Sunday, September 28, 2014

Inflation in higher education

Note: in this post higher education, post-secondary institution, college and university are used interchangeably.

The real price of higher education in the United States has gotten significantly more expensive in the past 35 years.  Though there is no conclusive reason why this is the case, there are numerous hypothesis.

Interestingly, the rise in price happened alongside an increase in the proportion of 18-24 year olds who chose to attend a post-secondary institution (IES). This leads one to wonder whether this is simply an example of the invisible hand operating. As the quantity demanded increased, the price increased. Though more suppliers got into the business (think at the rise in the number of for profit colleges), not enough have entered the market for the price to re-adjust to its previous level.  This could be partly due to the difficulties of starting a higher education institution, getting accreditation and attracting students. However, this very simplistic model is unlikely to be accurate.

Independently of whether this is the reason for the price increase, the fact is that the majority of college graduates in the United States now leave with sizeable debt, which is the main issue with increasing prices. Student loans are a special category of loans and are governed by a different set of rules. Notably, they are very hard to discharge (NOLO).  This can have a devastating impact on someone who was overly optimistic about their degree’s earning potential.

The high student debt load also has a direct impact on the economy. Indebted people will put off starting a business, or even a family. There are also costs associated with high debt levels, including psychological and physical ones. 

In this discussion, the right to self-determination holds an important place. Students choose to attend post secondary institutions and obtain student loans. There is no law that mandates they do so. They make a choice, and are accountable for the consequences.

However we cannot ignore that societal pressures are at play. Since the 1950s, college has been viewed as a sure way out of poverty, and a pre-requisite for any job (the latter is untrue). Furthermore, many incoming students ignore the differential in earning potential of the various degrees. Few would argue that a student who picks a degree with a low earning potential and goes 200 000$ into debt in the process bears some responsibility.  Unfortunately, this has resulted in an overly educated population whose skills are mis-matched with the job market (another economic cost to society).

Part of the problem is the system is currently set up in a way where people just out of high school are asked to make life determining financial choices.  Some countries avoid this by making high school 5 years, or introducing a trial period between it and college.

Some countries just make higher education completely free. Apart for Scandinavian countries, where this model has worked quite well, most countries that do so have an underfunded and overcrowded post secondary system. In a world of scarcity and limited resources, price is still an effective adjudicator.  From what I have seen, institutions that charge tuition oftentimes have better facilities and professors. This is key in education!

So does this mean that everything is ok with the current system? I would argue no. Besides the aforementioned costs of student loans, higher education correlates with better health outcomes and higher life long earnings (the two are undoubtedly linked). On the macro level, it is beneficial to a nation to have educated citizens, because this often correlates with innovation, a key component of growth.

The picture is not all dire - as awareness of the negative consequences of student loans increase, the demand for them is shifting. In California, many students attend community colleges for 2 years and then transfer to 4 year institutions from which they get their bachelors.  Some are negotiating better financial aid packages before accepting offers. And last but not least,  people are discussing the issue  and starting to take action.  

Ps. We should also quickly discuss the special case of for profit colleges in the states. If you need some background information, watch John Oliver’s fantastic take on the subject matter. Tl;dr – many for profit colleges target vulnerable populations and  lie about their success rates and the achievements of their graduates. Given the asymmetrical distribution of information in this particular market, I would argue that these student loans are in a different category, and the students are akin to scam victims.

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