News Highlights: 04/06/10

Rick Hess discusses criticizes the exclusion of profit-seeking companies from participating in i3 innovation funding.

Thomas Frey:

Overhead costs are far too high, state support is dropping, and college tuition is far too expensive. Colleges are pricing themselves out of existence.

Online education can take place at a fraction of the cost. Many of the courses can be packaged and commoditized, and as courseware aggregators begin to sell courses online, there will invariably be course wars where each will try to undercut the price of their competition.

Majors tend to be a label that is both defining and restrictive at the same time. Majors represent a top-down approach to sorting out what skills are important for a given career path. But over time the major tends to lose its relevance. Employers use majors to help prioritize candidates, but they all know that the major alone is a poor indicator of the skills and talents an individual will bring to the table. Is there a better system? None that I'm aware of yet, but it is clearly an old system long overdue for an infusion of disruptive new approaches.

classroom-centric education is not necessary for learning

Colleges are like slow moving whales about to get attacked by saltwater piranhas. While department heads in colleges are off studying the mating rituals of Komodo Dragons in Indonesia, corporate managers are working day and night, ruthlessly focused on opening new markets and uncovering new revenue streams. The pace and intensity of the work is radically different.

Colleges have huge operating budgets and the corporate world is seeing this as fertile territory to make money. The vultures are already circling.

Kerry Picket speculates whether Robert Shireman will be appointed as Student Loan Czar, and criticizes his appointment as Undersecretary as a violation of Obama's pledge to not allow lobbyists on his staff.

his previous involvement as a lobbyist for TICAS shows he is establishing the very policies at the Department of Education he advocated for when he previously headed up TICAS.

Congressman Buck McKeon criticizes the federal student loan takeover:

is a bad deal for both students and taxpayers.

It is just plain common sense that putting 100 percent of borrowing risk and responsibility on the U.S. Treasury — in other words, on taxpayers — would be a costly proposition..Yet because of congressional accounting rules, Democrats were able to claim ‘savings’ by driving out the private sector and transforming the U.S. Department of Education into one of the nation’s largest banks. This new analysis has a simple message: Taxpayers beware

Laissez Faire Higher Ed Market?

Here is my latest post on the CCAP Blog:

Ben Wildavsky has an interesting essay in the Chronicle this morning in which he calls for free global trade in higher education.
The globalization of higher education should be embraced, not feared. The worldwide competition for human talent, the race to conduct innovative research, the push to extend university campuses to multiple countries, and the rush to produce knowledgeable and creative graduates who can strengthen increasingly knowledge-based economies—all of those trends are hugely beneficial to the world.

Just as free trade in manufacturing provides the lowest-cost goods, benefiting both consumers and the most efficient producers, global academic competition allows for the free movement of people and ideas, on the basis of merit, with enormously positive consequences for people, for universities, and for nations.
I'm all for free and open global competition in higher education and ideas, and generally think that protectionist measures that restrict the number of students, scholars or colleges that can be traded (imported/exported) do more harm than good. There may be one factor that contributes more to the protectionism than anything else: the fact that many governments subsidize higher education extensively.

The public subsidization of of higher ed creates many perverse incentives that work counter to free trade.

First, public subsidies are intended to serve domestic interest. Many taxpayers support the subsidization of higher ed because they want it to be affordable and accessible for domestic students. If colleges supported by taxpayer money were to tell the public that they plan to reject many more domestic students in order to open more seats to foreign students based on merit, and that the taxpayer funds would used to pay for these students, then I suspect that the public would soon begin to demand that the taxpayer funds be re-allocated in order to serve domestic interests (FYI, a similar scenario has been taking place at the prestigious public state universities for some time).

Second, subsidies create barriers to competition. Domestic industry players (i.e. - colleges and their associations) would be, and have been, opposed to new market entrants. This would mean more competition for students, faculty and especially public resources. Higher education has substantial lobbying efforts to impose barriers to entry and protect its interests, mainly just to deter domestic competition. Introduce foreign competition, and the stakes become much higher.

Third, public subsidies distort market prices. It is impossible to have a global free market in higher education when the industry is so heavily subsidized and consumers rarely incur the full costs, especially when the subsidies from different governments are in various amounts. This prevents normal supply and demand conditions from establishing a market-clearing price, even in a domestic market.

While I laud Wildavsky for his desire to create a global free market in higher education, it is not quite a realistic goal in the era of massive public subsidization of the industry. However, there is some optimism that globalization may help turn the page on affordability:
a new corporation is promising that American college students can get a year's tuition, room, board, airfare, and support services for that price ($12,750)...Just one catch: It's all in China.
(Note: this list of perverse incentives created by public subsidies is certainly not exhaustive)

News Highlights: 04/05/10

Apollo to enter the UK MBA market.

Harris Miller and Kathy Mizereck respond in the Sun Sentinel to an earlier article that attacked career colleges.

Inside Higher ED on the disaggregation of degrees

Since the online-education boom, the notion that students could cobble together a curriculum that includes courses designed and delivered by a variety of different institutions — including for-profit ones — has gained traction in some circles. “As it has with industries from music to news, the logic of digital technology will compel institutions to specialize and collaborate, find economies of scale and avoid duplications

Much of the talk about this imminent unbundling has come from colleges that predict that students might want to transfer credits from other colleges that might have different missions. But the competition may also come from entities that do not even offer degrees.

educational model is not about minimizing costs as much as maximizing expertise. "Organizations that provide the 'best' online education in a given subject area will come to dominate others," he says. In other words, as technology allows students to pick and choose courses from different institutions, the education providers that thrive will be those that concentrate their resources in particular fields.

The institutions that dominate in a particular subject area will do so, in part, because they have expertise and experience in that subject area that will give them a leg up on institutions whose orientation is more general

Leveling the Playing Field

New research from the Parthenon Group reveals that the societal cost of producing a positive outcome (defined as a completion or transfer) is quite comparable for community and for-profit colleges.

When schools’ total revenues are considered (agnostic as to source of funding) and compared against the positive outcomes that are generated, private sector and public sector 2-year (or shorter)institutions look a lot alike: they take in roughly $25,000 of revenues to produce a positive outcome of graduation or transfer. This neck-in-neck cost to society clearly needs to be evaluated against the value of those degrees.

I'm not all that surprised about the results of this analysis, as I previously suspected that the true cost per student of public colleges (once we account for subsidies) is likely not all that different than what for-profit schools charge. While this research is quite compelling, it falls a little short of revealing the full societal cost, as it fails to account for implicit costs, such as lost property tax revenues due to the non-profit status of public institutions, and the opportunity costs of government subsidies.

The research also portrays the costs in terms of positive outcomes. In measuring the societal cost, I would think that we should account for both positive and negative outcomes. Despite a few shortcomings, the results are very interesting and suggest that further research needs to be done. Stay tuned.

Richard Vedder Comments

Richard Vedder gives 3 reasons why he doesn't like Obama's student loan takeover bill in this National Review Online post.

First, he violated basic tenets of representative democracy by tying otherwise politically unattainable education changes to the health-care bill.

Second, the bill’s student loan provisions will not save the $68 billion promised, and will move the country closer to a European-style socialism that has brought that continent stagnation.

Third, the bill proceeds from a false premise.

Community vs For-Profit Colleges

Daniel de Vise of the Washington Post reports on a new study scheduled to be released tomorrow that compares, among other things, the cost of community colleges vs that of for-profit colleges. The main findings of the study are:

1. For-profit colleges are adding capacity at a rate of 6 percent, investing $800 million to $900 million a year, compared with a 1-percent annual growth rate among two-year public institutions, whose growth is hindered by dwindling state funds.

2. For-profit colleges serve a larger proportion of high-risk students (meaning at risk of dropping out) than community colleges. Fifty-four percent of for-profit students meet three or more "risk factors" as defined by the federal government, including parenthood, delayed enrollment and lack of a high school diploma. Thirty-six percent of community college students are considered at high risk.

3. For-profits have -- arguably -- a higher success rate than community colleges. Sixty-nine percent of students surveyed by the federal government attained the degree or certificate they sought or transferred elsewhere within five years of enrollment in a for-profit college. The comparable rate in community colleges is 62 percent. Community college students are far more likely to transfer to other schools, whereas for-profit students are more likely to attain certificates and then conclude their studies.

4. For-profit colleges receive $26,700 in funding, on average, for every student who successfully completes study or transfers. Community colleges receive $25,300 per student. The funding sources, of course, look entirely different: the for-profits receive most of their funding in tuition and fees paid by students, whereas community colleges get most of their funds from state and local government.

5. For-profit students start out with a lower income than community college students but yield a greater earnings gain through their studies. For-profit students earn $14,700, on average, when they begin their studies, and see an income boost of $7,900, or 54 percent, when they leave. Community college students earn an average $20,300 when they start, and see a boost of $7,300, or 36 percent, when they finish.

6. For-profit students are less likely than community college students to report that they were surprised by how much they owed at the end of their studies. More than half of for-profit students report they were told how much they would have to borrow by their institution, according to a survey of students by the Parthenon Group. By comparison, about 40 percent of community college students said their institution provided information on debt.

Beating a Dead Horse

Here's my latest post on the CCAP blog.

(Career College Central also posted the piece)

Let's play a little game of education policy and research trivia. Read the below statements regarding the for-profit sector and try to guess when these statements were made.

Private career schools became a front-burner issue for postsecondary education policy about _______ (hint: timeframe)..., in terms of participation in federal programs and in broader discussions about consumer rights and abuses...The impetus...can be traced to one key indicator: rapid increases in the amounts defaulted by students participating in federally guaranteed student loan programs

The sudden interest in proprietary schools generated by the debate over default led to several subsequent policy discussions. One had to do with the level of debt appropriate for young people entering the labor market, another with the increasing proportion of overall federal funds for student assistance going to students in private career schools, and another with consumer rights and abuses related to admissions, advertising, and promises for employment

Now, you are probably familiar with the fact that the Obama Administration and the Department of Education are changing the cohort default rate rules to account for 3-year defaults in 2012, and that there have been discussions about tightening other regulations regarding the for-profit sector, such as the 90/10 rule and gainful employment. So it would be a great guess if you said that the above statements were made in 2009, but you would be way off because they were made during the 1980s and included in a paper by Lee and Merisotis (1990) that I recently came across.

That's right, we've been having the same policy discussion about student default rates and so-called consumer protections for around 25 years. Despite subsequent regulations including establishing limits on CDRs to maintain Title IV eligibility, the 90-10 and gainful employment rules, laws requiring career schools to publish their job placement and graduation rates, laws forbidding incentive compensation and a slew of other regulations being placed on the for-profit sector, not much has changed in terms of outcomes. It seems that all of this federal meddling has led to...an escalation of tuition and the closure of 1,000s of career schools. I'm not exactly sure this was the intended outcome.

Just to touch a bit more on CDRs, I don't find it surprising at all that research produced in the 1980s reveals the same findings that current research on default rates does, namely that:

Studies that examine the effect of institutional type on default have sometimes been viewed as controversial because, given the structure of the student loan system; institutions themselves have no direct control over the borrower to influence his or her repayment

...students from different cohorts and varying income levels showed a considerable variance in their propensity for defaulting, supporting the idea that sectoral differences in default rates may at least be partially explained by differences in borrower’s characteristics

Defaulters have, regardless of institutional sector, significantly lower family incomes at the time the loan is made

the disadvantaged socioeconomic status of students attending proprietary and two year schools was found to be most strongly correlated with the likelihood of default, and institutional practices were found to be of limited importance