Must Read Interview

by Andrew Gillen

This Minneapolis Fed interview of Kevin Murphy is full of great bits. I've excerpted two points he makes (about health care) that have implications for higher ed.

This first quote illustrates the importance of value added measurement (to make rational cost-benefit decisions).

Let’s say we have our War on Cancer, and we’re going to spend $100 billion. And we have a 50 percent chance of being successful in finding a 10 percent reduction in cancer. So we have a 50 percent chance of getting a $5 trillion return, a 50 percent chance that we’ll discover nothing. Okay?

Now let’s say there are two cost scenarios, to make it really simple. One is that the treatment is nearly free; it’s a really low-cost treatment. The other one is it costs $10 trillion. If each of those happens with 50 percent probability, well, as you can quickly realize, the expected gain is now zero. We’re going to discover this treatment with probability one-half, in which case we get $5 trillion in gains. But we have $5 trillion in expected cost, and so the net expected payoff is zero. I set it up that way to make the algebra simple.

Now let’s say we had a sane health care delivery system that didn’t use treatments that cost more than their benefits. Well, now your probability of failure is 75 percent, since half the time you discover nothing and half the time you discover something that is too costly to use. But rather than being lower, your expected gain is now $1.25 trillion. Half the time, you’re going to discover it. Of that, half the time it’s going to be low-cost. So a quarter of the time, you’re going to get $5 trillion, so you’ve got a $1.25 trillion expected gain for a $100 billion investment.

By rationalizing the care system, we’ve changed what was a zero, or actually negative, net return investment into a hugely positive net return investment. We didn’t make science better. We didn’t make the probability of discovery better. All we did was rationalize our care system so we don’t overspend.

This second quote illustrates the danger of third party payment.

I see that disconnect between the payers and the developers as being a major problem... in the private market, we don’t worry about people developing TVs that are too expensive. People have no incentive to do that. In the medical area that’s not true. In the current system, people have the incentive to develop things for which the costs could outweigh the benefits. As long as they’re still going to get used, people are going to supply them. So research is going to respond.

And just for fun, here are the top 10 facts about Kevin Murphy.

Links for the Twelve Commandments for Higher Education Reform

Here are links to all the commandments.

Commandment #1: Provide Better Information About Universities

Commandment #2: Fund Students Instead of Institutions

Commandment #3: Incentivize Key University Leaders to Reduce, Not Increase Costs

Commandment #4: Simplify and Reform Financial Aid

Commandment #5: Fix the Accreditation Process

Commandment #6: Reduce “Third Party” Payments to Universities

Commandment #7: Incentivize More Students to Attend Lower Cost Two-Year Colleges and Postsecondary Vocational Institutes

Commandment #8: Decrease Time to Degree Completion

Commandment #9: Promote Teaching over Publishing

Commandment #10: Divest Universities of Non-Core Activities

Commandment #11: Eliminate or Drastically Reform Intercollegiate Athletics

Commandment #12: Restructure and Clarify University Governance

Update: Supreme Court Rules in Favor of New Haven Firefighters in Ricci v. Destefano

Awhile back, CCAP published a study, The Law of Unintended Consequences Revisited: The Case of Ricci v. Destefano, in support of the New Haven, Connecticut firefighters. The Supreme Court has ruled in favor of the firefighters, reversing an earlier decision by Judge Sotomayor - Obama's nominee for the Supreme Court. See an earlier CCAP blog for a quick rundown on the potential implications that were avoided with this ruling.

Some Pictures to Ponder

by Andrew Gillen

I found these pictures to be interesting. The first one shows the percent of the 25+ population with a bachelor's degree or higher, as a percent of the population with a high school degree or higher.


Source: Digest of Education Statistics 2008 Table 8, CCAP Calculations
Note: For the gaps between earlier data points, a linear relationship between the starting and end points was assumed.

For sixty years, one fifth of HS grads went on to get a Bachelor's. Starting in early 70s, that began to go up, at more or less the same rate for the next four decades (with the only really noticeable pause occurring in the late 80s/early 90s). We are now at an all time high of 34%.

With the caveat that much of the early years were extrapolated, I'm stunned by the consistency of the figure in the first half the century. Supposedly very important events in the history of higher ed, like the original GI bill, do not appear to have noticeable impacts.

Assuming that the historical trend held, the second picture shows bachelor's or higher attainment broken down by source (ie, up to .2*HS attainment is attributed to "HS improvements", anything above to "college improvements")


Source: Digest of Education Statistics 2008 Table 8, CCAP Calculations
Note: For the gaps between earlier data points, a linear relationship between the starting and end points was assumed. HS attainment times .2 was classified as "HS Improvement" with the remainder classified as "College Improvement."

Virtually all of the increase in higher ed attainment prior to 1970 can be credited to improvements in the high school graduation rates. However, those improvements have plateaued. While colleges have taken over as the driver of higher attainment, given complaints about watering down content, how much further can they go?

More on the Wall St. Brain Drain

by Andrew Gillen

Yet another article sees the shift away from finance jobs for bright young grads as a good thing. This one is by Daniel Roth. HT: FS

Death to Merit (Grants)

by Daniel L. Bennett

The Chronicle reported yesterday that the Obama Administration intends to abolish merit-based financial aid programs for low-income students that were established in 2006. The short life of the Academic Competitiveness and National Smart Grant programs will not allow sufficient time to collect evidence in order to assess the effectiveness of the merit-based system. Such questions as

a) Is the program successful in improving high school preparedness for college?
b) Do recipients of the merit grants perform better in college and graduate at higher rates than non-recipient low-income students?
c) Are the grant award amounts sufficient incentive for recipients to enter and complete college?

will remain unanswered. Instead, Obama and the Department of Education plan is to shift all of these resources into making the Pell Grant an entitlement. Don't get me wrong--I believe that the Pell Grant is a great program, but evidence suggests that federal financial aid has done little to increase the percentage of high school students attending and completing college. It would be sound policy to let the merit program play out long enough in order to evaluate its effectiveness relative to other programs. What happened to pragmatism?

Commandment #12: Restructure and Clarify University Governance

Commandment #12: Restructure and clarify university governance by clarifying "ownership" and "property right" arrangements, in the process reducing the prominence of very long term employment contracts for faculty and administrators.

By Richard Vedder

On the first day of a beginning principles of economics class, I note that scarcity forces every society to face certain fundamental questions: What Do We Produce? How Do We Produce It? For Whom Do We Produce our limited number of goods and services?

Economic units are organized to deal with these questions. Some of these units are colleges and universities. They have to decide --what do we produce --engineers or philosophers? Advanced students of those subjects or less advanced ones? They have to decide how to produce these services --traditional residential education, commuter style education emphasizing part-time attendance, or on-line education? And admissions and financial aid offices deal with the issue of for whom we produce --large numbers or small, and how do we decide who gets the services?

All of these decisions --and more -- have to be made by human beings. They can be made by a powerful dictator, a strong willed CEO. They can be made by committees of employees or other "stakeholders" (a term, by the way, that I despise). In most American private enterprise, a rather powerful chief executive officer, sometimes working closely with a small executive team, makes most key decisions, some of which have to be ratified by a board of directors independent of the chief executive but generally supportive of that leader.

The for-profit higher education model generally conforms to the approach of the previous paragraph. When I think of CEOs of private for-profit higher education providers such as Randy Best of Higher Education Holdings (and more), and Andrew Clark of Bridgepoint Education, I am thinking of strong leaders not afraid to make decisions and to take risks. This approach seems to be working well, as the market share of the for profits by one measure has grown from less than one percent to about seven percent of the market over the past generation.

But what about the other 93 percent? Lines of authority are often blurred. The president often is strongly constrained by his own employees, especially tenured faculty. She or he receives only very modest rewards or punishment for unusually good or bad performance, in no small part because performance itself is not well measured, partly by design. There is no clear "bottom line" for most of higher education, in large part because of its non profit nature.

Suppose the president wants to create a new nursing degree. The faculty in other health science fields might argue that it is for them, not the president, to make a recommendation, as they are in fields close to that of nursing. The faculty in the physical and biological sciences might disagree, arguing that a huge chunk of a good nursing program must involve them. The physics department, wanting to upgrade its Ph.D. program, might say the University is spreading resources too thin, and that nursing is a relatively low level vocational activity that will bring less prestige than a high brow nationally recognized physics graduate program.

To deal with all of this, committees will be formed. A Curriculum Council, New Programs Committee, Faculty Senate, or other such groups will demand that they must approve the program. Some may try to block the program unless their own demands are met. Decision-making takes a long time, and is often timid, the result of several dubious but politically necessary compromises.

If higher education is going to become more efficient, affordable, and responsive to student needs as tastes and technologies change, higher education is going to have to move more away from the traditional approach mentioned in the previous two paragraphs. To be sure, at the top research universities, the faculty in many ways ARE the university, raising a good bit of institutional resources through their grant activities. In such an environment, the faculty can legitimately want to play a major role in determining the academic direction of the institution. But that is far less true at the typical mid-quality state university, at liberal arts colleges, and at community colleges.

In all of this reformation of governance, efforts should be made to reduce the proportion of resources that are fixed in nature ---particularly those reflecting lifetime employment contracts. Tenure has its value, and I am opposed to, say, a national law making tenure illegal. But the awarding of tenure should be limited, and more quasi-tenure arrangements, such as five year employment contracts, would increase the flexibility of administrators to reallocate resources, make the faculty less inflexible and arrogant, and increase the ability of top university officials to make decisions. At the same time, increasing CEO power must be accompanied by reforming boards of trustees, making them less patsies for the administration, and more true outside evaluators of performance and groups that hold university presidents truly accountable in a rigorous fashion.

FAFSA Reform

by Andrew Gillen

The papers this morning are abuzz with news about new plans to simplify the FAFSA. These proposals are a welcome development, but, in my opinion, they do not go far enough.

As fate would have it, I’ve done a chapter on FAFSA reform as part of a Lumina Foundation funded project that we’ve been working on for the past year. My favorite line: “Our mounting irritation morphed into dejected resignation as we slogged through the next dozen or so screens.”

This isn't the final draft (comments welcome), but feel free to click here to read more.

Commandment #11: Eliminate or Drastically Reform Intercollegiate Athletics

Eliminate or drastically reform intercollegiate athletic participation, including removing athletic department autonomy and ending large institutional subsidies

By: Matthew Denhart

Unique to American higher education, intercollegiate athletics have become a wildly popular form of entertainment. March Madness and college football’s BCS bowls generate millions of dollars worth of revenue every year. Yet there are costs associated with all this hoopla, and in many cases they are quite significant. The latest data from the NCAA indicate that only around 16 programs in the country have self-sustaining athletic departments. The hundreds of remaining programs rely upon wider institutional resources for their continued survival.

In 2006 the median institutional subsidy provided to athletics was almost $9 million at Division 1-A schools. More alarming is the rapid growth in this area. Between 2004 and 2006, allocated revenue grew 57 percent; whereas by 2006, allocated revenue accounted for more than a quarter of total athletic department revenues. Students are not only adversely affected by this through the opportunity cost of the university’s funds going to athletics, but also through a sizeable portion of student fees being directed to intercollegiate athletics. With sports losing more money than ever it is clear that serious reform is needed.

Entirely eliminating school-sponsored intercollegiate athletics would save money for virtually every school in the country. Beyond a cost issue, many argue that in addition to exploiting athletes, intercollegiate athletics subtract from the academic mission of the academy. Simply ridding higher education of athletics altogether would remedy the situation.

Yet given the wild popularity of college sports this is probably not very realistic, and is not entirely desirable either. Athletics do provide a number of positive benefits to both participants and society as a whole. Nevertheless the costs are tough to justify. There are a number of sensible reforms that could maintain athletics while realigning it with academic priorities and reducing costs.

One innovative approach implemented at Vanderbilt University by then-chancellor Gordon Gee was to eliminate athletic department autonomy by placing it under the student affairs wing of the university. In this scheme intercollegiate athletics falls under the Office of Student Athletics, Recreation and Wellness along with intramural and community sports programs. The athletic director position no longer exists but rather an assistant vice chancellor runs the day-to-day operations of the office. This makes athletics more responsive to the university and demands the same transparency required of other university departments. In addition, Vanderbilt has reported increased efficiency and savings associated with combining duplicate costs.

A number of less dramatic reforms could help save money as well. Leasing facilities when not in use is one way to generate new revenues. Travel costs could be reduced by realigning athletic conferences to be more regional in nature, shortening season lengths, substituting driving for flying when travel distances are only moderate, and banning long-distance travel to things such as preseason tournaments hosted in hard to reach locales. Reducing the number of available football scholarships would cut costs. Currently, schools are allowed 85 scholarship athletes in football even though there are less than 25 positions on a team. Better contracts that discourage the high mobility of coaches would help slow the growth of escalating coaches’ salaries.

College sports are in need of desperate reform. University presidents and boards of trustees need to reassert their responsibilities of oversight to better determine institutional priorities and reign in out-of-control spending by the athletics departments. Vanderbilt has offered one interesting model for reform but others have not followed suit. Something dramatic is needed for intercollegiate athletics. On its current path, with growing budget deficits and an increased reliance on dwindling institutional funds, it is bound to collapse under its own weight.

Stop Picking on Proprietary Institutions

by Daniel L. Bennett

The Chronicle reports that at yesterday's Department of Education hearing in Philadelphia,

[c]onsumer advocates also urged the department to standardize the rules that require for-profit institutions to show that a percentage of their graduates find “gainful employment".

If "consumer advocates" were truly concerned about protecting consumers, then they ought to be urging the DoE to require that ALL colleges show that a percentage of their graduates find "gainful employment". There is little to no information available for consumers to determine how much value a particular college adds to its graduate's post-secondary success. So let's stop picking on a particular segment of the higher ed industry, which happens to be growing faster, operating more efficiently and providing more innovation than the non-profit sectors. After all, some college presidents and thought leaders agree that the business model needs reformed for higher education to be sustainable.

Arizona to Vote on Affirmative Action Measure

by Daniel L. Bennett

The Arizona Senate passed a measure yesterday that will leave it up to the voters to decide whether affirmative action preferences should be banned in public college admissions practices (as well as employment decisions in the Arizona public sector). If banned, education and employment decisions that grant preferential treatment based on race, sex, color, ethnicity, or national origin would be prohibited. Kudos to Arizona for being practitioners of democracy and leaving it up to the people to decide.

However, in light of the recent allegations against the University of Illinois, it seems that family and political connections ought to be included in the list of banned preferential treatment as well... if the aim is to truly reward merit and promote egalitarianism. I've said this before and I'll say it again: I support equal opportunity, just not equal entitlement and certainly not a quota system.

Commandment #10: Divest Universities of Non-Core Activities

Commandment #10: Divest Universities of Non-Core Activities

by Daniel L. Bennett

The purpose of universities is to produce and disseminate knowledge. Providing students with fancy cuisine, elaborate accommodations and a plethora of student entertainment and recreation options has no impact whatsoever on the outcome of student learning objectives. If anything, the proliferation of such a consumer-oriented focus on campuses across the nation has detracted from student learning. Colleges need to divest themselves of these non education-related activities and re-focus on their original purpose - to seek and transmit knowledge.

It is true that students residing away from home for college need a place to live, dining options and social activities, but this does not necessitate that the colleges themselves need to provide such services. By doing so, colleges establish local monopoly power that results in an inefficient allocation of resources. It is safe to assume that if these markets were open to competition, there would be no shortage of private sector and entrepreneurial interest in providing these services -- and likely in a much more efficient and consumer-friendly manner. The privatization of these services would free up university resources and administrative burden to focus on education-related services. This would, in turn, result in lower operating costs that could be passed on to students in the form of reduced tuition charges.

In addition, a reduction in the operating costs via privatization of non-core activities would be a two-fold victory for the general public. First, it would lessen the need for public support of inefficient, tax-free college services. Second, the private sector pays taxes on its profits, so the privatization of non education-related services (i.e. - housing, dining, entertainment, etc.) would actually boost the tax base, as opposed to being a hindrance on it as is currently the case. This would free up public dollars for more productive uses, such as reducing the nation's growing debt that will surely imperil the future of the next generation of Americans.

Good policy will produce a win-win situation. Students and parents will benefit from private-sector competition of these services with lower costs and more choices, as well as from colleges placing a renowned emphasis on education-related activities. Faculty will benefit as more resources will be made available for education-related activities. The general public will benefit from the simultaneous reduction in expenditures on higher education and the increase in tax dollars from private businesses (not to mention the job creation in the private sector), assuming that policy makers direct the additional resources to more productive means. By privatizing non-core college activities, everyone wins except for rapacious university administrators whose bureaucratic regimes will diminish.

Growing University Corruption

By Richard Vedder

One of the many justifications of public funding of universities by proponents of such subsidies is that higher education promotes higher moral and ethical standards, building a better community. I have always thought the argument was rather amorphous and fuzzy, and I think a good case can be made that universities actually promote moral relativism and a decline in the implicit behavioral standards inculcated by most world religions, and certainly by the Christianity that dominates in the U.S.

When moral standards decline, economic growth falls. The rule of law depends not only on police and courts for enforcement, but on a moral code that most citizens instinctively follow that puts an emphasis on honesty, following rules and laws, and personal integrity. Where corruption is endemic and laws are flouted (e.g., in much of Africa), people are impoverished, economically if not spiritually.

Back to universities. Let me outline just four areas where dishonest, illegal, or ethically suspect conduct has been observed in recent months or years.

1. UNIVERSITY ADMISSIONS --- The University of Illinois is rightly getting pounded for showing preferential admissions for children of prominent politicians. Yet the U of I in one sense is being unfairly singled out, as the same sort of thing, albeit perhaps to a lesser degree, is widespread in higher education, as Dan Golden showed in his great book The Price of Admission.

2. FINANCIAL AID -- Universities were embarrassed a year or two ago when it was revealed that many of them took kickbacks from private loan providers for steering students their way to borrow money. Some admission officers went farther -- Columbia University, for example, fired its director of financial aid for allegedly promoting loan companies in which he held stock.

3. LYING ABOUT PERFORMANCE INDICATORS -- Clemson, the University of Southern California, Baylor --and other schools, all have somehow tried to portray misleading information to the public or to ranking organizations like US News & World Report, all in order to improve institutional reputation. USC, for example, apparently exaggerated the number of full time faculty belonging to the National Academy of Engineering.

4. ATHLETICS --NEBRASKA. The scandals in intercollegiate athletics are so universal, so all encompassing, that it is a serious blight on all of higher education. But let us just take one recent scandal --the Paul Donohue suspension from the Nebraska wrestling team. Donohue is a first rate wrestler who got in trouble for posing for a gay porno web site (I wonder if it had been a heterosexual site whether he would have received the same treatment?). As my great Ohio University colleague and sports reformer David Ridpath put it on Outside the Lines (ESPN), this is an example of "situational morality." It turns out, according to an ESPN investigative reporter, that 14 of 44 wrestlers have committed some sort of crime in the last year or two --and, I suspect, Donohue's offense is not even criminal. Enforcement of ethical standards in sports is sporadic, limited, and designed to minimize public exposure and damage to team competitive prowess.

Shame, shame, shame. Power corrupts. Absolute power corrupts absolutely. Would you buy a used car from a senior university administrator? If universities lose public trust, their claims on public subsidies will be correspondingly reduced.

Perhaps College Rankings Do Belong in the Sport's Page

by Daniel L. Bennett

Our friend Clifford Adelman made the comment at our summit on assessing university performance last month that rankings belong in the sports page. At the time I thought that he was just being boisterous and providing some comedic relief, but recently I've been pondering this and Mr. Adelman just may be on to something. College rankings and intercollegiate athletics are similar in some respects, notably with regards to the benefits and costs that they accrue and impose on colleges.

Let's start with the benefits, which are mostly auxiliary in nature. CCAP released a report in April that describes some of the benefits that intercollegiate athletics add to institutions and individuals. For one, athletic success can lead to national exposure, which in turn can increase the number and quality of applicants to a particular school. A strong (or improvement in) academic ranking (such as the US News or Forbes/CCAP) can also lead to an increase in the number and quality of applicants.

Second, athletics have the potential to build solidarity among a university community --connecting students, staff, faculty alumni and neighbors. Institutional rankings can have the same effect. After all, we all want to be proud of the institution that granted us a degree - athletics and rankings provide a rallying point.

Next, a successful athletics program has the potential to attract additional donors. A strong ranking can do the same. Lastly, there is evidence that graduates of colleges with successful athletic programs may benefit in the job market with higher starting salaries (see the regression results in the the above mentioned CCAP report). Students aim to gain entry to the best ranked college possible because it is believed that the higher ranked a school, the better post-graduation opportunities.

Now, let's turn to the costs. Operating a big-time athletics program is financially expensive. Very few (I believe 19 out of 119 in 2006) Division I schools operate on a surplus. The majority of colleges cross-subsidize their athletics programs. In other words, sports are a cost driver. College rankings, at least the US News Rankings, are also a cost driver, but in an indirect way. Statistical analysis, included in CCAP's College Rankings report, indicate that there is a significant positive correlation between spending and the US New's ranking components. My comrade, Richard Vedder, likes to jokingly say that our friend Bob Morse is the most influential person in American higher education due to the fact that many schools are inextricably bound to make decisions based on the effect that it will have on their US News ranking.

Don't get me wrong, I'm a big fan of both college rankings and sports. But have these two activities infiltrated higher education so far that institutions forgot that their mission is to seek and disseminate knowledge? Sure they are fun, but are institutional priorities unduly influenced by college rankings? Perhaps college rankings do belong in the sports page, rather than on the cover. After all, they do share many of the same auxiliary characteristics as athletics.

Commandment #9: Promote Teaching over Publishing

Commandment #9. Incentivize professors to teach more and better, and do less obscure academic research that is largely unread.

As alluded to in Commandment #8, tenure is primarily granted to professors who have demonstrated proficiency in research and publication, with little emphasis on instruction. With the preponderance of faculty, particularly at 4-year research institutions, largely, if not primarily, motivated by tenure, it is no wonder that instruction has taken a back seat in the American higher education system. That’s not to say that instruction counts for nothing – a hated professor will have a more difficult time – but on the margin research is regarded with much higher esteem. CCAP has lamented this trend away from instruction, the ostensible goal of higher education, and towards research for somewhat philosophical reasons. The goal, one would think, of colleges and universities is to educate. So why wouldn’t these institutions align the goals of their faculty with their own, broader institutional goals? We at CCAP suspect rankings and prestige play an important role and are hard at work creating alternative ranking methodology which would ameliorate these incentives. Tenure procedures could easily be amended so that faculty are rewarded for teaching well and often, which would align the interests of the faculty with those of the students, namely the goal of a quality education through stimulating and thorough instruction.

Considering the suspicions surrounding the claims of “value added” that many colleges and universities tote, perhaps the benefit to higher education isn’t the education per se. If these schools do simply act as signals (and there is some evidence that they may) it could very well be true that the value of the higher ed industry comes from its research. While there are many breakthroughs and valuable insights coming out of universities these days, there is also a lot of obscure, inaccessible research being conducted that is of little or no value to society. Of course, without hard data these claims are largely unsubstantiated, but anecdotal evidence seems to fully support the notion that much of the research being conducted at colleges and universities is of marginal significance, particularly once we consider the price tag. Perhaps a greater emphasis on collaboration and long-term research could help alleviate some of these problems. Still, any way you slice it, the incentives are misaligned and the research is often out of touch.

Commandment #8: Decrease Time To Degree Completion

Commandment #8. Eliminate funding to undergraduate students after four years of full time equivalent attendance; limit Ph.D. funding also to four years --incentivize schools to end long term (five year or more) Ph.D. attendance.

by Jonathan Leirer

One outstanding factor contributing to the cost of an education is the time it takes students to complete the degree. According to a 2003 longitudinal study authored by the NCES (The Condition of Education 2003 –Indicator 21: Time to Bachelor’s Degree Completion) the average time to completion for a bachelor’s degree is slightly higher than 55 months - roughly four and a half years. The study also reveals many other intuitive trends: students who switch institutions tend to take longer to graduate; students tend to graduate in less time as their parents’ education increases; older students take longer to graduate; students with better cumulative grade point averages graduate sooner, with one notable exception – students at 4-year private not-for-profit institutions with cum gpas above 3.5 took longer to graduate than students with cum gpas between 3.0 and 3.5, as well as students with gpas between 2.5 and 3.0.

Many of those factors are out of the control of public policy save one- that students who change schools take longer to graduate. Because this represents about 46% of the students receiving degrees, policy impacting transfers will have a large effect on graduation times. Without more detailed data, we will venture an educated guess that transfer students take longer to graduate because of imperfections and impediments associated with transferring college credit from one institution to another. This is something that could be alleviated, at least partially, by increased transparency about coursework and reciprocity agreements between instructions (particularly, between 4-year institutions and the 2-year institutions that often feed into them.)

Because 2-year institutions are significantly less expensive than 4-year institutions, encouraging students to start at 2-year institutions and transfer to 4-year institutions could be an extremely effective cost-saving measure. However, as previously mentioned, transfers tend to increase the time to graduation. In fact, students who start at 2-year institutions and transfer to 4-year institutions (which constitute about 14% of students, at the time of the study) take an average of 71 months to complete their degree. The time to completion is, however, lower for students who transfer to public 4-year institution (68.7 months) compared to those who transfer to private, not-for-profit 4-year institution (74.5 months). That is nearly a year and a half longer than the average for all graduates (55 months) and nearly a year longer than those who transfer from one 4-year institution to another, suggesting that there is some factor specific to 2-year institutions which may hinder transferring credits.

However, many of these points may be moot considering the perverse incentives students and institutions have to keep students in class longer. For universities, the incentives are obvious. The longer a student takes to earn a degree the more money the university receives. For students, the incentive may by a little more opaque. While there is a high opportunity cost to staying in school over working full-time, the structure of student aid financing gives students an incentive to stay. While in school, education loans are deferred (sometimes with the interest subsidized as well), funding is available, and the stress and responsibility of the “real world” stay distant and unobtrusive. While not an attack on the policy of deferring loan payments, the enabling effect of such policies should be recognized. With that in mind, perhaps the best policy to decrease time to completion without placing undue burden on the students would be to limit funding to 4-years of full-time equivalent attendance. This would give students the incentive to graduate in a timely manner, perhaps ultimately saving them, and taxpayers, thousands in unnecessary educational costs.

This approach can be used in our nation’s graduate programs as well, which are in dire need of reform. According to the December 2007 publication of "Ph.D. Completion and Attrition: Analysis of Baseline Program Data from the Ph.D. Completion Project" by the Council of Graduate studies, only 1 in 10 PhD students obtain their degree within 4 years. Even after a decade of graduate study, less than 60% of the students have completed their degrees – in the Humanities, the number drops to under 50%! So what’s going on here? One issue, oddly enough, is tenure. As a former PhD student myself, I solicited a lot of advise about my career goals, and one recommendation I heard repeatedly was, “Stay in grad school until you have a few publications or at least a revise and resubmit.”

It was recommended that I start publishing before the “tenure clock” starts ticking, therefore giving me a head start in the publication race. With such strong disincentives to graduate, it’s no wonder that time to completion is so high. How can this problem be addressed? Well, one could take the route that Harvard University did a few years back: tell departments that if their current students don’t finish, they won’t be allowed to admit new ones. It worked for Harvard. Even if the departments’ incentives are in line, they still need to motivate the students to complete their coursework and write their dissertations. One method of achieving such a goal would be to eliminate funding for doctoral students after a set amount of time has elapsed, probably around 4 or 5 years. With the prospect of a loss of funding, doctoral students would be very motivated to finish their degree requirements in a timely and efficient fashion.

Welcome the New Oligarchs of Student Loan Servicing

by Daniel L. Bennett

With the fate of FFELP seemingly decided, the Department of Education moved a step closer towards finalizing the deal to move all federal loans to the direct program yesterday by announcing the new student loan servicing oligarchs -- Pennsylvania Higher Education Assistance Agency, Great Lakes Education Loan Services, Nelnet and Sallie Mae. These four firms will provide all of the servicing of the Federal Government's current loan portfolio, as well as any loans that the government may acquire in the near future.

Losing out in phase 2 of the DoE's bidding process were Wells Fargo and ACS Educational Solutions. These were not the only losers though -- think of all the smaller loan companies. Of course the DoE will argue that it was a "full and open competition", as stipulated in the solicitation (and required by federal contracting law). However, it is safe to say that small loan service companies were implicitly barred from the bidding process from the get go, as the phase I solicitation specifically required bidders to

Demonstrate experience in processing a minimum of 500,000 student loan sales conversions annually and servicing at least 2,000,000 student loans.

The RFP did require bidders to submit a small business subcontracting plan, which requires that bidders provide, among other things:

(1) Separate percentage goals for using small business and women-owned small business concerns as subcontractors;
(2) A statement of the total dollars planned to be subcontracted and a statement of the total dollars planned to be subcontracted to small business;
(3) A description of the principal types of supplies and services to be subcontracted and an identification of types planned for subcontracting to small business, etc.

This does not preclude that smaller loan servicing companies will get a piece of the pie, as the subcontracting could be for indirect costs, such as janitorial services. While the newly minted oligarchs of student loan servicing will likely hire additional employees to manage their expanded portfolio, this announcement will likely subdue many smaller businesses and result in a stifling of the innovation and efficiency gains that competitive markets so often produce.

Ranking University Performance

By Richard Vedder

I had to fly 10 time zones to Central Asia to learn this, but I now realize that non-U.S. universities are even less oriented than American ones. Bob Morse of US NEWS and I attended the International Rankings Group meetings in Kazakhstan. A few impressions:

1) Most rankers care little about what students think or what they want to know that would enhance students choices as to schools;

2) They are mostly interested in enhancing rankings through faculty publications and citations. They also believe most human knowledge of importance is in the sciences, showing indifference or disdain towards the social sciences and humanities;

3) There is no doubt an attempt to dislodge American universities from the top 100 world university list;

4) IREG (the ranking organization) wants to go into the ranking certification business, an idea that I am somewhat skeptical of;

5) Some efforts at personalized (do it yourself) rankings are beginning to appear, a move I view with enthusiasm.

I just heard US NEWS is selling space on its web site for schools to peddle its wares, which I must say potentially could impact on the objectivity of the survey, although I hold Bob Morse (who actually does their rankings) in the highest personal esteem. He is a man of great honesty and integrity. I must say, with the Clemson scandal (on top of one at the University of Southern California)in mind, that I feel better about the Forbes/CCAP rankings, which are much, much more difficult to "game" than that of US News.

Commandment #7: Incentivize More Students to Attend Lower Cost Two-Year Colleges and Postsecondary Vocational Institutes

Commandment #7: Reduce higher education overinvestment by incentivizing more students to attend lower cost two year colleges and postsecondary vocational institutes

by Daniel Bennett

CCAP has said it before and we will say it again, the United States is over-invested in higher education. The U.S. expends a larger share of its GDP on tertiary education than any of the other OECD countries -- more than twice the average. The following OECD chart shows how the countries stack up.
Yet, the Obama administration has publicized a mathematically unattainable goal to become the world leader in percentage of young adults with a college degree. The percentage of students capable of handling a rigorous college curriculum peaked in the US years ago. To increase this percentage would necessarily mean to lower the already dubious academic standards. Do we really want to further admonish higher education in the US (one of our comparative advantages) in pursuit of some trivial global ranking?

Sure, most people need some training beyond high school to achieve personal economic success, but this does not necessitate allocating beaucoup bucks and mortgaging our future so that every person can give attending 4-year college a shot. This is setting people up to experience failure and a lifetime of financial misery. Instead, we need to do as Charles Murray recommends in Real Education and encourage more students to attend low-cost postsecondary institutions, such as community colleges and vocational training schools. This will provide them with a greater chance to be successful in life, as everyone is not cut our for academe. It is also a much more efficient use of resources.

Think about the last time that you hired a plumber or electrician, or took your car to the mechanic. I'm certain that it wasn't a painless drain on your bank account. These craftsmen, as well as a number of other professions (i.e. - nurses, legal aides and staff accountants) make decent livings and do not need a bachelor's degree to get these jobs. What they do need is some vocational training and this can be provided at a relatively low cost by one of the many fine career-oriented or community colleges in the US. In addition, there is good job security with these sorts of jobs because, let's face it, no one is outsourcing their plumbing or car repairs to China or India.

We need to provide encouragement and incentives for students to attend the much more cost-effective career-oriented schools. This could easily be accomplished through the existing financial aid process. This is a win-win situation. For students, it allows them to learn valuable career skills so that they can become productive members of society and earn a moderately good standard of living, without taking out a mountain of debt. For those who do exceptionally well in a 2-year (or less) school and decide to pursue further studies, then 4-years schools should make it relatively painless to transfer. For colleges, they can maintain (with any hope improve) their academic standards by not having to accommodate remedial students. For the public, it will provide a much more cost-effective means of training a skillful and productive workforce.

More Evidence Supporting My Story

by Andrew Gillen

In my financial aid report I argued, among other things, that some financial aid practices have the side effect of encouraging higher tuition. The two most popular, paraphrased responses were:

1) Duh, that is blatantly obvious. You really needed a PhD and a 40 page paper to realize that? What are they teaching kids these days?

2) You idiot - how could you be so craven as to think that this is even in the realm of possibility. Your cherry picked evidence can't hide the fact that your methodology is flawed, your assumptions indefensible, and your agenda makes you hopelessly biased.

I foolishly tried to respond to the second group (see here here here) when what I should have done was collect more cherries, I mean evidence.

Stephanie Lee provides one such cherry in Inside Higher Ed. The basic story is that the Stimulus bill introduced the American Opportunity Credit, which among other things, provides a tax credit for the first $2,000 of tuition and fees paid. Any school charging less than $2,000, such as California Community Colleges (CCC), could basically raise tuition without leaving their students any worse off, since the higher tuition would be reimbursed by the tax credit. The LAO is proposing exactly that.

Myself and group 1 think that this proposal is likely to be acted on, and that we'll see tuition rise more than it otherwise would have. Group 2 does not. Since California is having a pretty severe budget crisis right now, we'll soon see what happens.

While a better use of the money would be to fund Pell grants, I don't think this is a bad outcome in the instance of CCC. While there are serious issues [sticker shock (a big consideration, especially among California's large Hispanic population), timing (they have to pay tuition and then get the money back a year later), refundability (the credit is only 40% refundable, so it's not clear to me that a student attend CCC full time would have sufficient tax liability to benefit), etc.], community colleges generally receive quite spartan funding, and are likely to see cuts, so this could help keep them functioning at a relatively low cost to students, at least compared to the alternatives. I would feel quite differently about this happening at lavishly funded schools, which it arguably will, which is why I think using the money for Pell grants would have been a better policy option.

Commandment #6: Reduce "third party" payments to universities

Commandment #6: Reduce "third party" payments to universities --from the federal and state governments and from private contributors (by limiting tax exemptions except for pure academic purposes)

by Andrew Gillen

It is something of a mystery to us why donations for non-academic and non-research purposes are tax deductible. A least those activities have a plausible claim to have positive externalities. But why are we encouraging luxury sky boxes and the construction of dorms that cost more than the median home in this country by giving them tax breaks?

More importantly, third party payments in general are not helping. Currently, most states choose to give their public universities large lump sum grants in the form of state appropriations. See figure 11 of this Delta Cost Project report for an idea of the large sums we are talking about here. This is a bad idea that should be stopped. As my recent paper showed, state appropriations are the least effective method of providing financial aid.

To begin with, they are completely ineffective in keeping tuition for everyone low. Every $1,000 in state appropriations lowers tuition by between $100 and $150. Moreover, by definition they are not well targeted towards low income students. Since state taxes are generally less progressive than federal taxes, and the rich are more likely to attend college, in a sense, you’re taxing the poor to give a break to the rich.

State appropriations are so ineffective because higher education is involved in an arms race based on status or prestige. Universities will never have enough money. After some bare minimum necessary to function is met, they are essentially competing to be the best. Since being the best is expensive, another way of saying this is that they are competing to spend the most money. There is no end to this race, and we shouldn’t be playing it with taxpayer money. (See these papers for a great introduction to this argument).

These third party payments should be eliminated, and the money given directly to students based on means testing, just like the Pell grant. This will not only encourage equality of opportunity by ensuring that scarce financial aid funding goes to those who need it, but will also drastically reduce the ability of schools to play the status game with our money.

Evidence of Signaling

by Andrew Gillen

There is a long standing debate about where the considerable value that comes from a college degree comes from. One strain of thought holds that it is attributable to human capital accumulation - ie that students learn skills and knowledge in college that is valuable to employers. Another strain of thought holds that the value of a degree comes from signaling/screening. A college degree is useful not so much for what you learned while there, but as a signal to employers that you have a certain level of intelligence and persistence.

Both theories have some truth to them, though how much, I'm not sure. But I recently stumbled across something that caused me to up the weight I place on the signaling theory.

This Crimson story details how many Harvard grads went into finance over the years. HT: GM

It turns out that in 2008, 23% of Harvard graduates went into finance. Shocked by the high percent, I tracked down the figures for the number of graduates who majored in finance. That turns out to be 0.

Harvard doesn't offer a finance major. So I came up with a list of majors that were most likely to have taken some finance classes, with the percent of the class of 2008 majoring (1st or 2nd major) in parenthesis.

Finance (0%)
Business (0%)
Mathematics and Statistics (5.2%)
Economics (14.5%)

If all of these graduates choose careers in finance, that would still only be 19.4%. You could think of this as the percent of graduates that were in some way prepared for a job in finance. Of course, many of these 19.4% went into other professions. So we are looking at somewhat fewer than 19.4% that are plausibly educated for a job in finance. And yet 23% got jobs in finance.

To reconcile this with the human capital hypothesis, you'd have to think that a Harvard education is so great, that regardless of their major, Harvard graduates would be at the top of the list of employers in finance.

An alternative explanation comes from the signaling/screening hypothesis. In this case, employers in finance realize that gaining admission to, and graduating from Harvard requires an exceptional amount of intelligence. With such intelligence, graduates can quickly be taught what they need to know even if they were not exposed to many financial courses in college.

Personally, I find the second case to be much more persuasive.

Perhaps I'm Not Entrepreneurial Enough

by Andrew Gillen

Edububble tracks down this quote from Apple's Steve Jobs:

I naively chose a college that was almost as expensive as Stanford, and all of my working-class parents’ savings were being spent on my college tuition. After six months, I couldn’t see the value in it. I had no idea what I wanted to do with my life and no idea how college was going to help me figure it out. And here I was spending all of the money my parents had saved their entire life. So I decided to drop out and trust that it would all work out OK. It was pretty scary at the time, but looking back it was one of the best decisions I ever made.

The weird part is, this is a quote from a speech given at... a college graduation ceremony.

Commandment #5: Fix the Accreditation Process

Commandment #5: Reform accreditation, so it truly measures performance and does not impede competition, including that from emerging for profit institutions.

by Luke Myers

When the regional associations that accredit the nation’s colleges and universities were founded in the late 19th and early 20th centuries, their primary mission was to improve the quality of higher education. But today’s accreditation process has done little to stem the backwards slide in higher education and, by discouraging competition, may be indirectly contributing to the decline in quality and increase in cost.

The six regional accreditation associations are currently the gatekeepers to over $60 billion annually in federal financial aid. Without accreditation, few institutions of higher education could continue to operate. Yet, these associations are made up of and funded by the very institutions they evaluate, making accreditation a process that favors conformity and institutions’ desires rather than the public interest.

First, none of the six regional accreditation association makes public the results of their evaluations. Students, parents, and decisions makers overseeing public money have little information about the strengths and weaknesses of individual schools. Competition is therefore inhibited because standards are so minimal that almost all institutions of higher education in the nation receive some form of accreditation. The accreditation system provides little incentive for colleges to further compete for increased quality because there is no distinction made by the accreditation associations beyond whether schools meet the most basic requirements.

Second, those standards that do exist place emphasis on conformity rather than competition by focusing on the inputs and processes of providing a college education rather than student outcomes. Accreditation is more concerned with whether an institution has a mission statement, faculty senate, large library, professors with high credentials, and strong financial resources rather than with whether these standards actually produce successful students. By requiring colleges to conform to these guidelines on inputs, the accreditation process discourages innovation in the provision of higher education. Advancements developed by for-profit providers have been particularly limited as these new models of education have faced hostility from the traditional accreditation associations whose members are threatened by increased competition. The lessening of competition and imposition of conformity limits an institution’s managerial flexibility and increases the misallocation of resources, leading to increased costs for colleges and universities of all stripes.

Fixing the accreditation process requires that standards be based on a school’s educational outcomes and increased transparency in which all results of the evaluation process are made available to the public. Basing accreditation on whether a college’s graduates actually perform well encourages institutions to improve the education they provide while reducing the costs they input. Publicly releasing all information allows for stakeholders to make a clear distinction between individual schools, preventing colleges and universities from being satisfied with meeting just the minimal requirements. Both improvements incentivize the innovation and competition that is necessary for higher education to improve its declining quality and to keep up with the dynamically changing world.

Race Summary

by Andrew Gillen

Claudia Goldin and Lawrence Katz have a nice summary of the main idea in their recent book, The Race Between Education and Technology, over at Voxeu.

Ever since the beginning of the twentieth century, technological change has operated to increase the relative demand for educated and skilled workers... educational advance increases their relative supply. This “race” between education and technology can produce rising, declining, or stable levels of economic inequality...

Our book shows that the educational slowdown caused much of the recent rise in economic inequality...

The bottom line is that the future of inequality and this nation depend on increasing the supply of highly educated workers. Too many youth drop out of high school; too many high school graduates are not college-ready...

The Utility of Tuition Fees

By Richard Vedder

Eating dinner in Astana, Kazakhstan last night with a number of rectors (presidents) of European universities was fun and illuminating (I am attending the fourth meeting of the International Rankings Expert Group, along with Americans Bob Morse of US NEWS and Dewayne Matthews of the Lumina Foundation).

One of my dinner partners, I believe one from Germany or Slovenia, noted that surveys show greater satisfaction with studies from students who pay tuition, compared with those who pay no fees. His interpretation -- not mine -- is that the incremental revenues from fees lead to a better education for students, hence more satisfied students. He noted that at some schools, students have a say in the allocation of student revenues (tuition fees are relatively new to European universities).

There is an alternative interpretation. When universities are dependent on students directly for a good share of their income, and where admission standards are not extremely selective, universities go out of their way to make the customers happy rather than lose the tuition revenue. At tuition free selective universities, students provide no revenue, so universities concentrate on research, which is important in university rankings (even more so in Europe and Asia than in the United States). All nations are trying to catch up with the U.S. in higher education, and it is interesting that they see the path to that is mainly through research.

Higher education outside the U.S. tends to be rather centralized, and it is interesting whether the Bologna Process is making that more so. The 27 EU nations have been joined by 18 other countries (e.g., non-EU Norway, Switzerland, Iceland, aspiring EU nations like Turkey, Moldava, etc.) in agreeing on certain common matters, including the famous three year degree. My European friends say the jury is still out on Bologna, and its impact. I would agree. While I like the concept of a shorter degree, I worry about attempts to over-coordinate and regulate, reducing diversity, competition, intellectual vitality, and, who knows, efficiency.

This concern echoes my feelings generally about the EU. When the Common Market began and grew, I was all for it --reducing trade barriers enhances economic welfare. But the move to build a super nation in Europe means more bureacracy, less democratic input (Brussels administrators making decisions --no directly elected all-European president), etc. I hope that the Europeans don't do the same thing with universities they are generally doing with their government.

Commandment #4: Simplify and reform financial aid

Commandment #4: Simplify and reduce or eliminate for non-poor students federal financial assistance programs

by Andrew Gillen

As college has become expensive, more and more students are turning to financial aid. However, both the process and the outcome of financial aid currently leave much to be desired. Two changes to financial aid could significantly improve higher ed.

First, murder the FAFSA.

This monstrosity imposes large costs on students, schools and the government. The bulk of these costs are unnecessary - the distribution of aid is not affected to a significant degree by the radical reduction in the number of questions (see this paper by Susan Dynarski and Judith Scott-Clayton). Moreover, the complexity and confusion lead many students who would qualify for means tested aid to avoid applying altogether. While we favor reforming the entire aid calculation, merely simplifying the existing form would still be a huge improvement.

Second, eliminate financial aid for non-poor students.

Aid is currently too widely available. The Department of Education reports that 35.4% of dependent students from families making $100,000 or more received Federal Stafford loans, and 15.6% received the subsidized kind. The Government Accountability Office reports that just under a third of all unsubsidized Stafford loan dollars went to families making more than $100,000.

This has two main drawbacks. One, for any given amount of aid money, giving more to the well off means there is less available for the not so well off. Two, as our recent report documents, when financial aid is too widely available, it results in higher tuition. Higher tuition, of course, is the opposite of what financial aid programs are supposed to achieve.

I Met My Idol

By Richard Vedder

The greatest living human being is Margaret Thatcher in my opinion. I met her this morning at the Institute for Economic Affairs in London and chatted briefly with her, and my opinion has not changed. At 83, sher walks a bit slowly and is slightly hard of hearing, but her mind is sharp. She was surprised at the degree to which Obama is socializing the American economy, but agreed fiercely with me with of need for new forceful leaders -in both nations.

Our leaders today are mostly wimps who govern by poll rather than principle. That is to a considerable extent true in many areas of human endeavor, not just politics. Indeed, most university presidents I know are hard working, smart, articulate, and politically adept --but do not have a true vision of what universities should be doing. The Iron Maiden had a vision, as did her counterparts Ronald Reagan and Pope John Paul, and she steadfastly did things consistent with both her principles and her vision of a more robust, growth-oriented Britain.

University presidents need to decide --what is it we want to do? How can we do what we want to do efficiently and in a cost-effective manner? And they need to look beyond narrow institutional self interest to look at what universities should be doing in society. Most simply define greatness in terms of spending and academic reputation, and refuse to move to a new paradigm where incentives are to maximize outcomes per dollar of revenue. Moreover, most of them either have no clear idea of what institutional outcomes should be, or do little to find ways of measuring performance towards goals. We need a few Margaret Thatchers in higher education. For me, I am glad I have met my idol.

Commandment #3: Incentivize Key University Leaders to Reduce, Not Increase Costs

Commandment #3: Incentivize key university leaders to reduce, not increase costs

By Daniel Bennett

The higher education establishment has been the benefactor of a remarkable amount of resources (with tax-free status) from a wide variety of payees (government transfers, corporate sponsorships, alumni gifts, endowment growth, tuition, etc.), yet its fiscal irresponsibility is topped only by our impeccable friends in Congress. University officials have had every incentive to continually squander massive amounts of money to "improve" everything on campus except for education by engaging in a humorless game of follow the leader -- each vying for a coveted top 25 ranking.

This has propelled an arms race of lavish spending on everything except perhaps education. This reckless empire-building has resulted in devastatingly high tuition for students with nothing meaningful to show for it, unless of course you believe that bureaucratic armies, sports arenas and giant climbing walls actually contribute to the advancement of knowledge.

The preferential treatment of colleges by allowing them to receive impervious resources with next to zero accountability has enabled this game to grow exceedingly out of control, with tuition rising at nearly 2.5 times the rate of inflation each year for the past decade. This fiscal mismanagement needs to end -- students, parents and the public are outraged with the perpetually rising costs. University leaders need to be provided practical incentives to not only control, but to cut costs.

First up on the chopping block are the bloated administrative bureaucracies. Administrative staffs have increased at an average rate of about 4.7 percent over the past 10 years, a rate that is roughly double the rate of enrollment growth. At doctorate/research universities, 10% of these employees are paid an annual salary in excess of $100,000! Not only has the mere size of the bureaucracy exploded, but the salaries are exorbitant as well, especially without a incentive system in place that rewards the right kind of objectives--ones that improve educational outcomes, increase efficiency, reduce costs and make college more affordable.

Other notable items that could be rewarded include increasing facility/classroom utilization, privatizing costly non-core activities, increasing faculty productivity, reducing time-to-degree, improving completion rates, etc.

AAUP Is Wrong

By Richard Vedder

There was a time when I rather liked the AAUP. But as it has become more of a labor union and less of a defender of academic freedom, my views have changed. That is evident in reading today's Inside Higher Ed. Two AAUP officials say that President Obama's proposal to expand Pell Grants and other financial aid are good --but don't go far enough. We need to increase aid to historically minority institutions.

First, I think it is wrong to establish criteria for aid for institutions based on race. Second, while assistance per capita at historically black schools (there are, to my knowledge, no historically Hispanic or Asian schools) is below that at, say, Harvard, that is true for the vast majority of non-race based state universities as well. The solution to give special money to institutions similar to Title I in K-12 schools is not a winner --look at how little good it has done for improving educational outcomes at the secondary level (this idea comes from our friend but big spending advocate King Alexander of the Cal State system). The idea that we should have some sort of affirmative action program for research grants, aside from being racist, would lower the quality of supported research --yes, I think, on average, the faculty of Harvard are better scholars than the faculty of, say, Howard--and so does the NSF, NIH, etc.

Then there is the abysmal graduation rates at all U.S. schools, but notably at the schools that it is proposed to target with additional funds. Money should in any case be given not to schools, but to individuals --the Pell Grant idea is conceptually a sound one, although I am suspect that vast expansion of even that program may make it a middle class entitlement that will raise college costs and add to already significant OVER investment in traditional universities.

Call me cynical, but the AAUP is a union that is saying "don't give all the money to the kids --we have less ability to get our hands on it than when you give it to institutions." So, aside from being racist and asinine, the idea is probably also selfish and self-serving.

British Legal Education --Doing It Right

By Richard Vedder

I was chatting this morning in London with a good friend of mine whose son is finishing up a law degree in England at age 20, plans to go on to a quality American law school, which will grant him a year's transfer credit, and get a J.D. degree at age 22. Instead of 4 + 3 year program, he will go for 2 + 2 years --43 percent less time. How does he do it?

British students can enter law school directly from high school. The reasoning is that a person with a good high school diploma should have the minimal general education necessary to practice law. Most British law schools, like American ones, are for 3 years. Students go to school for 3 10-week terms annually for 3 years, or a total of 90 weeks. But the University of Buckingham goes for 45 weeks a year for two years --same 90 weeks, one less calendar year. Moreover, many good U.S. law schools will give a year of credit for the British legal training, allowing the student to receive the Juris Doctor degree in two more years --or by 22 --giving the student 3 years more of work experience, saving thousands of dollars in tuition and other expenses, etc. etc.

The University of Buckingham is Britain's only private university, and it is run by a world renown scientist and scholar, Terence Keeley, once of Cambridge but now Vice Chancellor (equivalent of president) of Buckingham. Terence is a remarkable man (I once visited him at his home in Cambridge, and consider him a friend). Are British lawyers worse than American ones? I doubt it very much. Why don't we do the same thing? Because the accrediting agencies especially the ABA, would no doubt oppose it, as would the bar associations wanting to restrict competition. Shame shame shame. If we are going to ignore Shakespeare's injunction to "kill all the lawyers," at least we can reduce the burden on society, and themselves, of educating them.

Rankings Misdeeds Yet Again

by Jonathan Robe

This past week college rankings (particularly those of US News and World Report) have taken something of hit. In addition to the on-going fiasco at Clemson, Inside Higher Ed reported on Monday that the University of Southern California has misreported to US News the number of its engineering faculty who are members of the National Academy of Engineering. USC claims to have 34 faculty with that distinction while the website of the Academy gives only 22. It turns out that a good number of its faculty USC claimed were not full-time faculty, the definition US News uses for the variable in its graduate ranking of engineering programs. Thus, USC has effectively manipulated its ranking (though whether this caused a substantial change remains to be seen).

These scandals provide us with further examples of the importance, usefulness, and difficulties of college rankings in modern American higher education. After all, if schools willfully "manipulate" data to improve their own ranking, then the schools do view the rankings as both useful and significant in assessing colleges for prospective students and the public. In one sense, though, the rankings played a crucial role in this instance in exposing the misdeeds of the school when a grad student first noticed the discrepancy. Rankings are fulfilling their role in increasing transparency and accountability in higher education, albeit in an imperfect way.

Instead of eliminating college rankings, we at CCAP argue for an improved ranking philosophy and methodology. The college rankings we have teamed up with Forbes to produce is a step in this direction. We seek to evaluate schools based on the outcomes of the college education rather than on the inputs that US News uses for their rankings. Our approach has the benefit of both evaluating what really matters when it comes to education and of being far less susceptible to direct institutional manipulation.

What USC did does nothing to add to the value of the education for the students who attend. While rankings can and should influence the way a school is run, that influence should never extend to a misrepresentation of the school's quality. And schools should seek to make the education better for the students; what USC did decreased the value of the students' education by promising them something which really doesn't exist.

Commandment #2: Fund Students Instead of Institutions

Commandment #2: In general, fund students and not institutions --eliminate general institutional subsidies in favor of targeted scholarship assistance based on need and merit

By Robert Villwock

The cost of obtaining a college degree is rising each year at a staggering pace. According to BarackObama.com, the cost of tuition and fees at private colleges and universities has risen by 11 percent in the last five years and nearly 6 percent in 2007 alone. At public universities, the President’s website says that tuition has risen by 35 percent over the past five years. Over 200,000 students have been priced out of a college education as a result of the price increase, again according to the President’s website.

The issue is a serious one that involves reform and innovation on the part of lawmakers and others involved in the decision making process of higher education financing. The current system of federal financial aid has allowed college prices to rise. While giving more money to higher education sounds like a good idea, it has had the unintended consequence of justifying the aforementioned tuition increases, as Andrew Gillen's report, Financial Aid in Theory and Practice, found.

The major point to keep in mind is that schools understand how much money they will receive from the government and therefore justify it as a means of raising tuition and fees. Just as is the case with inflation, as more money comes into the university in the short run, it raises the price in the near long term (strikingly similar to the results found by Milton Friedman in the 1970s regarding inflation).

The problem, therefore, is not the amount of money dispersed by the government, but rather how the money is dispersed. Instead of giving aid to universities, the money would be more efficiently spent if it were given directly to students. Universities would not be able to justify large increases in tuition and fees and would therefore be forced to provide the best quality product to attract students. A student who earned aid from the government would be free to pick the university of his or her choice and apply the aid earned to the cost of attendance.

As opposed to the current system that gives money to the school and allows the school to allocate the aid, this system empowers worthy students to pick the college that best suits their needs as well as one that offers the best quality education for the price.

The trend for universities in a financial aid system like this would naturally be to please students in every way possible. A 5 percent per year tuition raise would strike students as unjustifiable and result in less attendance the following year. Seeing as cost is one of the major deciders for most students, the school that delivers the highest quality product at a comparatively low price would be the winner. Schools, looking to accommodate its customers, would be forced to cut costs across the board to win new customers.

If this system was to be implemented, I suspect community college would become a much more favorable choice among students. A person would be able to get a comparable education at a community college for the first two years of school at a large discount and transfer to a public or private university to complete his or her degree. Some community colleges offer students a guideline of courses that transfer to public universities, which helps students stay on track for an on-time 4 year graduation from the public university. The opportunities are there for lawmakers to reform the current financial aid system, unfortunately the decision makers do not seem to understand the real problem.

Economic Changes for Higher Ed

Over at Marginal Revolution, Tyler Cowen discusses 10 things that university presidents and provosts should know about how the economics of higher ed is changing.

Excerpt:

3. Community colleges are in many cases turning out to be stronger competitors than are for-profits.

4. The higher education bubble has burst. The expiration of stimulus funds in 2011 will be a crushing event for many public sector universities.

5. Faculty governance is essential for tenure and curriculum decisions. But faculty governance for setting university priorities is a big mistake.

6. The value of face-to-face classroom time (discussed in Create Your Own Economy, by the way) will prove robust. But the very best teachers of the future will take on an increasing role as editors, collage creators, and DJs. A brilliant scientist who doesn't understand YouTube will be crippled as a teacher. Adjuncts may lead the wave of innovation here.

7. The way to be fiscally responsible is to refuse luxury projects in good times. If bad times have come it is already too late.

8. Current administrators are using stimulus funds to buy off the old interest groups, under the view that these are temporary bad times. Relative to what will come, these are "good times," and much of that surplus ought to be put in reserve funds. That is not happening.

Click over to read the whole list.

While you're at it - click here to read my report that predicted the higher ed bubble in April of 2008!

Higher Ed Watch Misfire

by Andrew Gillen

Over at Higher Ed Watch, Jason Delisle accuses me of falling for loan industry propaganda “bait, hook, line, and sinker” in my op-ed at Inside Higher Ed. He highlights this NBER paper to make his point.

I was all set to write up a response, but Scott Fleming in the comments not only beat me to it, but did so more thoroughly and elegantly than I was going to (2nd comment – though the name is not verified, whatever that means). I’ve copied his comment below, with my additions in bold:

It seems we're still not talking about the same thing. There's a distinction made by NBER, Holtz-Eakin and Gillen regarding market risk, economic cost, and arbitrage rates. Switching terms as if they were interchangeable, as you have done here, does not clarify the debate at all.

The NBER paper is a convenient side bar, but an updated analysis of their conclusions would yield dramatically different results now that new FFELP loans don't qualify for SAP allowances. The artificially suppressed 3-month CP rate ensures that FFELP lenders receive no SAP on loans made after January 1, 2000.(AG: Presumably, as financial markets recover, the subsidy payments to FFEL lenders will return (I’m against these). But even when they do, relying on old estimates is dangerous – the College Cost Reduction and Access Act reduced these subsides. Table 8 of the NBER paper indicates that the 11.2% difference in subsidy rates is cut to 7.7% by a .5% cut in subsidies, and to 4.8% by a 1% cut. Since the bill cut subsidies by .7% for Stafford loans, and .65% for consolidation loans, the subsidy rate difference as calculated by NBER would probably be around 6.5%.) Eliminating that one factor from the cost analysis done in the NBER paper would show FFELP to be cheaper than direct lending by about 200 bps (18.1 for FFELP v. 20.1 for direct lending) (AG: 18.1 figure comes from table 6 – subtract 13.2 from 31.3). Accordingly, a student lending model that does away with SAP but continues to originate loans through the private sector would be more cost effective for the government than a switch to 100% direct lending (emphasis added).
(AG: This is a key point missed by many. If you've got a government subsidized program that is costing too much (surprise surprise), here's a radical idea - stop subsidizing it)

That's still a distraction however (AG: Right on. I devoted a couple of sentences to the issues above. It was one of 5 separate objections I raised, and a pretty minor one at that - see the third bullet below. Even supposing that I'm completely wrong on this one, I would think you'd have to maybe sort of address the other 4, but maybe that's just me), since the real issue, and where NBER, Holtz-Eakin and Gillen all appear to agree, is whether direct lending can actually achieve the arbitrage spread necessary to generate the savings CBO projects. The fact that 10-year Treasury notes are already higher than CBO estimates for 2010 and are closing in on the rate assumed for 2011 suggests that "savings" from direct lending for FY10 and FY11 will be substantially overstated. In fact, inflationary pressure may erase most of the arbitrage earnings assumed by CBO before the bill even becomes law, and that's assuming a one-day shift, rather than a phased in approach as has been described by some policymakers recently.

Coincidentally, CBO also assumes only 8.8 percent unemployment for 2009, a figure that would sound like good news if it ever came back to visit.

A quick look back over the past 8 fiscal years shows a $31 billion cash flow shortfall in the direct loan program account - something not taken into account at all in the NBER paper. Even the most ardent supporters of direct lending would be compelled to admit that the program has never lived up to its budget expectations.

All excuses aside, is the government really going to erase an entire industry over savings that everyone knows will never materialize? Policymakers deciding that real people should lose real jobs to capture make believe savings seems like a bad policy choice to me.

To this I would like to add a few points.

• The op-ed was responding to the continual flouting of the CBO figures. If you would like to discuss the NBER paper I’m all for it. I think it's a very good paper, but note that they often dealt with the issues rasied by taking educated guesses when it comes to assumptions about differences between the programs. In spite of this I think that their figures are a more accurate assessment of the cost of these programs, but their assumptions are a source of differences nonetheless.

• Moverover, the NBER paper also provides evidence for a key point mentioned above – if the motivation of dropping the FFEL is to save money, than that is the wrong policy. To save even more money, drop the SAPs (payments to lenders) for FFEL and abolish DL. The fact that the near opposite of this is being proposed leads me to believe that there is some other motivation or belief that is driving this proposal.

• Another area where the CBO, Holtz-Eakin, NBER and I are in agreement is what I referred to as the most important point in my op-ed. As the NBER paper summarizes

The biggest difference is that the direct program reports large interest income, whereas the guaranteed program reports large interest costs.

I can’t stress enough 1) the importance of this in the CBO and OMB figures, and 2) the folly of thinking it is a great idea for the government to take over lending just because they can borrow at a cheaper rate than they lend. As I stated in my op-ed:

This gain reflects the fact that the government expects to borrow the money for DL at low rates (0.76 percent in 2010) and charge students 6.8 percent.

This substantial gain would be reported for any program that borrows at the Treasury rate, and lends at a higher one. But that doesn’t mean it’s a good idea. To understand why, note that the exact same logic -- that the government can borrow more cheaply than it lends -- could be used to argue that the government should take over all lending in any market.

Consider an analogy to mortgage lending. Just as with FFEL, there are private lenders that have received subsidies from the government (we’ve already provided Fannie Mae and Freddie Mac $200 billion, and are on the hook for losses on their $5.2 trillion combined portfolio). By the logic of the pro-DL advocates, this subsidization is much more expensive than if the government provided the mortgages in the first place, so why not have the government take over all mortgage lending? I don’t know of anyone who thinks the government should be the only provider of mortgages, but there seem to be quite a few who think such a policy is a good idea for student loans.

Commandment #1: Provide Better Information About Universities

Commandment #1: Provide better information about universities by making virtually all university operations open to public scrutiny and provide data on the "value added" to students by their attendance

By Daniel Bennett

Students, parents and policy makers are often left in the dark without a flashlight when it comes to having digestible information about our nation's colleges and universities. This prevents the making of well-informed and rational decisions, as well as enabling some colleges to get away with highway robbery. If we are going to seriously reform higher education, then we need institutions to

(1)begin an era of fiscal responsibility,
(2) start tracking data that speaks to the value that it adds and
(3) be transparent about what is going on inside the walls of the ivory tower by making this information publicly available.

For too long, higher education has been protected from public scrutiny in the name of retaining an autonomous institution that creates and disseminates knowledge. Many educational leaders now describe students as consumers. If this is the case, and I suspect that it is, then these consumers deserve information that will allow them to make more informed (and therefore better and more rational) decisions, especially in a time when tuition continues to spiral upward.

This information should include not only resource inputs, such as standardized test scores, alumni giving and average class sizes, but also information on the quality of instruction and budget expenditures. Lastly, value-added information on learning outcomes, graduation and job placement rates should be available. If colleges are going to continue to be the benefactor of taxpayer's dollars and a significant burden on familial resources as the training grounds for tomorrow's leaders, then it is high time that they start ponying up information on how they are using these vast portions of American wealth and what value they are adding to individual lives and society -- and make it Publicly available!

Smalls steps have been taken by groups such as the American Enterprise Institute, which recently released a report on graduation rates and dropouts, the Delta Cost Project, which recently released a report on Trends in Higher Education Spending, and of course the Center for College Affordability & Productivity, with recent reports on Net Tuition and the College Labor Force, to make information about university behavior public. There still lies a long road ahead with many obstacles to overcome, but the commandment has been spoken and we will work tirelessly to ensure that it is fulfilled.

The Bologna Process: Unintended Consequences

By Richard Vedder and Thomas Krause:

Enthusiasts for the Bologna Process like Cliff Adelman allege it will bring about great uniformity and efficiency to European higher education. For example, the three year bachelor's degree will reduce the time needed to demonstrate competency in a field.

A look at real life experiences however makes one wonder. In Germany(the home to one of the authors of this blog, Thomas Krause), previously most students received a first degree (the equivalent of the U.S. bachelor's degree) in about four years. Few went on for a master's degree. Now, well over 80 percent of new bachelor degree holders want to pursue a master's degree. Instead of reducing the length of college attendance, the Bologna Process may have lengthened it. Instead of reducing costs of higher education, it may have increased it.

To be sure, it can be argued that students are learning more now --two degrees instead of one. But is that really true? Has the first degree lost its prestige and acceptance, becoming something like the Associate Degree in the U.S. --a credential that is far less accepted by employers as demonstrating learning?

One of us, Richard Vedder, is in London meeting tomorrow with members of the European Parliament. He intends to get their take on the Bologna Process. But as we see it now, its value as a reform move may be less than is claimed by its proponents.

Twelve Commandments for Higher Education Reform

By Richard Vedder

The Lord gave us Ten Commandments to govern our human behavior, commandments that have stood the test of time. Unfortunately, higher education is in such need of repair, in my distinctly non-deified opinion, that I think we need 12 commandments to reform it. I list them below: each will be discussed in greater detail in an upcoming series of blogs that begins tomorrow.

1. Provide better information about universities by making virtually all university operations open to public scrutiny (e.g. data on salaries, budgets, curricular decisions, etc.) and provide data on the "value added" to students by their attendance;

2. Reduce "third party" payments to universities --from the federal and state governments and from private contributors (by limiting tax exemptions except for pure academic purposes);

3. Incentivize key university leaders to reduce, not increase costs (e.g., by reducing administrative bureaucracies);

4. Simplify and reduce or eliminate for non-poor students federal financial assistance programs;

5. Reform accreditation, so it truly measures performance and does not impede competition, including that from emerging for profit institutions;

6. In general, fund students and not institutions --eliminate general institutional subsidies in favor of targeted scholarship assistance based on need and merit;

7. Reduce higher education overinvestment by incentivizing more students to attend lower cost two year colleges and postsecondary vocational institutes;

8. Eliminate funding to undergraduate students after four years of full time equivalent attendance; limit Ph.D. funding also to four years --incentivize schools to end long term (five year or more) Ph.D. attendance;

9. Incentivize professors to teach more and better, and do less obscure academic research that is largely unread;

10. Divest universities of non-core activities (e.g., food and lodging operations, entertainment);

11. Eliminate or drastically reform intercollegiate athletic participation, including removing athletic department autonomy and ending large institutional subsidies;

12. Restructure and clarify university governance by clarifying "ownership" and "property right" arrangements, in the process reducing the prominence of very long term employment contracts for faculty and administrators.

Enough for now. I am off in a few days to Europe and Central Asia, discussing college rankings in, of all places, Kazakhstan.