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Presentation on theme: "THE BUSINESS OF HIGHER EDUCATION: THE SEQUEL Randy Boushek February 2015 LECNA Meeting."— Presentation transcript:


2 Whatever nobility one may ascribe to the mission of higher education, it cannot be considered in ignorance of the economics of higher education. In our last episode …

3 Strong and steady increase in demand Considerable pricing power Unquestioned value proposition Escalating household wealth and steadily declining interest rates Significant barriers to entry Government as cheerleader 2 x CPI increases in tuition and steady growth in net revenue Significant cost growth in administrative and student services Significant reduction in faculty teaching loads Program expansion without offsetting contraction Substantial increase in debt (student and institution) The Old Reality: In our last episode …

4 Flattening demand that is increasingly less “college-ready” Declining pricing power and substantial discounting Questioning of the value proposition (at what price?) Diminished wealth and borrowing capacity/appetite (institution/donor/parent) Rapidly expanding alternatives Increasing public criticism Increasingly difficult to generate net growth in tuition revenue  Need for new revenue sources Increasing pressure on costs, necessitating:  Productivity improvement  Expense reduction  Difficult decisions on programs and services Student loans becoming a “crisis” issue A New Reality: In our last episode …

5 Carneades (214 – 129 BCE)

6 Today: Challenging the Apologists The Value Proposition Argument The Net Tuition Argument The Archibald & Feldman Argument The Government Funding Argument

7 The Argument: The disparity in outcomes (expressed variously as unemployment rate, lifetime earnings, etc.) between those with a college degree and those without a college degree has never been greater.  The Value Proposition Argument This is a true statement as far as it goes … but it omits a critical part of the story

8 The Value Proposition Argument Deteriorating slower The value proposition compares the top line to the cost, which is still steadily rising now diverging for a very different reason! Outcome 1982 grads 2012 grads This is the outcome proposition Improving faster Those who have a college degree Those who don’t

9 Wage Deflation and Underemployment According to the Federal Reserve Bank of San Francisco, the median starting salary for recent college graduates rose only 6% from 2006 to 2013, less than half the meager rate of the overall U.S. workforce. In real terms (adjusted for inflation) this represents a decline of 10%. Underemployment has been one of the hallmarks of the slow recovery. Varies studies and surveys now show that nearly half of employed college graduates are in jobs that either do not or have not historically required a college degree. According to the U.S. Census Bureau, adjusted for inflation a typical 18-34 year-old today earns $2000 less per year than in 1980 … despite the fact that 40% more of the adults in this age group now have at least a bachelors degree compared to 1980. Across industries and geographic areas, many jobs that didn’t used to require a diploma – positions like dental hygienists, cargo agents, clerks, and claims adjusters – now increasingly do, not because they need to but because they can.

10 Individuals vs. Averages Outcome Half of all graduates fall below this line According to the Federal Reserve Bank of New York, the bottom quartile of wage earners with a college degree make little more than those with only a high school diploma. According to the Center for College Affordability and Productivity: Out of 100 students who enter college, 40 don’t graduate, and of the 60 who do, only 45 make more money than if they hadn’t gone to college.

11 The Argument: The average amount of debt incurred by the 70% of 2014 college graduates who had student loans was $33,000, about the same as the average price of a new car. Isn’t a student loan a much better investment? The New Car Comparison The analogy is clever – but also disingenuous.

12 The New Car Comparison A student loan represents only a portion of the total investment. If a car becomes unaffordable, it can be re-sold to recapture some of the investment and/or pay off the loan used to acquire it. Car loans are also dischargeable. Student loans cannot be monetized and are not dischargeable. Most people, especially those who need to take out student loans, don’t buy $33,000 cars (average vs. median; excludes used cars). A car has certain and immediate utility for all buyers. For many people, student loans have become an increasingly big bet with a decreasingly probable long-term payoff

13 The Argument: Since most college students receive some form of financial aid, college cost inflation should be measured by average net tuition, not by “list price” (i.e., undiscounted tuition).  The Net Tuition Argument Using average net tuition significantly understates inflation for two large groups of students – those already on campus, and those who pay more than the average (who are key to the financial model).

14 The change in average net tuition for incoming freshmen has been very different than the change experienced by returning students Assume that the list price for a new freshman class is $20,000 and that the average net tuition for that class is $10,000 (50% discount) Assume that Shannon pays the average net tuition of $10,000 Assume that the next year the list price increases by 5% ($1000) Unless Shannon’s financial aid is increased, her net cost just increased by 10% (from $10,000 to $11,000) This is what shapes most families’ perceptions of tuition inflation The Net Tuition Argument

15 Most colleges have a dispersion of students that range from full- ride to full-pay. Those who pay well north of the average net tuition are crucial to the financial model of higher education. These students have experienced disproportionately higher inflation in net tuition than those who pay at or below the average net tuition. The change in average net tuition has also been very different than the change in net tuition for the academically average student (other than gifted athletes and musicians) over the past 30 years, due to the significant growth of merit-based financial aid. The Net Tuition Argument

16 Dispersion of students by net tuition decile for LECNA colleges The Net Tuition Argument Net Tuition Rate Distribution 50% more

17 Dispersion of students by net tuition decile for LECNA colleges The Net Tuition Argument These students are key to your financial model. How well do you know them? More or less likely to be related to alumni? More or less likely to live closer? Higher or lower test scores? Carry more or less student loan debt? Higher or lower first year retention? Higher or lower 4-year graduation rate? Concentrated in which majors? More or less likely to live on campus? Resemble overall campus gender mix?

18 Sidebar: Other Peer Data

19  The Archibald & Feldman Argument

20 Argument 1: Cost disease (lack of productivity growth) is inevitable and therefore must be better funded Argument 2: College has not become less affordable The first is an opinion that cannot be carried to its logical conclusion, and the second is an obfuscation that can be readily disproved. The Archibald & Feldman Argument

21 The Affordability Argument The authors’ example (Chapter 12): The authors claim that the $500 increase in the amount available for All Other Stuff is proof that college has become more affordable, and therefore it is nonsense (their word) to claim otherwise. This can only be true if (a) household income actually went up, and (b) the cost of All Other Stuff did not.

22 The Affordability Argument What about All Other Stuff? Increase in payroll taxes: $190 (2x if self-employed) Increase in federal/state income taxes (assume 10% marg rate): $250 Inflation on 75% of All Other Stuff (assume CPI of 2%): $630 Increase in prop tax for local school district: $100 Increase in deductible/copay on corp health insurance plan: $200 Total nondiscretionary increase in cost of All Other Stuff: $1370 Total available for college costs = $52,500 – $42,000 – $1370 = $9130 Total college costs: $10,000  less affordable!

23 The Squeezing of the Middle Class Hidden inflation: off-index growth in expenses Transfer of retirement funding cost from employers to workers Transfer of medical insurance costs from employers to workers Increase in payroll taxes (rate and base) Increases in sales and property taxes Imposition of fees for previously free services Multiplication of costs for divided households

24 The Cost Disease Argument Cost Disease: the inability to improve productivity and thereby constrain increases in cost Carried to its logical conclusion, if the increase in cost in all other expenses is being moderated to some extent by productivity improvement, then eventually the cost which cannot be constrained will consume all available funds. A system will by definition fail before it reaches this point We are approaching the failure point on the traditional model of higher education

25 The Cost Disease Argument Three comparable professions cited by the authors: Doctors Dentists Lawyers What other characteristic do these professions share with higher education that enabled cost disease to linger? True costs are obscured/absorbed by third-party payers Shared characteristics:  Highly educated  Personal delivery  Limited personal capacity

26 The Cost Disease Argument What has happened in these professions? All three: market is becoming increasingly two-tiered (an elite market and a mass market) Doctors:increasing government control of costs (Medicare/Medicaid) and access (ACA) Dentists:consolidation of smaller practices into larger clinics Lawyers:reduction in supply (layoffs and reduced hiring), shrinking capacity and/or compelling higher productivity

27 The Cost Disease Argument How might these play out in higher education? A two-tiered market? Greater government control of costs/access? Consolidation? Reduction in supply?

28 The Argument: A significant reduction in real (inflation-adjusted) government spending on higher education has necessitated greater reliance on tuition increases and needs to be reversed  The Government Funding Argument There is passionate disagreement on whether government funding is the answer or the problem … but the real issue is the future capacity of the government to fund education … and how that funding will be apportioned

29 A Point of View on Government Funding

30 The Future of Government Funding Projected Federal Outlays by Category as a % of Total Outlays Entitlements Interest Defense All Other (including Education)

31 How Will It Be Apportioned ? To Which Institutions?  Vocational/Technical Schools, Community Colleges, Public Universities, Private Colleges? In What Form?  Universally Available, Need-Based Assistance, Loans? With What Kind of Strings?  Tuition Rates, Faculty/Administrative Costs, Graduation Rates, Placement Rates, Starting Salaries?

32 The Growing Generational Divide Over the next decade, substantial growth in retirement and health care entitlement payments to Baby Boomers will increasingly be borne by Millenials, who today are much more financially strained than Boomers were at the same age by underemployment, student loan debt, stagnant wage growth, and far greater personal responsibility for financing their own retirement and health care. At the same time, as many Baby Boomers choose to delay retirement either by choice or necessity, the jobs they aren’t/won’t be leaving are many of the jobs that Millenials aren’t/won’t be getting.

33 The Growing Generational Divide All data in the these slides comes from Pew Research The gap in household wealth between older households and younger households has increased dramatically: In 2011, the average wealth of the typical older household was 26 times that of the typical younger household, compared to only 10 times in the mid-1980’s.

34 The Growing Generational Divide All data in the these slides comes from Pew Research Housing accounts for 75% of wealth for the median household. Adjusted for inflation, home equity has changed dramatically by generation: In 2011, the median home equity for households headed by someone age 65 or older was 36% higher than in 1984, while the median home equity for households headed by someone age 45 or younger was 46% lower.

35 The Growing Generational Divide All data in the these slides comes from Pew Research Household income has also grown much more slowly for younger households than for older households: In 2012 (adjusted for inflation), the median annual income for households headed by someone 65 or older was 108% higher than in 1967, while the median annual income for households headed by someone 35 or younger was only 28% higher.

36 The Growing Generational Divide All data in the these slides comes from Pew Research The burden of student loans has also become much heavier for younger households: In 2010, 40% of all households headed by someone 35 or younger were carrying student loan debt, compared to 17% in 1989. Adjusted for inflation, the average balance of that debt tripled over that same period.

37 A generational shootout at the O.K. Corral? Two reasons not to think so: Increased generational interdependence Millenials are not Boomers The Growing Generational Divide

38 Generational Interdependence All data in the these slides comes from Pew Research In 2012, 40% of men and 32% of women between the ages of 18 and 31 were living in their parents’ home (highest share in modern history) 54 million Americans now live in multi-generational homes An estimated 24% of children under age 5 are cared for by a grandparent, and 1 in 10 children under age 5 live with a grandparent It is more likely today for a 20-year-old to have a living grandmother than it was in 1900 for a 20-year-old to have living mother

39 Millenials are not Boomers All data in the these slides comes from Pew Research Surveys show that Millenials actually respect their elders and trust people over 30! Young people are every bit as supportive as older people in their attitudes toward the social safety net for seniors  Surveys show that a considerably higher percentage of Millenials are concerned that financial shortfalls in Social Security and Medicare may lead to reduced benefits, versus concerned that maintaining current benefits may place too much burden on younger generations

40 Potential implications for higher education: TODAY: Must understand how this impacts the framing of the national debate on college costs TOMORROW: What happens when children of today’s younger households begin to reach college age? Will grandparents play a more significant role in future college decisions and funding? The Growing Generational Divide


42 The Speed of Change Geometric Change: What happens when something doubles (or halves) every year? After 10 years it has increased (decreased) a thousand-fold. The magnitude of the change becomes dramatically greater over time. We are just beginning to approach this kind of change on a number of fronts

43 The Speed of Change Where have we already seen dramatic impacts? Cell phones Computing power Data storage On-line knowledge Where are we approaching the inflection point? Genome sequencing Digital pixelization 3D printing

44 The Speed of Change What does this mean for the future? Knowledge (the world as we know it) will become obsolete more quickly The ability to release old knowledge and replace it with new understanding will become a crucial skill. We will need to better train our minds to recognize what we don’t see because we aren’t looking for it. “The illiterate of the 21 st century will not be those who cannot read, but those who cannot learn, unlearn, and re-learn.” - Alvin Toffler

45 The Speed of Change Potential implications for higher education: TODAY: Are we equipping today’s students with the adaptive skill that will be necessary to keep pace with future change? TOMORROW: What kind of future education/re-education will this pace of change require? What kind of geometric change could overtake the business of higher education?

46 Questions?

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