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.
