Not what it used to be
American universities
represent declining value for money to their students
ON THE face of it,
American higher education is still in rude health. In worldwide rankings more
than half of the top 100 universities, and
eight of the top ten, are American. The scientific output of American
institutions is unparalleled. They produce most of the world’s Nobel laureates and scientific papers. Moreover college
graduates, on average, still earn far more and
receive better benefits than those who do not have a degree.
Nonetheless, there is
growing anxiety in America about higher education. A degree has always been
considered the key to a good job. But rising fees and increasing student debt, combined with shrinking financial and educational returns, are
undermining at least the perception that university is a good investment.
Concern
springs from a number of things: steep rises in fees, increases in the levels
of debt of both students and universities, and
the declining quality of graduates. Start with the fees. The cost of university
per student has risen by almost five times the rate of inflation since 1983
(see chart 1), making it less affordable and increasing the amount of debt a
student must take on. Between 2001 and 2010 the cost of a university education
soared from 23% of median annual earnings to 38%; in consequence, debt per
student has doubled in the past 15 years. Two-thirds of graduates now take out
loans. Those who earned bachelor’s degrees in 2011 graduated with an average of
$26,000 in debt, according to the Project on Student Debt, a non-profit group.
More debt means more risk,
and graduation is far from certain;
the chances of an American student completing a four-year degree within six
years stand at only around 57%. This is poor by international standards:
Australia and Britain, for instance, both do much better.
At the same
time, universities have been spending beyond their means. Many have taken on
too much debt and have seen a decline in the health of their balance-sheets.
Moreover, the securitisation of student loans led to a rush of unwise private
lending. This, at least, has now been curbed by regulation. In 2008 private
lenders disbursed $20 billion; last year they shelled out only $6 billion.
Despite so many fat years,
universities have done little until recently to improve the courses they offer.
University spending is driven by the need to compete in university league
tables that tend to rank almost everything about a university except the
(hard-to-measure) quality of the graduates it produces. Roger Geiger of
Pennsylvania State University and Donald Heller of Michigan State
University say that since 1990, in both public and private colleges,
expenditures on instruction have risen more slowly than in any other category
of spending, even as student numbers have risen. Universities are, however,
spending plenty more on administration and support services (see chart 2).
Universities cannot look
to government to come to the rescue. States have already cut back dramatically
on the amount of financial aid they give universities. Barack Obama has made it
clear that he is unhappy about rising tuition fees, and threatens universities with aid cuts if they rise any further.
Roger Brinner from the Parthenon Group, a consultancy, predicts that enrolment
rates will stay flat for the next five to seven years even as the economy picks
up. The party may be well and truly over.
Balloon debate
In 1962 one cent of every
dollar spent in America went on higher education; today this figure has
tripled. Yet despite spending a greater proportion of its GDP on universities
than any other country, America has only the 15th-largest proportion of young
people with a university education. Wherever the money is coming from, and
however it is being spent, the root of the crisis in higher education (and the
evidence that investment in universities may amount to a bubble) comes down to
the fact that additional value has not been created to match this extra
spending. Indeed, evidence from declines in the quality of students and graduates suggests that a degree
may now mean less than it once did.
For example, a federal
survey showed that the literacy of college-educated citizens declined between
1992 and 2003. Only a quarter were deemed proficient, defined as “using printed
and written information to function in society, to achieve one’s goals and to
develop one’s knowledge and potential”. Almost a third of students these days
do not take any courses that involve more than 40 pages of reading over an
entire term. Moreover, students are spending measurably less time studying and
more on recreation. “Workload management”, however, is studied with
enthusiasm—students share online tips about “blow off” classes (those which can
be avoided with no damage to grades) and which teachers are the easiest-going.
Yet neither the lack of investment in teaching nor the deficit of attention appears to have had a negative impact
on grades. A remarkable 43% of all grades at four-year universities are As, an
increase of 28 percentage points since 1960. Grade point averages rose from
about 2.52 in the 1950s to 3.11 in 2006.
At this point a sceptic
could argue that none of this matters much, since students are paid a handsome
premium for their degree and on the whole earn back their investment over a
lifetime. While this is still broadly true, there are a number of important
caveats. One is that it is easily possible to overspend on one’s education:
just ask the hundreds of thousands of law graduates who have not found work as
lawyers. And this premium is of little comfort to the 9.1% of borrowers who in
2011 had defaulted on their federal student loans within two years of
graduating. There are 200 colleges and universities where the three-year
default rate is 30% or more.
Another issue is that the
salary gap between those with only a high-school diploma and those with a
university degree is created by the plummeting value of the diploma, rather
than by soaring graduate salaries. After adjusting for inflation, graduates earned
no more in 2007 than they did in 1979. Young graduates facing a decline in
earnings over the past decade (16% for women, 19% for men), and a lot more
debt, are unlikely to feel particularly cheered by the argument that, over a
lifetime, they would be even worse off without a degree than with one.
Moreover, the promise that
an expensive degree at a traditional university will pay off rests on some
questionable assumptions; for example, that no cheaper way of attaining this
educational premium will emerge. Yet there is a tornado of change in education
that might challenge this, either through technology or through attempts to
improve the two-year community college degree and render it more economically
valuable. Another assumption, which is proved wrong in the case of 40% of
students, is that they will graduate at all. Indeed, nearly 30% of college
students who took out loans eventually dropped out (up from 25% a decade ago).
These students are saddled with a debt they have no realistic means of paying off.
Some argue that
universities are clinging to a medieval concept of education in an age of mass
enrolment. In a recent book, “Reinventing Higher Education”, Ben Wildavsky and
his colleagues at the Kauffman Foundation, which focuses on entrepreneurship, add
that there has been a failure to innovate. Declining productivity and stiff
economic headwinds mean that change is coming in a trickle of online learning
inside universities, and a rush of “massive open online courses” (MOOCs)
outside them. Some universities see online learning as a way of continuing to
grow while facing harsh budget cuts. The University of California borrowed
$6.9m to do this in the midst of a budget crisis. In 2011 about 6m American
students took at least one online course in the autumn term. Around 30% of all
college students are learning online—up from less than 10% in 2002.
Digital dilemmas
To see how efficient
higher education can be, look at the new online Western Governors University
(WGU). Tuition costs less than $6,000 a year, compared with around $54,000 at
Harvard. Students can study and take their exams when they want, not when the
sabbaticals, holidays and scheduling of teaching staff allow. The average time
to completion is just two-and-a-half years.
MOOCs have also now arrived with great
fanfare. These offer free college-level classes taught by renowned lecturers to
all-comers. Two companies, Coursera and Udacity, and one non-profit enterprise,
edX, are leading the charge. At some point these outfits will need to generate some
revenue, probably through certification.
The broader significance of MOOCs is
that they are part of a trend towards the unbundling of higher education. This
will shake many institutions whose business model is based on a set fee for a
four-year campus-based degree course. As online education spreads, universities
will come under pressure to move to something more like a “buffet” arrangement,
under which they will accept credits from each other—and from students who take
courses at home or even at high school, spending much less time on campus.
StraighterLine, a start-up based in Baltimore, is already selling courses that
gain students credits for a few hundred dollars.
Some signs suggest that universities are
facing up to their inefficiencies. Indiana University has just announced
innovations aimed at lowering the cost and reducing the time it takes to earn a
degree. More of this is needed. Universities owe it to the students who have
racked up $1 trillion in debt, and to the graduate students who are taking
second degrees because their first one was so worthless. They also bear some
responsibility for the 17m who are overqualified for their jobs, and for the 3m unfilled positions for
which skilled workers cannot be found. They even owe it to the 37m who went to
college, dropped out and ended up with nothing: many left for economic reasons.
Universities may counter that the value
of a degree cannot be reduced to a simple economic number. That, though, sounds
increasingly cynical, when the main reason universities have been able to
increase their revenue so much is because of loans given to students on the
basis of what they are told they will one day earn.
Correction: Donald Heller is at Michigan State University,
not Pennsylvania State University as this article originally suggested.
This was corrected on December 17th 2012.
