These are roiling times for our vast edu-industrial complex –
public and private colleges and universities and their attending students. Even
the most renowned public universities are being tested, as a new batch of
freshman will soon enter their hallowed halls.
The prestigious University of California (UC) system, founded in
1868 in Berkeley, has over 238,000 undergraduate and graduate students going to
its 10 universities throughout the state. More than 71,000 freshmen will begin
classes at UC later this month and next month. Echoing the formidable challenges
facing public colleges-universities, UC President Janet Napolitano said several
months ago that because of substantial budget cuts, nearly every state
university in the nation had been forced to make a “Hobson’s choice, and they
all have reached the same decision: Open doors to out-of-state students to keep
the doors open for in-state students.”
Her use of the phrase “Hobson’s choice” to characterize her difficult
job is interesting. Thomas Hobson was a 17th century livery stable owner in
Cambridge, England who had over 40 horses for rent. Having so many horses made
it appear to customers that they had many choices available to them. But there
actually was only one choice, because Hobson required his customers to choose
only the horse in the stall nearest the door, so his best mounts would not be
overused by perceptive customers. Hobson’s choice has thus come to mean a
situation in which you are supposed to have a choice but really do not have any
choice because there is only one thing you can really have or do.
Thomas Hobson is alive and well at virtually every public
college-university. Over the past several decades California and many other states
have substantially reduced the amount of public funding they provide their
universities – 40 years ago UC received 32% of its budget from the state, now less
than 16% is provided.
As usual, legislators wanted it both ways; cut higher education
funding and suffer no negative consequences. But there have been predictable
consequences, tuitions have risen (to replace the lost public funding) and the
composition of students has changed (to increase revenue). In order to garner
more income universities have made their Hobson’s choice and raised tuitions
and accepted more out-of-state students, who pay far more tuition than in-state
students. In the case of UC/Berkeley, the 2016-17 tuition for in-state students
is $13,500/yr, out-of-state tuition is $35,850/yr. Unsurprisingly, ever-rising
tuition has created headwinds for students, universities and politicians.
In-state students and their parents have been none too pleased
that universities have raised tuition and are accepting more out-of-state
students – this fall, 32%
of UC/Berkeley admitted freshmen are either from out of state or other nations.
After a series of public protests California legislators, Ms. Napolitano
and the UC Board of Regents had several discussions. UC agreed to reduce the
number of out-of-state students and increase the number of in-state students in
return for receiving more state funds.
Everyone agrees that US colleges and universities have long produced
storied and positive benefits for our society and their graduates. This is why
going to college has been an essential ingredient for attaining the “American
Dream.” Over the past century the ranks of baccalaureate (BA) degree holders
have increased spectacularly, as shown in the figure below. People who have a
BA now represent 34% of young adults, more than a ten-fold increase since 1905,
when my grandfather graduated from college. Having a BA is fast becoming the
new norm rather than the exception for young adults. In 2013-14 more than 2.7 million adults graduated from a 2- or 4-yr college.
Source: National Center for Education Statistics.
This dramatic, continuing upsurge in people receiving BAs is
creating challenges for more recent college graduates. Their Associate or
Baccalaureate degrees may not be worth as much as they were decades ago when
just 10% or 20% of young adults earned a BA.
The law
of diminishing returns, first posited in the 18th century, applies to
college grads as well as other productive inputs. As more of any given input
(like skilled, BA-holding workers) are added to the productive work force, their
incremental contribution (“return”) to output will diminish. This is beginning
to happen for college graduates. But not just the returns from a college degree
are weakening.
With ever-more young people (and their parents) demanding a 2- or
4-college education, the costs of attending college have risen significantly, in
part reflecting the relative insensitivity of costs to levels of demand. In
economic terms, college attendance seems fairly price inelastic, especially for
“selective” colleges. Thus, the expense of going to a public college-university
has increased 94%, after adjusting for inflation, during
the past 15 years; for private colleges-universities the increase is 46%. And
yet even with these substantial cost increases, college attendance has
skyrocketed to 20.2 million (M) in 2015 from 15.3M in 2000, an increase of 32%.
Faced with more demand for their product, colleges are more able to charge what
the market will bear.
Recognizing the benefits of having a more educated work force,
federal and state governments have long subsidized college attendance, starting
with the 1944 GI Bill (formally called the Servicemen’s Readjustment Act) that provided
returning WWII veterans with cash to attend college, high school or vocational
school, among other benefits. The cost of sending veterans to college paid for
itself many times over through increased post-war economic growth fueled by their
increased productivity.
In April when I first heard of Bernie Sanders’ free college
tuition plan I wondered that if his idea were ever to become law, would it have
an effect similar to that of the 1862 Homestead Act ratified about 60 years
after the pioneering Lewis and Clark expedition traversed some of the new US
territories. Why? Because like promising free tuition in the 21st
century, this Act provided virtually everyone in the US with 160 acres of free
land in the mid-19th century.
The US wanted its citizens to inhabit its then very
sparsely-populated new western region, so it offered free land to incentivize
its settlement. Similarly, when the government wanted to improve the US labor
force in the mid-20th century, as service men and women were returning from the
WWII, it began subsidizing college education with the GI Bill.
The Homestead Act distributed 270 million acres of federal land (nearly 10% of all
the area of the US) to 1.6 million homesteaders (about 4% of the US population).
One consequence was that many people who didn’t know much about farming, moved
to the Great Plains (where the climate was not benign at all) and beyond, claimed their 160 free acres and had
difficulties being successful. Only 40% of the land-grant applicants who
started the process were able to complete it and obtain title to their
homesteaded land. Despite this low success rate, the Act served to populate the
American west.
The timing of now offering a 100% subsidy for public college
tuition is very different than the Homestead Act, because one-third of young
adults have already “populated” public universities, paid for that education
and has college degrees. In addition, it will be challenging for some new
students (like the Homestead Act’s new farmers), who are enticed by free
tuition but not completely prepared to successfully graduate. Who will be
responsible for their success? This job would probably become another
potentially significant indirect cost borne by public colleges-universities. Even
without a free-tuition incentive, only 52%
of incoming college students actually graduate within 5 years (and just 25%
from for-profit colleges). This percentage may further fall when more students
show up.
Other than offering political enticement for young people to vote
for Democrats, is there a broader rationale for spending billions per year on a
federal free tuition plan? I don’t think so.
Receiving a BA degree has intrinsic and realized value for each
graduate. Every college student and her/his parents understand the value of
graduating from college. It is far from zero. Two ways of measuring it are:
$610,000 and 2.2%. Over their entire working life, the typical college graduate
will earn $1.19
million. This is $610,000 more
than the lifetime earnings of a typical high school graduate and $335,000 more
than that of a typical associate degree graduate. The national unemployment
rate is 4.9%; for high-school graduates it is 5.4%; for young adults with a BA
it is 2.7%,
2.2% less than the overall unemployment rate. College graduates both earn more
money and have an easier time finding a higher-paying job.
This college earnings premium has existed for a long time, but has
not increased recently. According to the Pew Research Center this leveling of
the premium is due in part to the reduction in annual real (inflation-adjusted)
earnings for high-school and 2-year college graduates since the 1980s, rather
than actual gains in college graduates’ salaries. The Pew report
found that the median annual real earnings for young college-educated workers
was $45,500 in 2013, compared to $28,000 for high-school graduates — a premium
of $17,500. College graduates’ real earnings increased only 1.8% between 1986
and 2013; but high-school graduates’ real earnings decreased 7.7% between 1986 and 2013. A Goldman Sachs’ assessment
found that students who graduate from universities that rank in the lower 25% of
college rankings (often including lower-cost schools like 2-year community
colleges and less selective 4-year colleges) enjoy no salary premium at all,
and earn less than high school graduates.
More and more college graduates are entering the US work force as
macroeconomic growth has dissipated. In 2015 the US real GDP increased only 2.4%;
in 2016Q2 annual growth was a meager 1.2%. Thus,
with increasing supply of college graduates and lessening demand for their
services, more are “underemployed” in jobs that do not require a college degree
or are working part-time when they want a full-time job. In July, the Economic
Policy Institute found that 12.6% of college graduates were underemployed, much
higher than 9.6% in 2007 during the Great Recession.
With more than one-third of young adults now gaining BAs, having
an undergraduate degree is becoming a standard, not the exception. Markets,
including the employment market for college graduates realize this. Despite
increasing costs, college-based wage premiums will diminish because of the
pending “normalcy” of having a BA. But, as pundits have stated, what’s more
expensive than going to college? Not going to college.
This disquieting trend has prompted some analysts to say that the
nation has reached a point of diminishing returns from increased work force
educational attainment (referring to college graduation). Harvard economist Dale
Jorgenson and his co-authors state
that increasing the quality of the US work force through higher educational
attainment may no longer provide the same, prominent benefit as a source of US
economic growth that it has since the 1950s.
At this point, the US economy may have all the college-educated
workers it needs. Jorgenson instead argues that getting low-skilled
(non-college educated) workers who have exited the labor market – and thus are
not counted as being unemployed – back into the labor force, together with
increased private investment, will revive higher growth more than producing
more BAs.
And yet the politics for spurring college attendance are
inescapable. Hillary Clinton has largely usurped Bernie Sanders’ proposal to dramatically
lower the costs of attending college by providing students who attend public
universities and colleges with “free” tuition. Unlike Bernie’s original plan, hers
wisely caps the provision of free tuition to families who make less than $85,000/yr
now, rising to $125,000 in 2021. Nevertheless, such a huge, new subsidy would
disproportionately benefit more well-off families than others because as family
income rises, so too does college attendance. Only about 20% of
children from the poorest 2% of families in the country attend college. For the
richest 2% of families, who are far more likely to attend higher-cost, more
selective colleges, around 90% of children attend college.
From an individual student’s perspective, it is worth remembering
that free tuition does not mean free college. Tuition is a sizeable piece of
total college costs, but represents only a part of all college-associated expenses
that include living expenses, books, ancillary fees, and room & board in
addition to tuition. For the 8 colleges and universities that my family members
attended, tuition accounts on average for 51% of total college expenses,
according to the College
Board.
About 73% of
post-high school students going to college attend public colleges-universities.
If implemented (and that’s a very large IF, given the political composition of
Congress and the cost of such a subsidy), a free-tuition policy will
dramatically increase the demand for publicly-funded tertiary education,
despite the aforementioned relative price inelasticity of demand for college
education. Nothing beats free. Such a free tuition policy will undoubted
unleash a lecture hall’s worth of unintended consequences, in addition to
diminishing the college earnings premium.
Clinton's plan will not increase the capacity of public
colleges-universities to meet the augmented attendance. For several reasons her
plan may place public colleges-universities between the rock of satisfying
larger numbers of students and the hard place of not having a way of meeting
this increased demand. A possible consequence may be that her plan could
perversely lead to increased
tuition levels that may have to be covered by the federally-funded program. A
direct federal subsidy of college tuition would likely increase the already
all-too-weak incentives of universities to reign in tuition, unless forced to
limit their increases.
There are a plethora of calculations for how much the Hillary-Bernie
free-tuition program may cost. My round-number guesstimate of Hillary’s
income-capped plan is at least $60 billion per year. For some perspective, this
potentially-worthy tuition subsidy cost is about 3 times as much as farm
subsidies and almost 2 times as much as the oil and gas industry’s principal subsidies.
In this time of historically-low growth and missing-in-inaction,
Republican austerity-flavored Congressional economic legislation to promote economic
progress, it may be that the supply of college-educated people is rising more
than demand for them. Promising billions of federal and state dollars annually
to zero-out public universities’ tuition may be politically advantageous, as
demonstrated by young ex-Bernie acolytes. But by itself it will not help that
many people. Certainly not the majority of young (and older) workers without
BAs, whose job prospects and wages have dissolved as employers require college
degrees for more and more jobs. Moreover, nations like Germany, Finland and
Brazil that offer free college education have lower
levels of post-high school educational attainment than the US does now. Norway, another free-tuition nation, has a slightly higher level than we do.
Better ways to reduce college costs would be to increase the
number of Pell Grants and the grants’ allowable maximum amount, increase the
availability of federally-guaranteed Stafford loans and increase federal and
state direct funding of colleges in return for their agreeing to stringent limits
on allowable increases for in-state tuition. Make all public and private loans’
payments based on the student’s post-graduation income level and increase the
payment period from the standard, too short 10 years to at least 20 years that
is common in other countries. Also, simplify and consolidate the loan process,
such as Jeb Bush, of all people, has suggested.
Qualified students would receive a single line of educational credit
and take what they need each semester. For every $10,000 you borrow, you turn
over an additional percentage point of your income each year for 25 years. It’s
prorated to the exact amount of what you borrow, so that if you have a debt of
$28,000 you would be paying 2.8 percent of your income after graduation. The
payoff term runs out in less than 25 years if your total payments hit 1.75
times the amount you originally borrowed. Borrowers would pay through payroll
deduction or quarterly payments, as they now pay estimated taxes. This would
reduce the number of people who are behind or in default (11.6%),
often because they are not aware of the confusing array of income-driven
repayment programs that already exist.
The media’s fixation with the “student loan crisis” is unduly
focused on a tiny fraction of exceptional situations, not the circumstances
facing the vast majority of BA holders. The median monthly student loan payment
is $203,
or about 4% of earnings – roughly comparable to an average household’s monthly
expenditures on entertainment.
Progressive politicians need to recognize it’s no longer the 1960s
or 1970s when only 10% of young adults got BAs. Promoting piecemeal policies
like free tuition sound admirable, but have drawbacks. Less
inviting but more appropriate programs such as simplified, expanded college
loans and more direct public funding of 4-year (and especially 2-year, vocationally-focused)
colleges-universities will be much more cost-effective for increasing the
educational attainment of our young adults. Thomas Hobson needs to be dismissed
from academia’s ivory towers.
