented in higher ed, if somebody had the actual courage to propose them (Any candidate or staffer – Dem or GOP – that is interested in these types of reforms can pick up a copy of Going Broke by Degree: Why College Costs Too Much as a starting point).
Here’s also another idea that some intrepid candidate (again Dem or GOP) might want to examine – what role do college endowments play in the ever rising cost of higher education? Our friend Lynne Munson has provided everyone with tremendous congressional testimony and op-eds on this issue. Instead of just more money, more money, more money and cutting out private companies whenever possible, maybe we should start asking college endowments to start footing some of these bills? The richest colleges and universities have more money than everybody realizes and right now they can just sit upon their piles of cash, without the same payout requirements that other non-profits must adhere to. This is on top of the favored tax treatment that colleges and universities receive. Why do we let these endowments escape without paying any taxes and without having any obligations to taxpayers, students, families? It’s an issue that might resonate with voters, especially since higher ed is viewed (rightly or wrongly) as being arrogant and aloof by most “regular” people.
Like I said, this isn’t necessarily a Democratic or Republican issue and in fact I think there is a strong non-partisan element to it. But the Republicans look like they are out of ideas right now, so maybe they would benefit most from it. Like it or not, there is no doubt that the Democratic Party and their candidates are thinking much more about higher education and student loans these days.
Good, Bad and Predicitable News
By Richard Vedder
I am too busy to write three detailed blogs, but my friend Charles Miller and Whiz Kid Jim Coleman have sent me three things worth talking about, albeit briefly.
Does Education Pay?
Every year, Sandy Baum and her colleagues at the College Board publish a document purporting to show how wonderful higher education is, providing vast benefits to students and to the broader public. Charles and I were ruminating about some possible flaws in the analysis the other day, and a cursory read of the latest iteration of the study confirms my suspicions. Sandy et al have page after page of tables showing higher education is negatively associated with bad things (e.g., unemployment, smoking, crime), but positively associated with good things (e.g., blood donations, volunteerism). I will repeat, for the umpteenth time, that showing association does not prove causation. The kids going to college are, AT AGE 18 BEFORE ENTERING COLLEGE, on average more trustworthy, disciplined, community-minded, etc., then those kids not going to college. The issue is how much does college ADD to the virtuous qualities they already had in some quantity, and how much does college REDUCE the bad qualities? On that, we have no good data.
Moreover, the huge economic benefits of going to college probably are skewed upward in Sandy's analysis in a variety of ways that time does not permit me to get into today. However, one interesting stat that is reported but not commented on: the college-high school earnings differential for 25-34 year old women is now smaller than it was in 1995. While that was not true for males, the question is starting to arise: as costs of college continue to grow, but benefits level off or even decline, is college worth it? Stayed tuned. We will have more to say about this.
NCATE Does Something Right--For A Change
As readers know, I am dubious about accreditation as in currently operates in America. And amongst accreditors, I have always considered the absolutely worst accreditation organization to be NCATE, the National Council on the Accreditation of Teacher Education. We train teachers terribly in America, and NCATE has contributed to that and, moreover, is a barrier to letting good persons into schools to teach who do not meet the mindless standards of this nefarious organization that ranks as one of the greatest threat to America's future of any organization. Studies show that teachers in NCATE approved ed programs do no better than teachers in non NCATE programs, but that does not stop the Ed Establishment from letting this group to continue its stranglehold on entry into large parts of teaching. Legislators are timid to take them on since they are in cahoots with the teachers unions that have bribed many lawmakers into submission.
But NCATE did something good, the Chronicle reports. Or, rather, it did not do something very bad. The group was going to impose a "social justice" standard for America's teachers --roughly that you have to profess that you are a bleeding heart liberal who will say nothing bad about the good guys (poor people, people with politically correct personal characteristics), and will continue to press the bad guys (corporations, successful people) to help subsidize the good guys. Now, to be sure, their definition of "social justice" is no doubt couched in much more idealistic language. However, NCATE has dropped this overt politicization of teaching from consideration. Now, if they would only try to get teachers who know something and who are good at working with kids!! That reminds me --why aren't we moving to abolish public subsidies for colleges of education?
Texas Enrollment Trends
It is time for states to start reporting 2007 enrollment at their public institutions. The Houston Chronicle tells us that enrollment in Texas this fall is up more than two percent --24,000 more students. Interestingly, most of the incremental student count is in the community colleges. Today, far more Texans go to community colleges than four year universities (unlike 15 years ago) and the shift in student mix towards community colleges is one way to hold down college costs. On the whole, I view this trend positively.
All of this simply is a demonstration of the Law of Demand --when something gets more expensive, people buy less of it, in part by buying cheaper substitutes. More and more kids are saying no to high priced schools ---and costs are rising faster in Texas four year public universities as the legislature gave them freedom to set their own tuition. Supply limits at the better schools (especially UT Austin and Texas A & M) might force some kids to choose between going to a perceived mediocre lesser state school (e.g., University of Houston) or to a community college and later trying to transfer to a quality state institution. Markets work. Universities may start pricing themselves out of the market --student loans and all.
I am too busy to write three detailed blogs, but my friend Charles Miller and Whiz Kid Jim Coleman have sent me three things worth talking about, albeit briefly.
Does Education Pay?
Every year, Sandy Baum and her colleagues at the College Board publish a document purporting to show how wonderful higher education is, providing vast benefits to students and to the broader public. Charles and I were ruminating about some possible flaws in the analysis the other day, and a cursory read of the latest iteration of the study confirms my suspicions. Sandy et al have page after page of tables showing higher education is negatively associated with bad things (e.g., unemployment, smoking, crime), but positively associated with good things (e.g., blood donations, volunteerism). I will repeat, for the umpteenth time, that showing association does not prove causation. The kids going to college are, AT AGE 18 BEFORE ENTERING COLLEGE, on average more trustworthy, disciplined, community-minded, etc., then those kids not going to college. The issue is how much does college ADD to the virtuous qualities they already had in some quantity, and how much does college REDUCE the bad qualities? On that, we have no good data.
Moreover, the huge economic benefits of going to college probably are skewed upward in Sandy's analysis in a variety of ways that time does not permit me to get into today. However, one interesting stat that is reported but not commented on: the college-high school earnings differential for 25-34 year old women is now smaller than it was in 1995. While that was not true for males, the question is starting to arise: as costs of college continue to grow, but benefits level off or even decline, is college worth it? Stayed tuned. We will have more to say about this.
NCATE Does Something Right--For A Change
As readers know, I am dubious about accreditation as in currently operates in America. And amongst accreditors, I have always considered the absolutely worst accreditation organization to be NCATE, the National Council on the Accreditation of Teacher Education. We train teachers terribly in America, and NCATE has contributed to that and, moreover, is a barrier to letting good persons into schools to teach who do not meet the mindless standards of this nefarious organization that ranks as one of the greatest threat to America's future of any organization. Studies show that teachers in NCATE approved ed programs do no better than teachers in non NCATE programs, but that does not stop the Ed Establishment from letting this group to continue its stranglehold on entry into large parts of teaching. Legislators are timid to take them on since they are in cahoots with the teachers unions that have bribed many lawmakers into submission.
But NCATE did something good, the Chronicle reports. Or, rather, it did not do something very bad. The group was going to impose a "social justice" standard for America's teachers --roughly that you have to profess that you are a bleeding heart liberal who will say nothing bad about the good guys (poor people, people with politically correct personal characteristics), and will continue to press the bad guys (corporations, successful people) to help subsidize the good guys. Now, to be sure, their definition of "social justice" is no doubt couched in much more idealistic language. However, NCATE has dropped this overt politicization of teaching from consideration. Now, if they would only try to get teachers who know something and who are good at working with kids!! That reminds me --why aren't we moving to abolish public subsidies for colleges of education?
Texas Enrollment Trends
It is time for states to start reporting 2007 enrollment at their public institutions. The Houston Chronicle tells us that enrollment in Texas this fall is up more than two percent --24,000 more students. Interestingly, most of the incremental student count is in the community colleges. Today, far more Texans go to community colleges than four year universities (unlike 15 years ago) and the shift in student mix towards community colleges is one way to hold down college costs. On the whole, I view this trend positively.
All of this simply is a demonstration of the Law of Demand --when something gets more expensive, people buy less of it, in part by buying cheaper substitutes. More and more kids are saying no to high priced schools ---and costs are rising faster in Texas four year public universities as the legislature gave them freedom to set their own tuition. Supply limits at the better schools (especially UT Austin and Texas A & M) might force some kids to choose between going to a perceived mediocre lesser state school (e.g., University of Houston) or to a community college and later trying to transfer to a quality state institution. Markets work. Universities may start pricing themselves out of the market --student loans and all.
Tuesday, October 23, 2007
Tuition Containment: A New Approach
By Richard Vedder
It is business as usual at American universities when it comes to tuition charges according to the latest reports released by the College Board, and it is infuriating for many. I have long opposed full blown price controls where markets operate freely, although this is clearly not the case in higher education. There is, however, an intermediate approach to full blown controls worthy of market.
Colleges and universities that increase their tuition fees in any given year by more than the three year moving average growth in median family income (maybe median household income), will start losing their federal tax exemption. When I say "lose their exemption" I mean: some endowment income including capital gains would be subject to taxation; annual gifts to universities would lose some tax deductibility to the donor; bequests upon death would be taxable and, possibly, even, universities would become subject to corporate income taxes.
Here is how it would work. Suppose the 3 year moving average of median family income is rising 4 percent a year. Colleges could raise their fees 4 percent or less without penalty. They would pay penalties for bigger increases. Say they lose 2.5 percent of their exemption for each 0.1 percentage point tuition increases exceed the family income threshold (4 percent in this example). If a school raises tuition 5 percent, it loses 25 percent of its exemption; 7 percent, it loses 75 percent; 8 percent it loses the entire exemption.
Are there some problems with this approach? There are literally dozens of them. Are they resolvable? I think the answer is yes. Universities seeking privileged tax status would have to play by the rules. A school wanting to raise tuition fees 15 percent could do so –but only at a high price.
It is business as usual at American universities when it comes to tuition charges according to the latest reports released by the College Board, and it is infuriating for many. I have long opposed full blown price controls where markets operate freely, although this is clearly not the case in higher education. There is, however, an intermediate approach to full blown controls worthy of market.
Colleges and universities that increase their tuition fees in any given year by more than the three year moving average growth in median family income (maybe median household income), will start losing their federal tax exemption. When I say "lose their exemption" I mean: some endowment income including capital gains would be subject to taxation; annual gifts to universities would lose some tax deductibility to the donor; bequests upon death would be taxable and, possibly, even, universities would become subject to corporate income taxes.
Here is how it would work. Suppose the 3 year moving average of median family income is rising 4 percent a year. Colleges could raise their fees 4 percent or less without penalty. They would pay penalties for bigger increases. Say they lose 2.5 percent of their exemption for each 0.1 percentage point tuition increases exceed the family income threshold (4 percent in this example). If a school raises tuition 5 percent, it loses 25 percent of its exemption; 7 percent, it loses 75 percent; 8 percent it loses the entire exemption.
Are there some problems with this approach? There are literally dozens of them. Are they resolvable? I think the answer is yes. Universities seeking privileged tax status would have to play by the rules. A school wanting to raise tuition fees 15 percent could do so –but only at a high price.
Sending Our Tax Money To The Buckeyes
By Bryan O'Keefe
As most people know, I am a rather avid Pennsylvania sports fan – just this past weekend, I spent a good part of Saturday watching the Penn State/Indiana football game and Sunday evening I was parked in front of the television again, this time for the Steelers/Broncos game. In addition to my affection for the Nittany Lions and the Steelers, I also follow George Washington University basketball (my alma mater) and have been a season ticket holder since graduation. So, I come to this blog posting with no particular animus towards sports in general – quite the contrary.
Never the less, the Wall Street Journal had an excellent piece on Friday detailing the excesses surrounding the Ohio State football program and athletics department. Most of the details would be expected from an elite Big 10 program, but some even surprised me – for example, the athletics department has some sort of exercise equipment that even a professional sports team said was out of their league. Furthermore, the total budget for the athletics department is an astounding $109 million dollars.
The story defends the program somewhat, with the claim that most of the extravagance is funded by alumni donations. Others have told me that Ohio State deserves credit because its athletic department is self-sufficient and does not draw on general university resources. Those are points well-taken.
But the story misses a major topic: namely that those same alumni donations that help fund the program are subsidized by taxpayers. Donors receive nice tax deductions for their support of these programs, so, in essence, all of us are helping to fund today’s collegiate sport excesses.
Our friend Wick Sloane wrote a paper a couple of months ago which touched on this subject – why are we always griping about the lack of student loans, grants, etc. when we allow donations to sports stadiums to be tax deductible? Is that the proper role of the tax code? Should donors lose part of their tax deduction if they donate to the stadium instead of say, the school library? Instead of just blindly increasing loan amounts, maybe we should tinker with the tax deduction for donations to athletic programs, so any new loans or grants would at least be revenue neutral.
I also think this story makes it painfully clear that we need a new model for collegiate sports in general. The day of athletes being students first and competitors second – especially in the high level basketball and football programs – is over. (It still does exist when you get into the more obscure sports like fencing, but they are not really the problem here) Maybe instead of treating athletics as we do now, we should force universities to spin them off as separate businesses. Let them raise capital and actually pay their players. These are just ideas that we should be seriously considering in the future.
I certainly don’t have all of the answers for this problem, but something seems seriously wrong when we spend most of our time working on how to make the educational component of college (the reason we go to college in the first place) more affordable and productive and yet thousands of alumni donors across the country are getting hefty tax breaks for putting their names on stadiums.
One final note – I know I am picking on Ohio State here – that has nothing to do with the fact that the Buckeyes do in fact play Penn State this weekend. (I would love to see Penn State pull the upset) Ohio State just had the misfortune of being profiled for the Journal. I am sure that the same situation exists at Penn State and many other big-time college football and basketball programs.
As most people know, I am a rather avid Pennsylvania sports fan – just this past weekend, I spent a good part of Saturday watching the Penn State/Indiana football game and Sunday evening I was parked in front of the television again, this time for the Steelers/Broncos game. In addition to my affection for the Nittany Lions and the Steelers, I also follow George Washington University basketball (my alma mater) and have been a season ticket holder since graduation. So, I come to this blog posting with no particular animus towards sports in general – quite the contrary.
Never the less, the Wall Street Journal had an excellent piece on Friday detailing the excesses surrounding the Ohio State football program and athletics department. Most of the details would be expected from an elite Big 10 program, but some even surprised me – for example, the athletics department has some sort of exercise equipment that even a professional sports team said was out of their league. Furthermore, the total budget for the athletics department is an astounding $109 million dollars.
The story defends the program somewhat, with the claim that most of the extravagance is funded by alumni donations. Others have told me that Ohio State deserves credit because its athletic department is self-sufficient and does not draw on general university resources. Those are points well-taken.
But the story misses a major topic: namely that those same alumni donations that help fund the program are subsidized by taxpayers. Donors receive nice tax deductions for their support of these programs, so, in essence, all of us are helping to fund today’s collegiate sport excesses.
Our friend Wick Sloane wrote a paper a couple of months ago which touched on this subject – why are we always griping about the lack of student loans, grants, etc. when we allow donations to sports stadiums to be tax deductible? Is that the proper role of the tax code? Should donors lose part of their tax deduction if they donate to the stadium instead of say, the school library? Instead of just blindly increasing loan amounts, maybe we should tinker with the tax deduction for donations to athletic programs, so any new loans or grants would at least be revenue neutral.
I also think this story makes it painfully clear that we need a new model for collegiate sports in general. The day of athletes being students first and competitors second – especially in the high level basketball and football programs – is over. (It still does exist when you get into the more obscure sports like fencing, but they are not really the problem here) Maybe instead of treating athletics as we do now, we should force universities to spin them off as separate businesses. Let them raise capital and actually pay their players. These are just ideas that we should be seriously considering in the future.
I certainly don’t have all of the answers for this problem, but something seems seriously wrong when we spend most of our time working on how to make the educational component of college (the reason we go to college in the first place) more affordable and productive and yet thousands of alumni donors across the country are getting hefty tax breaks for putting their names on stadiums.
One final note – I know I am picking on Ohio State here – that has nothing to do with the fact that the Buckeyes do in fact play Penn State this weekend. (I would love to see Penn State pull the upset) Ohio State just had the misfortune of being profiled for the Journal. I am sure that the same situation exists at Penn State and many other big-time college football and basketball programs.
Market Based Management and Entrepreneurial Initiatives in Higher Education
By Richard Vedder
Charles Koch is a shrewd businessman, and he and his brother David are both listed amongst the 10 richest Americans by Forbes magazine. Charles has been particularly generous in funding a "market based management" approach to non-profit organizations, including universities. CCAP has benefited from his generosity.
I was reminded of this today when I saw three bits of news that imply the entrepreneurial spirit is growing in higher education, some good news to offset the bad news of continuing rising tuition fees.
First, the Carlyle Group, a major private equity player, is teaming up with Apollo Corporation (the University of Phoenix), in a $1 billion joint venture overseas. As the American for profit market becomes more crowded and enrollment growth slows, the for profits will either have to invade the mainline four year undergraduate market or seak opportunities elsewhere. This is the latest and biggest foray into international education by the American based for profit firms.
Second, 10 schools announced that they are pledging to work to develop measures of learning effectiveness -- of "value added" during the college years. The schools include some medium-sized non-prestigious not-for-profit institutions (e.g., Franklin University and the innovative Western Governors University), as well as major for profit participants (e.g., Kaplan). This is good news, and these schools are precisely the ones who will gain -- by demonstrating to the world "our students are learning something” --can they say that at Harvard, or Slippery Rock (a smaller state university in Pennsylvania)? I worked with the heads of two of the schools on the Spellings Commission, Bob Mendenhall and Jonathan Grayer, and I am delighted to see them participate in this positive effort.
Third, new statistics show that online enrollments now exceed 3 million. While many are taking on line courses as part of their conventional learning experience, it does show that colleges are well aware of the potential of this new technology. Questions still arise --what is the quality of this form of instruction? What are the cost factors -- is it saving money? But at least there is a move away from teaching the way Socrates did 2,400 years ago, and that, on balance, is probably a good thing. On-line enrollment growth is starting to slow, which is to be expected, as the torrid growth rates observed earlier are not sustainable long term. What the optimal mix of conventional and on-line learning is, I don't know, but I like the fact that this non-conventional teaching method is getting increased use.
Charles Koch is a shrewd businessman, and he and his brother David are both listed amongst the 10 richest Americans by Forbes magazine. Charles has been particularly generous in funding a "market based management" approach to non-profit organizations, including universities. CCAP has benefited from his generosity.
I was reminded of this today when I saw three bits of news that imply the entrepreneurial spirit is growing in higher education, some good news to offset the bad news of continuing rising tuition fees.
First, the Carlyle Group, a major private equity player, is teaming up with Apollo Corporation (the University of Phoenix), in a $1 billion joint venture overseas. As the American for profit market becomes more crowded and enrollment growth slows, the for profits will either have to invade the mainline four year undergraduate market or seak opportunities elsewhere. This is the latest and biggest foray into international education by the American based for profit firms.
Second, 10 schools announced that they are pledging to work to develop measures of learning effectiveness -- of "value added" during the college years. The schools include some medium-sized non-prestigious not-for-profit institutions (e.g., Franklin University and the innovative Western Governors University), as well as major for profit participants (e.g., Kaplan). This is good news, and these schools are precisely the ones who will gain -- by demonstrating to the world "our students are learning something” --can they say that at Harvard, or Slippery Rock (a smaller state university in Pennsylvania)? I worked with the heads of two of the schools on the Spellings Commission, Bob Mendenhall and Jonathan Grayer, and I am delighted to see them participate in this positive effort.
Third, new statistics show that online enrollments now exceed 3 million. While many are taking on line courses as part of their conventional learning experience, it does show that colleges are well aware of the potential of this new technology. Questions still arise --what is the quality of this form of instruction? What are the cost factors -- is it saving money? But at least there is a move away from teaching the way Socrates did 2,400 years ago, and that, on balance, is probably a good thing. On-line enrollment growth is starting to slow, which is to be expected, as the torrid growth rates observed earlier are not sustainable long term. What the optimal mix of conventional and on-line learning is, I don't know, but I like the fact that this non-conventional teaching method is getting increased use.
Higher Education to the People: Go To Hell
By Richard Vedder
Sandy Baum has released her annual study on tuition costs, and, surprise, surprise, tuition costs are continuing to rise at more than double the rate of inflation. Social Security recipients are getting a 2.9 percent cost-of-living adjustment soon, but college tuition fees rose over 6 percent at both public and private four year schools this fall. The more cost-conscious community colleges saw costs rise a more reasonable 4.2 percent.
You might say "published tuition fees are a fiction, since a majority of students get some sort of financial aid." That argument fails on two grounds -- first, a good hunk of the financial aid is the form of loans requiring repayment. Second, "net" tuition fees --after financial aid -- also rose more than 6 percent last year at the four year schools. A quarter of century of trends where tuition rises at double the inflation rate and at an inflation-adjusted rate of over three percent a year continues unabated.
This is happening, of course, in a period in which America is telling higher education loud and clear that the rising real costs are a major problem. The Spellings Commission explicitly urged universities to limit tuition increases to the rate of growth in per capita or per family personal income (I know, because I inserted that passage into the report with the support of chair Charles Miller). State legislatures and governors are cajoling some universities to freeze or limit fee growth. The media are screaming increasingly about this problem. But colleges are not taking this seriously, with the possible exception of the community colleges and a small minority of other schools.
Rather, many schools are like Boston University, which has just announced it (like scores of other schools), wants to join the top ranks of universities, and is raising $1.8 billion to do the job -- hiring more very high paid superstar professors, for example. Of course, all schools are trying to get tax exempt monies from the private sector to lead to ever more costly education. The bottom line, more than ever, is the US News & World Report rankings. Congress could do something about this by putting limits on the use of tax exempt monies in higher ed, although it is easier to propose the idea than actually draft the legislation (I know, because I have discussed the issue with congressional staffers interested in putting some limits on the wild collegiate spending spree).
I always said that if the colleges ignore the people, ultimately the people will turn on them. So far, they have not, since the college-high school earnings differential is large enough to justify exorbitant fees on a private investment decision basis (in most cases). But their arrogance is breathtaking, and the mood to "do something' about it is growing. If it reaches a threshold where it becomes a major national political issue, something will be done. Likely, it will be bad for the nation. Certainly it will not be liked by the colleges who are now behaving more like the spoiled rich teenagers they are educating than as responsible members of the American community.
Sandy Baum has released her annual study on tuition costs, and, surprise, surprise, tuition costs are continuing to rise at more than double the rate of inflation. Social Security recipients are getting a 2.9 percent cost-of-living adjustment soon, but college tuition fees rose over 6 percent at both public and private four year schools this fall. The more cost-conscious community colleges saw costs rise a more reasonable 4.2 percent.
You might say "published tuition fees are a fiction, since a majority of students get some sort of financial aid." That argument fails on two grounds -- first, a good hunk of the financial aid is the form of loans requiring repayment. Second, "net" tuition fees --after financial aid -- also rose more than 6 percent last year at the four year schools. A quarter of century of trends where tuition rises at double the inflation rate and at an inflation-adjusted rate of over three percent a year continues unabated.
This is happening, of course, in a period in which America is telling higher education loud and clear that the rising real costs are a major problem. The Spellings Commission explicitly urged universities to limit tuition increases to the rate of growth in per capita or per family personal income (I know, because I inserted that passage into the report with the support of chair Charles Miller). State legislatures and governors are cajoling some universities to freeze or limit fee growth. The media are screaming increasingly about this problem. But colleges are not taking this seriously, with the possible exception of the community colleges and a small minority of other schools.
Rather, many schools are like Boston University, which has just announced it (like scores of other schools), wants to join the top ranks of universities, and is raising $1.8 billion to do the job -- hiring more very high paid superstar professors, for example. Of course, all schools are trying to get tax exempt monies from the private sector to lead to ever more costly education. The bottom line, more than ever, is the US News & World Report rankings. Congress could do something about this by putting limits on the use of tax exempt monies in higher ed, although it is easier to propose the idea than actually draft the legislation (I know, because I have discussed the issue with congressional staffers interested in putting some limits on the wild collegiate spending spree).
I always said that if the colleges ignore the people, ultimately the people will turn on them. So far, they have not, since the college-high school earnings differential is large enough to justify exorbitant fees on a private investment decision basis (in most cases). But their arrogance is breathtaking, and the mood to "do something' about it is growing. If it reaches a threshold where it becomes a major national political issue, something will be done. Likely, it will be bad for the nation. Certainly it will not be liked by the colleges who are now behaving more like the spoiled rich teenagers they are educating than as responsible members of the American community.
Friday, October 19, 2007
Universities Out of Touch: Another Example
By Richard Vedder
I should probably not write blogs 12 hours after beginning work, but I am mightily annoyed again, by another example of how universities are emphasizing things that do not resonate well with the American public, and for good reason.
The American Association of Colleges and Universities is run by the very capable Carol Geary Schneider, and is interested in liberal education, a topic on which we need thoughtful dialogue. Today I received an email from AAC&U saying they are renaming and strengthening a publication. The new Diversity & Democracy will "explore questions of race and gender, class and ethnicity, sexual identity and religious identity." Of the four publications of AAC&U, two are on race, class or gender matters. None are on the debate over core curriculum. None are on ways of enhancing efficiency and productivity in the teaching of the humanities.
AAC&U is doing what many colleges do these days --"celebrating diversity" -- as long as diversity is about race, class, gender and sexual orientation. Much attention is placed on whether restrooms are transgender friendly, or whether faculties have an optimal type of skin pigmentation or the proper balance of reproductive organs. Hardly anyone is clamoring for intellectual diversity, the free market in diverse ideas. Colleges are becoming increasingly racist, sexist, and intolerant of those who hold mainstream values. Nationwide, skepticism about the direction of affirmative action at the college level is growing, and voters in states as diverse as Washington and Michigan have put limits on university obsessions with diversity. Even if you believe, however, that affirmative action is an appropriate policy, should we be putting more attention on it than on issues that are of vital concern to the American public, such as the cost of higher education and how to contain its growth?
This leads me to ask, again and again, the question: why do we continue to provide public subsidies to institutions so far removed from the mainstream of our society, institutions that are arrogant and elitist? As the late Milton Friedman put it to me in an email a few years ago, perhaps the time has come to tax universities rather than subsidize them. It is time for them to get back to basics and stop trying to outdo one another on issues that are receding from the forefront of American life as the discrimination and abuse of certain groups that once plagued America dissipates in importance. I have a feeling if we got rid of every affirmative action official, multicultural affairs guru, and diversity coordinator at my university, the relations between groups of students would not change much --and we would save a few million dollars. However, universities live in there own little world, and will continue to do so as long as we write them checks to pay for their questionable idiosyncrasies.
I should probably not write blogs 12 hours after beginning work, but I am mightily annoyed again, by another example of how universities are emphasizing things that do not resonate well with the American public, and for good reason.
The American Association of Colleges and Universities is run by the very capable Carol Geary Schneider, and is interested in liberal education, a topic on which we need thoughtful dialogue. Today I received an email from AAC&U saying they are renaming and strengthening a publication. The new Diversity & Democracy will "explore questions of race and gender, class and ethnicity, sexual identity and religious identity." Of the four publications of AAC&U, two are on race, class or gender matters. None are on the debate over core curriculum. None are on ways of enhancing efficiency and productivity in the teaching of the humanities.
AAC&U is doing what many colleges do these days --"celebrating diversity" -- as long as diversity is about race, class, gender and sexual orientation. Much attention is placed on whether restrooms are transgender friendly, or whether faculties have an optimal type of skin pigmentation or the proper balance of reproductive organs. Hardly anyone is clamoring for intellectual diversity, the free market in diverse ideas. Colleges are becoming increasingly racist, sexist, and intolerant of those who hold mainstream values. Nationwide, skepticism about the direction of affirmative action at the college level is growing, and voters in states as diverse as Washington and Michigan have put limits on university obsessions with diversity. Even if you believe, however, that affirmative action is an appropriate policy, should we be putting more attention on it than on issues that are of vital concern to the American public, such as the cost of higher education and how to contain its growth?
This leads me to ask, again and again, the question: why do we continue to provide public subsidies to institutions so far removed from the mainstream of our society, institutions that are arrogant and elitist? As the late Milton Friedman put it to me in an email a few years ago, perhaps the time has come to tax universities rather than subsidize them. It is time for them to get back to basics and stop trying to outdo one another on issues that are receding from the forefront of American life as the discrimination and abuse of certain groups that once plagued America dissipates in importance. I have a feeling if we got rid of every affirmative action official, multicultural affairs guru, and diversity coordinator at my university, the relations between groups of students would not change much --and we would save a few million dollars. However, universities live in there own little world, and will continue to do so as long as we write them checks to pay for their questionable idiosyncrasies.
Why Don't Poor People Get College Degrees?
By Richard Vedder
On the Spellings Commission, it became an article of faith that high costs of college were a major barrier to low income access, and that access is declining as costs rise. Thus we push, successfully, for bigger Pell Grants. My Commission colleague (and now friend) Bob Zemksy tended to civilly dissent from that view, citing some evidence of his own from Pennsylvania.
I am increasingly coming to the view that Bob is largely right. While rising college costs is a huge problem to society, the negatives in terms of barriers to access are somewhat overrated. That view was strengthened by the September 2007 issue of Postsecondary Education Opportunity. While Tom Mortenson' preaching on access issues sometimes drives me crazy, his numbers are great. (Tom believes the evil taxpayers and politicians are denying poor people access, but he never has a negative word to say about what he no doubt perceives to be sainted, selfless and public spirited universities whose falling productivity is just a fact of life).
New data that Tom provides shows that in 2006, 12.1 percent of those in the lowest income quartile had obtained bachelor's degrees by the age of 24 --almost exactly the same proportion as in 1970. The inference is that college graduation is becoming a status reserved mainly for the affluent --or at least the non-poor. And the stagnation in that statistic is a legitimate cause of concern for those believing in the American egalitarian ideal.
At the same time, however, the percent of those in the bottom quartile attending college has risen sharply, from roughly 25 percent around 1970 to over 40 percent today. While participation has gone up for all groups, the percentage increase (both absolutely and relative to the 1970 participation rate) is greatest for this income group. Rising college costs have been accompanied by healthy increases in higher education participation among the poor.
What we see, then, is this: more poor go to college, but no more poor (in a relative sense) graduate. Another way of putting it is that the college success rate (graduation rate) among the poor seems to have fallen rather sharply.
This result, then, seems consistent with findings of individuals as diverse as AEI scholar Charles Murray, Rutgers sociologist Jackson Toby, South Carolina's intrepid educational research Harry Stilles, and myself: many kids who go to college are unprepared. As we try to increase the proportion going to college, we are increasingly enticing kids who have a low probability of success, in some cases because of lack of cognitive skills (Charles's point), in some cases because of messy and time-consuming family responsibilities, and, yes, sometimes for economic reasons. But money and "access" are not the main problems. Lower income kids are trying college out more than ever --with decidedly mixed effects.
I have always been willing to use some charitable funds unproductively to give everyone a chance at college, in keeping with the American Dream and egalitarian principles. But there are limits. Are we willing to spend billions if it results in just one more poor kid graduating? Cost-benefit calculations apply here as in almost any decision involving resources.
Mortenson also reveals a larger proportion of Pell Grants now go to support community college attendance --which, I think, he views as retrogression, but which I view as good. Give kids whose academic profile (which often correlates highly with income) is weak a chance by sending them to instruction-intensive but low cost community colleges before sending them on to the residential university/country club four year college setting which is quite costly to society.
On the Spellings Commission, it became an article of faith that high costs of college were a major barrier to low income access, and that access is declining as costs rise. Thus we push, successfully, for bigger Pell Grants. My Commission colleague (and now friend) Bob Zemksy tended to civilly dissent from that view, citing some evidence of his own from Pennsylvania.
I am increasingly coming to the view that Bob is largely right. While rising college costs is a huge problem to society, the negatives in terms of barriers to access are somewhat overrated. That view was strengthened by the September 2007 issue of Postsecondary Education Opportunity. While Tom Mortenson' preaching on access issues sometimes drives me crazy, his numbers are great. (Tom believes the evil taxpayers and politicians are denying poor people access, but he never has a negative word to say about what he no doubt perceives to be sainted, selfless and public spirited universities whose falling productivity is just a fact of life).
New data that Tom provides shows that in 2006, 12.1 percent of those in the lowest income quartile had obtained bachelor's degrees by the age of 24 --almost exactly the same proportion as in 1970. The inference is that college graduation is becoming a status reserved mainly for the affluent --or at least the non-poor. And the stagnation in that statistic is a legitimate cause of concern for those believing in the American egalitarian ideal.
At the same time, however, the percent of those in the bottom quartile attending college has risen sharply, from roughly 25 percent around 1970 to over 40 percent today. While participation has gone up for all groups, the percentage increase (both absolutely and relative to the 1970 participation rate) is greatest for this income group. Rising college costs have been accompanied by healthy increases in higher education participation among the poor.
What we see, then, is this: more poor go to college, but no more poor (in a relative sense) graduate. Another way of putting it is that the college success rate (graduation rate) among the poor seems to have fallen rather sharply.
This result, then, seems consistent with findings of individuals as diverse as AEI scholar Charles Murray, Rutgers sociologist Jackson Toby, South Carolina's intrepid educational research Harry Stilles, and myself: many kids who go to college are unprepared. As we try to increase the proportion going to college, we are increasingly enticing kids who have a low probability of success, in some cases because of lack of cognitive skills (Charles's point), in some cases because of messy and time-consuming family responsibilities, and, yes, sometimes for economic reasons. But money and "access" are not the main problems. Lower income kids are trying college out more than ever --with decidedly mixed effects.
I have always been willing to use some charitable funds unproductively to give everyone a chance at college, in keeping with the American Dream and egalitarian principles. But there are limits. Are we willing to spend billions if it results in just one more poor kid graduating? Cost-benefit calculations apply here as in almost any decision involving resources.
Mortenson also reveals a larger proportion of Pell Grants now go to support community college attendance --which, I think, he views as retrogression, but which I view as good. Give kids whose academic profile (which often correlates highly with income) is weak a chance by sending them to instruction-intensive but low cost community colleges before sending them on to the residential university/country club four year college setting which is quite costly to society.
Thursday, October 18, 2007
The Endowment Issue
By Richard Vedder
The libertarian in me says government should not mess with college endowments. Universities presumably are trying their best to accomplish their mission, and attempts to force universities to spend X amount out of their endowments infringe on the judgments of university officials, and may force them to pursue policies inconsistent with their long term objectives. A one size fits all national policy is seemingly inappropriate.
Yet the universities have engaged in a spending spree over the decades, with costs rising sharply in spite of increasing private support. Also, they already have gotten into bed with governments prostituting themselves in numerous ways to get taxpayer money. Endowments have accrued because of all sorts of favorable tax treatments -- income given by donors is exempted from federal individual income taxation (including capital gains), and the income earned from the endowments in the form of dividends, interest, and capital gains is not taxable, nor are estate taxes levied on university gifts. Thus, we have given universities a privileged position in society largely because we assume that endowment gifts will be put to productive and efficient use in furthering the quantity and quality of teaching and research efforts.
Therefore, we are delighted to have Lynne Munson with us at CCAP, albeit only in an adjunct capacity. Today, Lynne has written a very nice op-ed piece in USA Today. I recommend it to blog readers.
I have carefully read the criticism of the higher education establishment in response to testimonies given by both Lynne and veteran Congressional Research Service scholar Jane Graville before the Senate Finance Committee, and, for the most part, I think it is misplaced. For example, I do not think the fact that part of endowment monies are earmarked by donors is really a serious obstacle to requiring universities to spend a minimum of, say, five percent of their endowment income. I suspect Lynne and I will become more active on this issue in the coming months. Stay tuned.
The libertarian in me says government should not mess with college endowments. Universities presumably are trying their best to accomplish their mission, and attempts to force universities to spend X amount out of their endowments infringe on the judgments of university officials, and may force them to pursue policies inconsistent with their long term objectives. A one size fits all national policy is seemingly inappropriate.
Yet the universities have engaged in a spending spree over the decades, with costs rising sharply in spite of increasing private support. Also, they already have gotten into bed with governments prostituting themselves in numerous ways to get taxpayer money. Endowments have accrued because of all sorts of favorable tax treatments -- income given by donors is exempted from federal individual income taxation (including capital gains), and the income earned from the endowments in the form of dividends, interest, and capital gains is not taxable, nor are estate taxes levied on university gifts. Thus, we have given universities a privileged position in society largely because we assume that endowment gifts will be put to productive and efficient use in furthering the quantity and quality of teaching and research efforts.
Therefore, we are delighted to have Lynne Munson with us at CCAP, albeit only in an adjunct capacity. Today, Lynne has written a very nice op-ed piece in USA Today. I recommend it to blog readers.
I have carefully read the criticism of the higher education establishment in response to testimonies given by both Lynne and veteran Congressional Research Service scholar Jane Graville before the Senate Finance Committee, and, for the most part, I think it is misplaced. For example, I do not think the fact that part of endowment monies are earmarked by donors is really a serious obstacle to requiring universities to spend a minimum of, say, five percent of their endowment income. I suspect Lynne and I will become more active on this issue in the coming months. Stay tuned.
Wednesday, October 17, 2007
Power Brokers On Higher Education
By Richard Vedder
I am in Washington, D.C., and have spent some time with a large number of political leaders, opinion-makers, etc., ranging from freshman Congressmen to the Chief Justice. It is amazing how often the subject of higher education has come up.
I heard two major GOP presidential candidates speak, Rudy Guiliani and Fred Thompson. Interestingly, neither mentioned higher education at all in their 20-30 minute speeches. This confirms my suspicion that the GOP candidates may be neglecting a topic of growing interest to the general public --rising higher education costs. In contrast, Democratic candidates are speaking up on this issue, Senator Clinton has issued a detailed and serious higher education proposal as part of her campaign strategy.
Treasury Secretary Henry Paulson did raise the topic of higher education during a Q and A session after a short speech. He opined that our K-12 system is producing an inferior product that puts us at a competitive disadvantage internationally in the long run. He contrasted this to our higher education system, which he asserted was "the best in the world." Is it? How does he know? If so, what explains the difference in the quality of education at the two different levels? On that, he was silent. Paulson is a sharp guy, a heavyweight who once ran Goldman Sachs, but he seems somewhat out of it with respect to higher education --why is that? Indifference? Ignorance? Reform in higher education will come only when people of substance get interested in the problem.
I was also at a nice session honoring the late Chief Justice Rehnquist. Former Justice Sandra Day O'Connor noted how Bill Rehnquist, her fellow Stanford student, worked his way through college. His daughter Janet noted that the GI Bill made it possible for him to go to both Stanford as an undergraduate and as a law student, demonstrating that this modified voucher plan helped provide access to someone who used that education most productively. To me, that is why a modified GI Bill approach holds more promise when it comes to government higher education support than dropping money out of airplanes over college campuses ---blanket institutional subsidies.
Chief Justice Roberts noted how Rehnquist's knowledge of history wowed his clerks (including Roberts). The Chief Justice would ask his clerks about obscure battles in the early 18th century and be chagrined when his clerks had no idea about them, shaking his head over the qualitative decline in American education. What would he have thought about student performance on the Intercollegiate Studies Institute's rather simple examination on civic literacy, on which even Harvard seniors average less than 70 percent?
I am in Washington, D.C., and have spent some time with a large number of political leaders, opinion-makers, etc., ranging from freshman Congressmen to the Chief Justice. It is amazing how often the subject of higher education has come up.
I heard two major GOP presidential candidates speak, Rudy Guiliani and Fred Thompson. Interestingly, neither mentioned higher education at all in their 20-30 minute speeches. This confirms my suspicion that the GOP candidates may be neglecting a topic of growing interest to the general public --rising higher education costs. In contrast, Democratic candidates are speaking up on this issue, Senator Clinton has issued a detailed and serious higher education proposal as part of her campaign strategy.
Treasury Secretary Henry Paulson did raise the topic of higher education during a Q and A session after a short speech. He opined that our K-12 system is producing an inferior product that puts us at a competitive disadvantage internationally in the long run. He contrasted this to our higher education system, which he asserted was "the best in the world." Is it? How does he know? If so, what explains the difference in the quality of education at the two different levels? On that, he was silent. Paulson is a sharp guy, a heavyweight who once ran Goldman Sachs, but he seems somewhat out of it with respect to higher education --why is that? Indifference? Ignorance? Reform in higher education will come only when people of substance get interested in the problem.
I was also at a nice session honoring the late Chief Justice Rehnquist. Former Justice Sandra Day O'Connor noted how Bill Rehnquist, her fellow Stanford student, worked his way through college. His daughter Janet noted that the GI Bill made it possible for him to go to both Stanford as an undergraduate and as a law student, demonstrating that this modified voucher plan helped provide access to someone who used that education most productively. To me, that is why a modified GI Bill approach holds more promise when it comes to government higher education support than dropping money out of airplanes over college campuses ---blanket institutional subsidies.
Chief Justice Roberts noted how Rehnquist's knowledge of history wowed his clerks (including Roberts). The Chief Justice would ask his clerks about obscure battles in the early 18th century and be chagrined when his clerks had no idea about them, shaking his head over the qualitative decline in American education. What would he have thought about student performance on the Intercollegiate Studies Institute's rather simple examination on civic literacy, on which even Harvard seniors average less than 70 percent?
Sunday, October 14, 2007
Hillary on Higher Ed
By Richard Vedder
Senator Clinton unveiled her higher education plan last week. Overall, it is not a very good plan, but it is far better than I expected it to be. It is reasonably detailed and has a few very good features.
The good news is that it proposes to eliminate the guaranteed student loan program, an incredibly good idea. It also proposes to require colleges to report earnings and employment data on graduates --another great idea.
This is offset, however, by proposing an increase in total federal higher education spending by a massive expansion of tax credits, which is an open invitation for colleges to raise tuition fees. The huge expansion in grants is also conceivably dubious, but if done using vouchers it is an idea with some potential. Incentive grants to improve graduation rates could be good, depending how they are administered. A huge expansion of AmeriCorps, which provides funds for college tuition in exchange for a year of community service, has little to do with higher education, and where is the evidence that program has been effective? Nothing in the plan deals with the root causes of higher education’s inefficiency. Still, for Senator Clinton, it isn't too bad --and at least she is giving us some specifics on what she would do --more than most other candidates are doing.
Senator Clinton unveiled her higher education plan last week. Overall, it is not a very good plan, but it is far better than I expected it to be. It is reasonably detailed and has a few very good features.
The good news is that it proposes to eliminate the guaranteed student loan program, an incredibly good idea. It also proposes to require colleges to report earnings and employment data on graduates --another great idea.
This is offset, however, by proposing an increase in total federal higher education spending by a massive expansion of tax credits, which is an open invitation for colleges to raise tuition fees. The huge expansion in grants is also conceivably dubious, but if done using vouchers it is an idea with some potential. Incentive grants to improve graduation rates could be good, depending how they are administered. A huge expansion of AmeriCorps, which provides funds for college tuition in exchange for a year of community service, has little to do with higher education, and where is the evidence that program has been effective? Nothing in the plan deals with the root causes of higher education’s inefficiency. Still, for Senator Clinton, it isn't too bad --and at least she is giving us some specifics on what she would do --more than most other candidates are doing.
Thursday, October 11, 2007
Better Than a University
By Richard Vedder
Today's Wall Street Journal has a characteristically thoughtful and well crafted article by Christopher DeMuth, president of the American Enterprise Institute, in which he announces he is stepping down after more than two decades of running that great organization. Chris has done an extraordinary job of running what I think is one of America's greatest research organizations, one with which I am honored to be associated.
As Chris points one, some of the very best research in America is done outside the walls of universities. As a researcher, I think the environment of AEI is more conducive to doing cutting edge work than that of the typical university. I have long wondered if we should divide the research and teaching functions within universities --perhaps divesting the research functions to a separate organization. This makes more transparent what really goes on with the ivory towers of academia, and, if done properly, might have advantages in improving the research productivity as well.
The question is: why do the think tanks have more influence on the course of public policy developments than do the universities with vastly more resources? I am of the opinion that the think tanks, often "schools" of reasonably like-minded (but still diverse) scholars, have synergies that permit new ideas to percolate better than in the typical university. I am at a meeting of think tanks now, and cannot develop that idea further at the moment, but new research director Andy Gillen shares my interest in evaluating the research functions of universities, and hopefully CCAP will move in that direction.
I have worked or studied at three universities or liberal arts colleges in the top 20 on the US News lists. I have enjoyed my years there. But I have worked no place where the intellectual stimulation, the search for truth, and the civility is greater than at the American Enterprise Institute. In that regard, Chris DeMuth gets a lot of the credit for AEI's development into arguably America's premier free market think tank in terms of its influence in moving the public policy debate in a positive direction.
Today's Wall Street Journal has a characteristically thoughtful and well crafted article by Christopher DeMuth, president of the American Enterprise Institute, in which he announces he is stepping down after more than two decades of running that great organization. Chris has done an extraordinary job of running what I think is one of America's greatest research organizations, one with which I am honored to be associated.
As Chris points one, some of the very best research in America is done outside the walls of universities. As a researcher, I think the environment of AEI is more conducive to doing cutting edge work than that of the typical university. I have long wondered if we should divide the research and teaching functions within universities --perhaps divesting the research functions to a separate organization. This makes more transparent what really goes on with the ivory towers of academia, and, if done properly, might have advantages in improving the research productivity as well.
The question is: why do the think tanks have more influence on the course of public policy developments than do the universities with vastly more resources? I am of the opinion that the think tanks, often "schools" of reasonably like-minded (but still diverse) scholars, have synergies that permit new ideas to percolate better than in the typical university. I am at a meeting of think tanks now, and cannot develop that idea further at the moment, but new research director Andy Gillen shares my interest in evaluating the research functions of universities, and hopefully CCAP will move in that direction.
I have worked or studied at three universities or liberal arts colleges in the top 20 on the US News lists. I have enjoyed my years there. But I have worked no place where the intellectual stimulation, the search for truth, and the civility is greater than at the American Enterprise Institute. In that regard, Chris DeMuth gets a lot of the credit for AEI's development into arguably America's premier free market think tank in terms of its influence in moving the public policy debate in a positive direction.
Wednesday, October 10, 2007
Have the For Profit Schools Peaked?
By Richard Veddder
I have heard some educrats in traditional not-for-profit education say that the "fad" for for-profits schools is peaking, that they remain a minor threat, but only that. They cite financial scandals, government investigations, falling stock prices of companies like market leader Apollo Group (University of Phoenix), the saturation in the market for specialized degrees for adult learners, etc.
It is true that this sector took some lumps, as all rapidly growing enterprises do somewhere along the way. At the beginning of this year, the price of Apollo stock was about half of what it had been two years earlier, and some other companies (e.g., Career Education, Corinthian Colleges) had also seen similar, albeit smaller declines.
But I think the sector is still very much in a growth mode, and Wall Street agrees. If you invested an equal amount of money at the beginning of this year in the common stock of seven leading companies (Apollo, Capella, Corinthian, Devry, ITT Educational Services, Strayer, and Career Education), you would have seen a 59.6 percent increase in the value of your investment --four times the growth in the Dow Jones Industrial Average. The poorest performing of these companies had over a 21 percent price appreciation. Apollo gained back a majority of the losses of the previous two years, and that company's enrollments (over 311,000 in May) are picking up again after a lull.
Moreover, I think we may be understating the robustness of the industry, because significant portions of it are run by privately owned, non-traded companies. The recent aggressive expansion of companies like Bridgepoint Education and Randy Best's companies are evidence of this.
The industry's medium term growth is likely in part because the major competition, the not-for-profits, for all their talk of change, are still doing pretty much the same old thing, albeit with slightly less excess. Tuition charges are still on average rising faster than inflation rates, fundamental efficiency changes are still elusive, and the incentives to grab a growing market for adult education are still somewhat muted in the not-for-profit sector (although these institutions are starting to put some market incentives into their non-traditional programs, particularly those on line). The University of Phoenix may not have much of a football team (it has none, of course), but it is laughing all the way to the bank.
Meanwhile, CCAP is trying to explore the growth of this industry more extensively, and Whiz Kid Jim Coleman is working with me on a significant study of that industry's growth, prospects, and characteristics relative to the rest of higher education.
I have heard some educrats in traditional not-for-profit education say that the "fad" for for-profits schools is peaking, that they remain a minor threat, but only that. They cite financial scandals, government investigations, falling stock prices of companies like market leader Apollo Group (University of Phoenix), the saturation in the market for specialized degrees for adult learners, etc.
It is true that this sector took some lumps, as all rapidly growing enterprises do somewhere along the way. At the beginning of this year, the price of Apollo stock was about half of what it had been two years earlier, and some other companies (e.g., Career Education, Corinthian Colleges) had also seen similar, albeit smaller declines.
But I think the sector is still very much in a growth mode, and Wall Street agrees. If you invested an equal amount of money at the beginning of this year in the common stock of seven leading companies (Apollo, Capella, Corinthian, Devry, ITT Educational Services, Strayer, and Career Education), you would have seen a 59.6 percent increase in the value of your investment --four times the growth in the Dow Jones Industrial Average. The poorest performing of these companies had over a 21 percent price appreciation. Apollo gained back a majority of the losses of the previous two years, and that company's enrollments (over 311,000 in May) are picking up again after a lull.
Moreover, I think we may be understating the robustness of the industry, because significant portions of it are run by privately owned, non-traded companies. The recent aggressive expansion of companies like Bridgepoint Education and Randy Best's companies are evidence of this.
The industry's medium term growth is likely in part because the major competition, the not-for-profits, for all their talk of change, are still doing pretty much the same old thing, albeit with slightly less excess. Tuition charges are still on average rising faster than inflation rates, fundamental efficiency changes are still elusive, and the incentives to grab a growing market for adult education are still somewhat muted in the not-for-profit sector (although these institutions are starting to put some market incentives into their non-traditional programs, particularly those on line). The University of Phoenix may not have much of a football team (it has none, of course), but it is laughing all the way to the bank.
Meanwhile, CCAP is trying to explore the growth of this industry more extensively, and Whiz Kid Jim Coleman is working with me on a significant study of that industry's growth, prospects, and characteristics relative to the rest of higher education.
Friday, October 05, 2007
Robert Reich's Excellent Questions
Robert Reich, Labor Secretary under President Clinton, brings up some great questions about charitable contributions to, among other things, university endowments in a piece in the Los Angeles Times this Monday.
Among the most interesting points:
"I'm all in favor of supporting the arts and our universities, but let's face it: These aren't really charitable contributions.... I see why a contribution to, say, the Salvation Army should be eligible for a charitable deduction. It helps the poor. But why, exactly, should a contribution to the already extraordinarily wealthy Guggenheim Museum or to Harvard University (which already has an endowment of more than $30 billion)?"
Read the whole thing here.
Among the most interesting points:
"I'm all in favor of supporting the arts and our universities, but let's face it: These aren't really charitable contributions.... I see why a contribution to, say, the Salvation Army should be eligible for a charitable deduction. It helps the poor. But why, exactly, should a contribution to the already extraordinarily wealthy Guggenheim Museum or to Harvard University (which already has an endowment of more than $30 billion)?"
Read the whole thing here.
Thursday, October 04, 2007
Perverted Priorities
By Jim Coleman
The Austin American-Statesman recently ran a series of articles investigating sports spending at the University of Texas. The articles highlight the perverted priorities which are increasingly embraced by public universities.
According the Statesman, the University of Texas’ Athletic department will spend a record breaking budget of $107.6 million to support its athletic programs, which consist of just 511 athletes. That is an average expenditure per athlete of $211,000. What makes this worse is where some of the money goes. For every football home game, $20,000 is spent so players can sleep at a local hotel. In 2005, $ 200,000 was spent renovating the football locker room. Improvements included leather recliners, big screen projectors, and flat screen TVs. An average of $3,500 of per athlete is spent on tutoring players, that is special tutoring above and beyond what non-athletic in-state students get for their $8,000 tuition. Every year the Athletic department charters about 20 private flights at $90,000 each. Finally, over the past five years, the athletic department has committed nearly a billion dollars in expenditures for constructing and renovating facilities.
Prima facie, the athletic spending at UT looks fairly high, especially when broken down into per athlete expenditures, but what really makes these numbers pop out is how they compare to UT’s academic expenditures . For the 2006-2007 school year, UT had a core academic budget of 974 million dollars. This money funded salaries, building maintenance, utilities, scholarships, and basically everything else needed to provide the students with the academic resources they needed. Dividing the academic expenditures by the number of enrolled students for that year, 49,697; yields an average academic expenditure per student of $19, 598; a paltry sum when compared to athletic expenditures per athlete. The numbers are even worse when one takes into account the $19,598 is financed largely by students in the form of tuition and handed back to them in the form of university services. They pay to learn, while student athletes do not pay to play (one might even go as far to say that the student athletes at UT are PAID to play in the form of very generous fringe benefits).
This brief review of UT’s spending habits highlights a growing trend among many public universities. Public schools, whose primary mission is to offer affordable higher education, are increasingly willing to forgo academic improvement and affordability in favor of athletic name recognition. It is ludicrous and irresponsible for a university to spend over 200 grand per student athlete, while non-athletic students are forced into debt in order to complete their education. A large portion of the money that UT spends on its athletes would be better spent on making UT’s academic programs more affordable and of higher quality. From an economic standpoint, it is hard to fathom that the marginal returns on the football team’s leather recliners and flat screen TVs are higher than the returns to be had from making college affordable enough that students don’t have to take out loans just to buy books.
I imagine that there are two canned and impotent objections that people will have to this blog. First, they might argue that these athletic expenditures are good business for the university, because good athletics yield high name recognition, which increase enrollment, which ultimately yields more academic funds. There may be some truth to this argument, but UT should have all the name recognition it needs in virtue of being a division I school. The expenditures discussed here are simply excessive. I would conjecture any benefits the school derives from sports expenditures are exhausted long before the 200 grand per athlete mark is ever reached. Second, one might argue, as UT indeed does, that since the athletic programs are largely self-supporting the numbers I cite are not particularly important. Absurd. The point of a public university is to provide affordable education. UT’s own mission statement reads, “The mission of The University of Texas at Austin is to achieve excellence in the interrelated areas of undergraduate education, graduate education, research and public service.” I fail to see how a self-supporting athletics program is exempt from this mission statement. The athletics department is part of UT and hence subservient to UT’s super objective, education. Consequently, if revenues brought in from athletics can be better spent on lowering tuition and strengthening the curriculum by all means that is what a university has a responsibility to do.
Jim Coleman is a philosophy and economics undergraduate at Ohio University and a Research Associate ("Whiz Kid") at the Center for College Affordability and Productivity.
The Austin American-Statesman recently ran a series of articles investigating sports spending at the University of Texas. The articles highlight the perverted priorities which are increasingly embraced by public universities.
According the Statesman, the University of Texas’ Athletic department will spend a record breaking budget of $107.6 million to support its athletic programs, which consist of just 511 athletes. That is an average expenditure per athlete of $211,000. What makes this worse is where some of the money goes. For every football home game, $20,000 is spent so players can sleep at a local hotel. In 2005, $ 200,000 was spent renovating the football locker room. Improvements included leather recliners, big screen projectors, and flat screen TVs. An average of $3,500 of per athlete is spent on tutoring players, that is special tutoring above and beyond what non-athletic in-state students get for their $8,000 tuition. Every year the Athletic department charters about 20 private flights at $90,000 each. Finally, over the past five years, the athletic department has committed nearly a billion dollars in expenditures for constructing and renovating facilities.
Prima facie, the athletic spending at UT looks fairly high, especially when broken down into per athlete expenditures, but what really makes these numbers pop out is how they compare to UT’s academic expenditures . For the 2006-2007 school year, UT had a core academic budget of 974 million dollars. This money funded salaries, building maintenance, utilities, scholarships, and basically everything else needed to provide the students with the academic resources they needed. Dividing the academic expenditures by the number of enrolled students for that year, 49,697; yields an average academic expenditure per student of $19, 598; a paltry sum when compared to athletic expenditures per athlete. The numbers are even worse when one takes into account the $19,598 is financed largely by students in the form of tuition and handed back to them in the form of university services. They pay to learn, while student athletes do not pay to play (one might even go as far to say that the student athletes at UT are PAID to play in the form of very generous fringe benefits).
This brief review of UT’s spending habits highlights a growing trend among many public universities. Public schools, whose primary mission is to offer affordable higher education, are increasingly willing to forgo academic improvement and affordability in favor of athletic name recognition. It is ludicrous and irresponsible for a university to spend over 200 grand per student athlete, while non-athletic students are forced into debt in order to complete their education. A large portion of the money that UT spends on its athletes would be better spent on making UT’s academic programs more affordable and of higher quality. From an economic standpoint, it is hard to fathom that the marginal returns on the football team’s leather recliners and flat screen TVs are higher than the returns to be had from making college affordable enough that students don’t have to take out loans just to buy books.
I imagine that there are two canned and impotent objections that people will have to this blog. First, they might argue that these athletic expenditures are good business for the university, because good athletics yield high name recognition, which increase enrollment, which ultimately yields more academic funds. There may be some truth to this argument, but UT should have all the name recognition it needs in virtue of being a division I school. The expenditures discussed here are simply excessive. I would conjecture any benefits the school derives from sports expenditures are exhausted long before the 200 grand per athlete mark is ever reached. Second, one might argue, as UT indeed does, that since the athletic programs are largely self-supporting the numbers I cite are not particularly important. Absurd. The point of a public university is to provide affordable education. UT’s own mission statement reads, “The mission of The University of Texas at Austin is to achieve excellence in the interrelated areas of undergraduate education, graduate education, research and public service.” I fail to see how a self-supporting athletics program is exempt from this mission statement. The athletics department is part of UT and hence subservient to UT’s super objective, education. Consequently, if revenues brought in from athletics can be better spent on lowering tuition and strengthening the curriculum by all means that is what a university has a responsibility to do.
Jim Coleman is a philosophy and economics undergraduate at Ohio University and a Research Associate ("Whiz Kid") at the Center for College Affordability and Productivity.
The Optimal Length of Study for a Degree
By Richard Vedder
Chicago's Mayor Richard Daley opined the other day that it took too long to get a baccalaureate degree and that we could whack college costs dramatically by shortening the time in takes to finish. Meanwhile, the New York Times had a story about the reforms some schools (e.g., Princeton) are taking to shorten the length of time it takes to get a Ph.D., now averaging over eight years nationally. In Europe, the Daley idea has already taken hold, and under Bologna rules the standard B.A. degree in EU universities is now three years.
Meanwhile, the de facto bachelor's degree in the U.S. is now about five years. What is right? Three years? Four years? Five years? What about a Ph.D.? 3-4 years? 5-6 years? 7-8 years?
Economics offers some insights into the answer. I would opine that the costs per year of college tend to rise the longer one is in school. The direct financial outlays may be pretty constant, but the opportunity cost of going to college tends to rise because of earnings foregone. An 18 year old freshman might be giving up a $15,000 a year job to go to college, but the 22 year old senior with four years of work experience is more likely giving up a $20,000 or $25,000 a year job.
Similarly, there may be diminishing returns in terms of the true economic value of the courses taken in college. The first eight business courses in basic economics, accounting, finance, statistics, etc., may have a good deal practical utility, but further courses (a third economics class, for example), probably have less vocationally related benefits at the margin.
The graph shows the hypothetical, marginal social benefit and marginal social cost curves for college attendance. The optimal length of college attendance, optimally tied to degree completion, occurs at the point where the marginal social benefit equals the marginal social cost. My guess is for most baccalaureate programs, that point comes after about three years of study, and for Ph.D. programs after 3-4 years. Students hang around far longer than optimal, in part because of perverse financial incentives for both colleges and individuals (subsidized student loans and state subsidies to universities based on enrollment are two examples).
The huge reason for the "hanging around," however, relates to certification. There is a huge jump in the financial benefits of the student’s college attendance when the last course needed for obtaining a degree is completed. Up to that point, the marginal costs of college to the individual may equal or even exceed the marginal benefits, but the person hangs around because of the huge payoff associated with completing that last course that certifies college graduation
This reflects the information and search costs to employers --to employers, a prospective applicant is likely to be perceived as productive if he or she has a degree, and there are high risks associated with hiring "a dropout." Reform of higher education may center on developing a cost-benefit calculus resembling the above graph--reflecting the true utility to society and employers of the education received by students. More information about the "value added" by degree at various levels of instruction is key to implementing such reforms.
***************
Two CCAP notes: First, we welcome back to the Website "the Cowboy," a faithful reader and commenter on our blog. He has had a very rough year, losing most of his Montana ranch in the big forest fires of the summer. We are overjoyed that he has recovered enough to rejoin the fray. Second, CCAP would not function without the Whiz Kids, students who help do the research that, among other things, keeps me writing these commentaries. I am overjoyed to have Jim Coleman join us. He is a philosophy and economics major --a great if unusual combination --and has the inquisitive mind that I require of all our young associates. Welcome aboard Jim.
Chicago's Mayor Richard Daley opined the other day that it took too long to get a baccalaureate degree and that we could whack college costs dramatically by shortening the time in takes to finish. Meanwhile, the New York Times had a story about the reforms some schools (e.g., Princeton) are taking to shorten the length of time it takes to get a Ph.D., now averaging over eight years nationally. In Europe, the Daley idea has already taken hold, and under Bologna rules the standard B.A. degree in EU universities is now three years.
Meanwhile, the de facto bachelor's degree in the U.S. is now about five years. What is right? Three years? Four years? Five years? What about a Ph.D.? 3-4 years? 5-6 years? 7-8 years?
Economics offers some insights into the answer. I would opine that the costs per year of college tend to rise the longer one is in school. The direct financial outlays may be pretty constant, but the opportunity cost of going to college tends to rise because of earnings foregone. An 18 year old freshman might be giving up a $15,000 a year job to go to college, but the 22 year old senior with four years of work experience is more likely giving up a $20,000 or $25,000 a year job.
Similarly, there may be diminishing returns in terms of the true economic value of the courses taken in college. The first eight business courses in basic economics, accounting, finance, statistics, etc., may have a good deal practical utility, but further courses (a third economics class, for example), probably have less vocationally related benefits at the margin.
The graph shows the hypothetical, marginal social benefit and marginal social cost curves for college attendance. The optimal length of college attendance, optimally tied to degree completion, occurs at the point where the marginal social benefit equals the marginal social cost. My guess is for most baccalaureate programs, that point comes after about three years of study, and for Ph.D. programs after 3-4 years. Students hang around far longer than optimal, in part because of perverse financial incentives for both colleges and individuals (subsidized student loans and state subsidies to universities based on enrollment are two examples).
The huge reason for the "hanging around," however, relates to certification. There is a huge jump in the financial benefits of the student’s college attendance when the last course needed for obtaining a degree is completed. Up to that point, the marginal costs of college to the individual may equal or even exceed the marginal benefits, but the person hangs around because of the huge payoff associated with completing that last course that certifies college graduation
This reflects the information and search costs to employers --to employers, a prospective applicant is likely to be perceived as productive if he or she has a degree, and there are high risks associated with hiring "a dropout." Reform of higher education may center on developing a cost-benefit calculus resembling the above graph--reflecting the true utility to society and employers of the education received by students. More information about the "value added" by degree at various levels of instruction is key to implementing such reforms.
***************
Two CCAP notes: First, we welcome back to the Website "the Cowboy," a faithful reader and commenter on our blog. He has had a very rough year, losing most of his Montana ranch in the big forest fires of the summer. We are overjoyed that he has recovered enough to rejoin the fray. Second, CCAP would not function without the Whiz Kids, students who help do the research that, among other things, keeps me writing these commentaries. I am overjoyed to have Jim Coleman join us. He is a philosophy and economics major --a great if unusual combination --and has the inquisitive mind that I require of all our young associates. Welcome aboard Jim.
Monday, October 01, 2007
Why Not the Five Percent Endowment Rule?
By Richard Vedder
2006-7 was a banner year for investors, certainly not typical, so the 25 percent or higher rate of return earned at Yale, Harvard, Duke, Northwestern, Notre Dame and some other schools is a bit unusual. Consequently, universities should be careful and only spend from their endowments an amount that is sustainable in the long run. Yet some endowments are becoming so large that universities are clearly reinvesting some of the endowment earnings in an expanded base of principal, rather than using funds to make college more affordable.
I looked at three schools --Harvard, Yale, and the University of Virginia. At all three schools, less than four percent the average daily endowment base in the 2006-7 school year was spent. If Harvard and Yale had spent 5 percent and dedicated the increased spending to tuition reduction, they could have eliminated undergraduate tuition charges altogether --easily. If Virginia, which is a less well endowed public school, spent 5 percent and dedicated the added spending to tuition reduction for all students from families with less than $100,000 annual income, I would guessetimate that tuition could have been reduced well over $5,000 on average per student --an amount equal to about 60 percent of the in state tuition charges.
What this means is this: rich schools have chosen to charge students high tuition and then use the funds to increase the size of their endowments (especially so at Harvard, Yale, and, I believe, Princeton) rather than relieve financial pain for parents. The IRS requires non-university charities to spend 5 percent out of their endowments if they want to keep tax exempt status. There is a reason for that. Donors making new gifts and universities with investment income are getting a tax break for helping defray the cost of higher education. As Wick Sloane reminds us constantly, these tax breaks can be expressed in "Pell Grant equivalents." Tax policy currently favors the “Harvards” of the world relative to the poor kid needing a Pell Grant.
As an economist, I believe the 5 percent annual payout rate is conservative in meeting the goal of having the principal on existing endowment stay constant over time in an inflation-adjusted sense. Over the long haul, the inflation-adjusted rate of return on fairly conservatively invested endowments is well above that 5 percent rate --at Harvard, Yale and Princeton over the past 10 years, the rate of return after adjusting for inflation averaged well over 10 percent a year, so asking schools to spend one-half that amount is not too much.
Sometimes it is said, "small, poor schools cannot do as well, since that do not have much money to invest, and cannot afford risky investments like Harvard can." Balderdash. Students at my university, working with barely one million dollars in funds and investing in equities, have a long-run rate of return on investing university endowment funds of least 10 percent after inflation. A poor school, whose funds were 75 percent in an index stock fund and 25 percent in bonds, could have spent 5 percent a year over the past decade without eating into endowment. It is time for Congress to act.
*****************
Speaking of endowments, Claremont McKenna College just received a $200 million endowment gift --expanding its already healthy endowment around 50 percent. The donor has chosen to allocate the endowment to promoting economics and finance education for CMC students, which is his right. CMC has a great tradition in economics already (I have taught there and once very reluctantly turned down an offer of a chair there), and this should help the school reach the very top of liberal arts colleges (it is already high on the US News and World Report ranking, remarkable for a school barely 60 years old). Congratulations to a fine school. Let us hope CMC honors the donor's wishes and does not use funds to splurge on conspicuous consumption that does little to enhance learning, truth or beauty.
2006-7 was a banner year for investors, certainly not typical, so the 25 percent or higher rate of return earned at Yale, Harvard, Duke, Northwestern, Notre Dame and some other schools is a bit unusual. Consequently, universities should be careful and only spend from their endowments an amount that is sustainable in the long run. Yet some endowments are becoming so large that universities are clearly reinvesting some of the endowment earnings in an expanded base of principal, rather than using funds to make college more affordable.
I looked at three schools --Harvard, Yale, and the University of Virginia. At all three schools, less than four percent the average daily endowment base in the 2006-7 school year was spent. If Harvard and Yale had spent 5 percent and dedicated the increased spending to tuition reduction, they could have eliminated undergraduate tuition charges altogether --easily. If Virginia, which is a less well endowed public school, spent 5 percent and dedicated the added spending to tuition reduction for all students from families with less than $100,000 annual income, I would guessetimate that tuition could have been reduced well over $5,000 on average per student --an amount equal to about 60 percent of the in state tuition charges.
What this means is this: rich schools have chosen to charge students high tuition and then use the funds to increase the size of their endowments (especially so at Harvard, Yale, and, I believe, Princeton) rather than relieve financial pain for parents. The IRS requires non-university charities to spend 5 percent out of their endowments if they want to keep tax exempt status. There is a reason for that. Donors making new gifts and universities with investment income are getting a tax break for helping defray the cost of higher education. As Wick Sloane reminds us constantly, these tax breaks can be expressed in "Pell Grant equivalents." Tax policy currently favors the “Harvards” of the world relative to the poor kid needing a Pell Grant.
As an economist, I believe the 5 percent annual payout rate is conservative in meeting the goal of having the principal on existing endowment stay constant over time in an inflation-adjusted sense. Over the long haul, the inflation-adjusted rate of return on fairly conservatively invested endowments is well above that 5 percent rate --at Harvard, Yale and Princeton over the past 10 years, the rate of return after adjusting for inflation averaged well over 10 percent a year, so asking schools to spend one-half that amount is not too much.
Sometimes it is said, "small, poor schools cannot do as well, since that do not have much money to invest, and cannot afford risky investments like Harvard can." Balderdash. Students at my university, working with barely one million dollars in funds and investing in equities, have a long-run rate of return on investing university endowment funds of least 10 percent after inflation. A poor school, whose funds were 75 percent in an index stock fund and 25 percent in bonds, could have spent 5 percent a year over the past decade without eating into endowment. It is time for Congress to act.
*****************
Speaking of endowments, Claremont McKenna College just received a $200 million endowment gift --expanding its already healthy endowment around 50 percent. The donor has chosen to allocate the endowment to promoting economics and finance education for CMC students, which is his right. CMC has a great tradition in economics already (I have taught there and once very reluctantly turned down an offer of a chair there), and this should help the school reach the very top of liberal arts colleges (it is already high on the US News and World Report ranking, remarkable for a school barely 60 years old). Congratulations to a fine school. Let us hope CMC honors the donor's wishes and does not use funds to splurge on conspicuous consumption that does little to enhance learning, truth or beauty.
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