Tuesday, October 02, 2012

The inevitable accountability cliff for higher ed

The press has been heating up over the past few years with reports of high student loan debt and questionable employability after school.  In this post I will argue that higher education will inevitably face a reckoning in which universities are held more accountable for student outcomes.  This accountability is becoming more evident as colleges set the bar lower and lower to attract more students.

The goal of this article is to discuss the economic outcomes of a college education.  There are many other benefits students find in college, such as building a social network or becoming "learned" about the world; these are hard to put a price tag on, short of careful experiments.  So let's set those benefits aside and focus on what we are able to measure: earning potential and economic value.

The question of whether colleges are providing value for students is clear: students' outcomes can be determined in large part by their fields of study and the the quality of the school attended.  But hundreds of thousands of students are graduating each year unable to find a job; and 44.7% of those students able to find a job end up working somewhere where a degree is needed.  The cause of this is that schools hold little accountability for students' outcomes.  Although colleges must meet a minimum standard for their student sto receive student loans, those rules enforced by the department of education set an extremely low bar (thanks to education loan lobbyists).

The implications of the education bubble

How will this education bubble turn out?  We will probably continue to see growth in the student-loan industry as long as interest rates remain low -- this will last until 2015, according to the Fed.  Once interest rates pick back up, the gravy train for schools will start to end, but the effects may take a few more years to come to a head, because students will need to start defaulting on their loans.  This is scary, since the bubble is already over a trillion dollars, and it is not clear what will happen to these students in the meantime.

Since student loans are guaranteed by the federal government, and since lenders have easy recourse to garnish wages, this is likely to be an ongoing drag for the broader economy and for an entire generation of debt-ridden Millenials.  As public opinion turns and outraged citizens begin to insist on greater accountability for colleges (some students are already suing their for-profit colleges for misleading them), politicians will take less in lobbyist donations and start to set the bar higher for colleges to recieve funding.  Several high-profile reports will come out about colleges knowingly graduating students without proper job skills.  Any college without a significant cash endowment would be well-advised to stop spending on new projects, sell unnecessary property through 2013 and 2014, and hold on tight.

Dovetailing with the impending student loan crisis are technological advances in higher education.  Startups like Coursera are making it extraordinarily cheap for the highest-quality professors to teach students.  This also means that the old brick-and-mortar college experience is becoming less necessary, and it is bad news for intermediate-quality faculty and institutions.  The most elite colleges are likely to stay, as the private boarding schools they've always been, but countless intermediate institutions will find it hard to complete.  In a few years, the worst careers will be those in these intermediate colleges -- those built up to require high tuition but which do not recieve the best of the best students.

The highest graduation rate in the world

It's worth noting that the Obama administration is encouraging students to go to college, seeking "the highest college graduation rate" in the world.  This is a nice goal if everything else is held equal, but this plan aims to optimize the wrong metric.  The administration is getting what it is asking for, all right, as colleges pump out young English majors while their federally subsidized loans continue to inflate these colleges' profits.  But this is more because standards are dropping and less because students are becoming educated.

It used to be the case that good colleges survived in part on graduates' kind donations.  With the mandate to graduate as many college students as possible, and with interest rates so low, a new breed of college has evolved to subsist purely off of student loans.  The problem with this brand of college is that its incentives are completely disconnected from students' outcomes.  These colleges prey on low-income students, selling dreams of a bright future, and graduate these students at a low bar to make room for the next batch.  There is no accountability to these students, short of meeting federally lax rules on the fraction of students who can default on their loans.

Mitigating the education bubble

What do we really want when we ask for more college graduates?  We're really asking for a college-educated population. We should adjust our metric of success to reflect this.  Instead of aiming for the highest college graduation rate (a metric which can be gamed by setting the bar lower and inflating colleges with a student loan bubble), we should aim to produce the best-educated country in meaningful academic fields, such as science, math, and technology.  This is easily tested by standardized exams, and it is less easily game-able.  It is also more meaningful than "increase the college graduation rate".

A real solution would have two prongs.  First, this solution would focus on improving education at the primary and secondary levels.  This Fall over two million students will be taking remedial education classes in college to learn what they did not learn in high school.  This is simply unacceptable, in part because these students are paying for an education they should have gotten for free in high school; instead, they will be left saddled with debt for taking classes like Algebra II.  It is also unacceptable because these colleges are expanding their remedial programs to accommodate these students, in a creep toward privatized secondary education.  By improving primary and secondary education, the impact on the economy will be easier to measure from a basic accounting standpoint.

The second prong would be to increase schools' accountability to students to guarantee that their degree programs provide gainful employment.  One solution here is to ensure that colleges receive a specific fraction of their income in alumni donations.  Another possibility would be to require schools to underwrite student loans for a fraction of their students.

Further reading:

College majors by income: http://www.payscale.com/college-salary-report-2013/majors-that-pay-you-back
Grads having trouble finding work: http://www.nytimes.com/2011/05/19/business/economy/19grads.html
Student loan lobbyists: http://www.nytimes.com/2010/02/05/us/politics/05loans.html?pagewanted=all
Remedial education: http://www.bloomberg.com/news/2012-09-11/college-is-no-place-for-remedial-education.html
Colleges with the lowest graduation rates: http://www.huffingtonpost.com/2010/12/15/colleges-with-the-lowest-_n_797119.html
Targeting minorities: http://chronicle.com/article/For-Profit-College-Is-Accused/133225/