College Price vs. Value and Experiential Education
Allyson Savin NU’07 and Jim Stellar
AS and JS wrote a blog post a few years ago on leadership – a natural topic as AS was a student leader.But AS was also a business student, and worked for the federal government in the area of bank regulation through the financial crisis, before beginning work for a private equity firm in Washington DC.She has since joined a consulting firm assisting financial institutions navigate complex regulations. Her experience in business and JS’ experience in higher education administration trying to hold down costs at a public university (Queens College, CUNY) led us to try to write something for this blog about higher education and costs vs. benefits.
Recently The Chronicle of Higher Education had yet another article on rising tuition costs. This kind of piece is common everywhere. Perhaps the most depressing title of a somewhat recent article is from the May 12, 2012 New York Times, “A Generation Hobbled by the Soaring costs of College.”The sobering fact is that national student debt has now exceeds one trillion dollars, rivaling the money lost in the bursting of America’s last market bubble on housing.
The problem with borrowing, of course, is that the payback is much higher than the original investment. For example, suppose you borrow $50,000 to help pay for college beyond what you can get in grants or what your family can contribute from income or savings. This could be a quarter of your total tuition for 4 years, so it seems reasonable by that view. However, as one website calculates it, the total payback over 10 years will be almost $70,000 at the standard rate of 6.8% compounded annually and more importantly at $575 a month.That is about as much as a car payment … on a car you do not have.
Some have raised the question of whether we are now in a college tuition bubble, e.g. a 2011 feature story in CFA Magazine. This question is part of a larger set of concerns about price e.g. a 2011 report by Education Trust. Compared to a 40-year average rise in the general cost of living of 3.2% (or about three and a half times), in the last 35 years over which college tuition prices have been recorded, tuition increased almost 10 times according to one report. Americans appear to have covered most of these increased tuition costs by borrowing, often by the student themselves, even after the bursting of the housing bubble reduced their capacity to borrow.
So, why do we do it? One rational reason we borrow is that the education itself has lasting value in the labor force. For example, if you went to college at a very good place in a lucrative major (e.g. MIT and engineering), you would pay a high cost ($215 thousand) but the return on that investment also would be high ($1.6 million) according to one website. This kind of calculation is controversial but it highlights the fact that in some cases it might make rational economic sense to borrow. Another factor is that many universities try to compete for students by steeply reducing the price of their tuition (like putting a product on sale) by giving out financial aid. In a few cases, it is enough to cover the entire cost of tuition. Perhaps we could even regard these college financial aid operations as a wealth redistribution process in America where the wealthy family pays the full fare and those that are not wealthy get assistance. Yet that is not the experience of most students who come out with substantial college debt and are not in the most lucrative of professions but are in ones that fit their aspirations and even their passions.
To go back to the idea of a market bubble, the funny thing about a bubble is that classically the people in it typically do not know they are in it. This exists for at least two reasons. First, if people are willing to pay the price for something, then the product is worth it. It is only when they stop paying that one sees the bubble. Second, as the new field of neuroeconomics and research on decision heuristics show (see the now famous book by Kahneman, “Thinking Fast and Slow,”) the buying decisions we make are often made out of our emotional brain circuits. Worse yet, we are often unaware of the biases that enter into these decisions. In a famous statement before the subprime housing mortgage bubble burst taking the stock marked down with it, then Secretary of the Federal Reserve, Allan Greenspan, warned that the market was “irrationally exuberant.” At the time, most people wondered about that statement. Why wouldn’t the same decision heuristics apply to most American families deciding to borrow for college?
Consider a well-known psychological phenomenon based on operant psychology research on animals – “delay vs. amount.” Here rewards to be gotten in the future or prices to be paid in the future are discounted in their value by the amount of time until they occur. And it even shows up in your brain. But, every college student knows this effect first-hand when they walk into an exam less prepared than they want to be because the night before, when they could have been studying, they went to a party. Had the exam been taken in a night course, few students would have gone to an early evening party just before the later evening exam. We see the same behavior when people buy things on a credit card that they might not have bought with cash. Why shouldn’t students and their families work just this way when making borrowing decisions with future pay-back to cover the cost of tuition dollars due today.
Another interesting factor may be that when borrowing for education we are not borrowing against a fixed asset like a car or the value of a house. There is no tangible product involved. Do we do different computations in our head than if we borrow against something much more amorphous like future earnings with a college degree? Do students and their families get “stars in their eyes” when they look at college in a way that outstrips what we do when we look to buy something physical? Clearly people fall in love with houses and cars and buy more than they can handle, but it seems to us that there is something particularly interesting about college. Students and their families often stay with the plan and finish the college degree even when the payments start to bite or debt rises. In higher education, we love that kind of loyalty, but is it good for the students or is this an example of colleges chasing prestige by creating an attractive image for themselves and distorting the student’s decisions?
So what can we contribute to this conversation? We would make the argument that while we should have the conversation about reducing college costs, we might also have the conversation about increasing the value of a college education, perhaps through experiential education. Consider briefly Cooperative Education where students work full-time at a paid internship for a substantial period often outside the university in authentic jobs in companies that partner with the university to take students. Many students in cooperative education schools repeat that experience, getting a valuable breadth of experience as well as the depth. We need more research on how much of a return on investment these and other experiential education programs actually produce in higher education. While we are at it, we need research on the claimed maturity effect that can drive a greater investment of the student’s time in their classroom education and lead to better degree completion. We will return to these topics in future blog posts.