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The Prohibitive Cost of Higher Education: A Racket?

Posted by Larry Doyle on April 10, 2012 7:04 AM |

I have often thought, “If education is expensive, try ignorance.”

I strongly believe that the key to future prosperity is a quality education. That said, there is increasing evidence that the costs connected to higher education have ratcheted higher at an unsustainable pace. I initially addressed this critically important topic a year ago in a commentary entitledAre Student Loans an Impending Bubble? Is Higher Education a Scam?. I wrote then:

I am a huge proponent of the need for quality education in our nation. That said, as this expose reveals there are MANY serious problems, conflicts of interest, and assorted other issues in higher education today. A racket, you might ask? Yes, in a manner of speaking, there are certainly elements of a racket within higher education today.

I welcome readdressing this topic today. 

Just this past weekend I was discussing the prohibitive cost of higher education with one of my brothers. We commented on how these costs have dramatically outpaced inflation and income levels over the last few decades. Serendipitously, this morning I come across a very disturbing report which I will be sending my brother and many friends who work in the field of higher education. Thanks to the folks at Demos and specifically the author John Quinterno, a graduate of Notre Dame and the University of North Carolina, for a tremendous analysis on the current state of higher education in America. What do we learn? A lot, including:

This report examines how state disinvestment in public higher education over the past two decades has shifted costs to students and their families. Such disinvestment has occurred alongside rapidly rising enrollments and demographic shifts that are yielding more economically, racially, and ethnically diverse student bodies. As a result students and their families now pay—or borrow—a lot more for a college degree or are getting priced out of an education that has become a requirement for getting a decent job and entering the middle class.

This study traces trends in the size and composition of the young adult population and analyzes patterns in state support for public higher education over the past two decades. Trends in tuition and financial aid are also examined and policy recommendations are presented for ways to renew America’s commitment to nurturing a strong and inclusive middle class through investments in public higher education.

Key highlights of the report include:

College Population Trends
Compared to the generation that came of age in the 1990s, the current population of young adults is much larger in size, much more racially and ethnically diverse, and more apt to enroll in college than the generation that came of age in the 1990s.

In fall 2009, some 17.6 million individual students enrolled in undergraduate programs, up from 11.9 million in 1990, a 46.5 percent increase. Of those 17.6 million students, 13.4 million, or 76.2 percent, studied at public institutions. Enrollments grew by 32.5 percent between 2000 and 2009, with 44.5 percent of that increase occurring between 2007 and 2009, the same time when the Great Recession was raging. Public enrollments, meanwhile, grew by 2.8 million students, with 1.3 million of those additional students enrolling between 2007 and 2009.

How has the increased demand for higher education played out? Are you sitting down?

State Investment in Higher Education
A review of financial data from 1990 onwards suggests that a structural change in state support for higher education is underway.

While state spending on higher education increased by $10.5 billion in absolute terms from 1990 to 2010, in relative terms, state funding for higher education declined. Real funding per public full-time equivalent student dropped by 26.1 percent from 1990-1991 to 2009-2010.

Over the past 20 years there has been a breakdown in the historical funding pattern of recessionary cuts and expansionary rebounds. The length of time for higher education funding to recover following recessions has lengthened for every downturn since 1979 with early evidence suggesting that the recovery from the Great Recession will be no different.

Patterns in Tuition and Financial Aid
As state support has declined, institutions have balanced the funding equation by charging students more. Between 1990-1991 and 2009-2010, published prices for tuition and fees at public four-year universities more than doubled, rising by 116 percent, after adjusting for inflation, while the real price of two-year colleges climbed by 71 percent.

Costs have doubled.
In many states, the tuition increases of the past 20 years have occurred alongside expansions in state-sponsored financial aid programs. However, an increasing percentage of that aid is taking the form of merit-based aid which is awarded without regard for students’ financial situations.

What does this mean? State aid has been utilized increasingly to “buy” the students which the institutions most want.

Challenges for Students, Families, and States
The steady escalation in college prices has occurred alongside stagnant incomes for most American households.  Median household income in the United States in 2010 was just 2.1 percent higher than in 1990.

Remember, costs doubled; here we learn that income levels are stagnant. How does that work? Well, who is providing a lot of the the funds in terms of loans? Uncle Sam.

To bridge the gap between cost and financial aid, increasingly students are borrowing from federal loan programs and private sources like banks. The volume of outstanding student loan debt has grown by a factor of 4.5 since 1999.

The ‘old man’ provides the bulk of the money currently as banks have been challenged in tapping Wall Street’s securitization markets for funding. Do you have any doubt, though, that the Uncle Sam and Wall Street’s ‘originate to distribute’ student lending model have driven the cost of higher education literally off the charts? You think?

In excess of a quadrupling of student loan debt smells a lot like sub-prime residential lending to me. This dynamic is not only the definition of a bubble, but also a burden which will serve as an enormous economic drag for many of these students and our nation as a whole.

A total racket? No, perhaps not a total racket . . . but a doubling of costs against incomes being flat gives a strong hint that there are most definitely elements of a racket within the realm of higher education in America today.

Quinterno’s report provides a voluminous amount of details, analysis, and recommendations. Anybody who has even a passing interest in this topic will find it a must read. I welcome providing a link to The Great Cost Shift: How Higher Education Cuts Undermine the Future Middle Class.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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