The Economics of Education

As the May 1st deadline has come and gone, college deposits have been mailed and the majority of our senior students have happily secured their places in the incoming college class of 2013. Other students have tentatively sent in money to enroll for a spot in the freshman class but are riding the waitlist at preferred schools, hoping for the kind of positive admissions outcomes we saw in 2008. Still other students and families have sent in deposits but are looking for creative ways to finance the next four years of school.

Economic Trends in Education

Financing education has been a very popular topic this year. In my meetings and conversations with parents, I have never fielded so many questions about financial aid or requests for referrals for financial aid consulting as I have this year. As a result of diminished property and portfolio values, continued stress in the job market, and the tightest capital markets we've seen in decades, financing education has become a challenge for many families. Some of our parents, for fiscal reasons, have even been forced to pull their students from private high schools. And economics have loomed larger on the horizon of college choice than ever before.

We are hopeful when we hear Bernanke's forecasts of the end of the recession and a positive third quarter, and our emotions are buoyed by the recent upswing in the stock market, but the question remains: Will there be lasting changes to higher education as a result of the current recession?

Market forces have clearly shifted the educational landscape as we've come to know it. Over the last year we have seen endowments shrink, leading institutions as hallowed as Harvard to scramble to cover their operating costs. Announcements of hiring and salary freezes coupled with early retirement and furloughs at the most prestigious schools were not unusual this season. Simultaneously, applications to the most prestigious schools have continued to soar, driving the acceptance rates for the class of 2013 deeper into the single digits (29,112 applications for 2,046 admits at Harvard (7.0%); 21,964 applications for 2150 admits at Princeton (9.8%); 26,000 applications for 1951 admits at Yale (7.5%)).

In uncertain times and in times of economic hardship, people look to education as a safe haven. A college or graduate degree is one thing that no one else can take away, no matter what happens. Many people are going to school for the first time; others are going back to school as a means of bolstering their skill sets or exploring new career options.

Some educational consumers are looking for name recognition, others for value. For the many students with adequate scores but inadequate fiscal resources to attend the most competitive and prestigious schools, families must balance the virtues of the name-brand experience against the weight of the debt that their families and children may incur if they attend one of these "name" institutions.

Though we are seeing many families reaching for the proverbial gold ring of an Ivy League education, we are likewise seeing more and more families placing the premium on value rather than prestige. As applications to the elite schools have risen, so too have applications to the bargain state universities and the wildly affordable community colleges. According to the College Board's Annual Survey of Tuition and Fees, the average cost of tuition for students at private institutions is now $25,143, compared to $6,585 for in-state students at public universities and $2,300 for students at community colleges. Economic forces are driving higher caliber students to the lower-cost public schools, significantly boosting class averages for GPA and admission test scores, impacting the quality of student and the campus ethos, attracting higher level faculty and potentially changing the very nature of these institutions.

Just as economics have impacted the demand for education, so too have economic forces impacted the supply. Some school systems such as the state university systems of California and Arizona, facing decreasing state subsidies, have had to cap admissions for the class of 2013. Many universities, having witnessed their portfolios and endowments wither as donor generosity simultaneously diminished, were faced with the challenge of appropriately filling their incoming classes while being sensitive to the pressing financial needs of their respective institutions. For many institutions struggling with skyrocketing demand for financial aid, "need-blind" admissions policies shifted to a more "need-conscious" approach. Universities with the deepest pockets were forced to reach deep into their reserves, to the tune of tens and hundreds of millions of dollars, to meet the financial needs of the incoming class. Other universities, lacking the deep financial reserves, took a more pragmatic approach and factored in the financial status of students when determining admissions decisions. “Full-pay” applicants were able to leverage their status as financial assets to universities strapped for cash. Across the board, as more and more money went towards students with pressing financial needs, less money was available for merit-based awards, determined by academic performance rather than by need.

Universities worked hard to adjust to tighter capital conditions as students and families grappled with the same concerns. Private sector lending, dramatically impacted by the mortgage debacle, remains slim as banks continue to shore up their liquidity and cash positions. Affordable financing through the private sector has become increasingly scarce, but thankfully government lending has made up for some of the deficits in this sector.

Another surprising impact of the economic times is the increased utilization of the wait list by colleges. This summer, students can expect to see more activity from the admissions wait list than at any time in history. Record numbers of students have been placed on wait lists this year, and, more than likely, a record number of students will be admitted from the wait lists. Colleges are hedging their bets after they over-estimated yield (the percentage of students who eventually enroll to a given school after receiving an offer) in 2008, when the "summer melt" was particularly extreme. In 2008, there was more scrambling late in the summer as schools worked their lists to fill their classes. This year, many students who have accepted offers to attend schools may back out to pursue more affordable options, opening up new spots for wait-listed students. Just as we had many of our students gain entry to their reach schools in the summer of 2008, we expect more of the same for this summer.

Clearly, economics have shifted many aspects of the educational landscape in 2009, and these changes may have lasting effects for years to come.

Behind it all: the Rising Cost of A College Education

Against the backdrop of these many changes to the state of education lies the stark economic reality that a traditional college education has become extremely, even prohibitively, expensive for many people. The statistics released by the educational think-tank the National Center for Public Policy and Higher Education (NCPPHE) are sobering. Between 1982 and 2007, the cost of attending a four-year college (tuition and fees) has increased a whopping 439%, outpacing the increase in median household income (which increased 147% over the same time period) by a factor of 3. Between 2000 and 2008, the annual cost (room, board, and tuition) of attending a private 4-year institution has increased from $28,310 to $34,132 and the cost of attending a 4-year public institution has increased from $10,742 to $14,317. Rising costs are placing a significant financial burden on families.

According to the NCPPHE's report, Measuring up 2008, on average, the cost of attending a public 4-year college (tuition, room and board) now consumes 40% of the annual income for a working class family, compared to 25% for a middle class family and 16% for an upper-middle class family. The cost of attending a private 4-year college or university accounts for a far greater share of family income. And many families find themselves simultaneously financing the education of multiple children.

Families are feeling the strain. They dedicate much of their savings to finance their children's education, but fewer and fewer families can cover the full cost of four-years of college. With increasing frequency, students are assuming a larger share of the financial burden. Over the last decade, the number of students borrowing has increased from 4.1 million to 6.1 million and the amount of student debt has more than doubled from $41 billion to $85 billion. In my graduate work at GSU, I have come in contact with students in their early 30s who are carrying over $100,000 of educational debt. Saddled with 6 figures of debt, these individuals feel constrained in the paths they can take outside of school and uncertain when they will be economically free of the cost of their education.

Parents want to give their children opportunities for success after college and are also naturally concerned about burdening their families and their children with high debt loads resulting from education. Many families are looking for educational options that will offer their children career opportunities as well as relative economic freedom after college.

There is HOPE yet

Luckily for residents of Georgia, the HOPE scholarship has been steadily transforming the quality of a public education, and now it is possible to get a very respectable education without breaking the bank. When I was graduating from high school in 1994, the year after Zell Miller put the HOPE into place, the University of Georgia was the back-up, the safety school. How times have changed! In many of the conversations I now have with students and families, UGA is the reach school. Just as the Woodruff money has revolutionized Emory, so too has the HOPE transformed UGA and raised the level of every public school in the GA system.

The HOPE scholarship came as answer to the sky-rocketing cost of higher education. As tuition increased year after year, better and better students opted for the free-ride at GA public colleges and universities. Better students raised the class averages, leading admissions officers to become more selective, which impacted standings and rankings, which in turn attracted better students and faculty. Soon these institutions had completely transformed.

The bar continues to rise higher and higher every year for the GA schools. One of my colleagues, a college counselor at a local private school, affirmed that a student can only be considered "safe" at UGA with a 3.5 unweighted GPA, AP classes, and a 1300. If trends continue, I would not be surprised if the education level and the selectivity for UGA come to rival that of UVA, one of the top public schools in the nation. The Honors Program at UGA is already attracting some of our top students; the 2008 freshman class for the Honors Program boasted an average SAT score of 1456 and a high school GPA of 4.04.

As UGA approaches the academic level once held by GA Tech, GSU has risen to the level once held by UGA; Georgia Southern, and Georgia College and State University are steadily rising to new academic levels as well. Every state school is shifting up.

In my 5 years at GSU, I have been taken aback by the renaissance underway on that campus. Every year I watch new buildings coming up--new dorms, student facilities. Classrooms are being revitalized; the library is entering the 21st century with greatly improved resources. Fewer and fewer of the beige-cinder blocked prison-styled classrooms remain. GSU is beginning to feel more and more like a conventional college campus. I have also noticed my tuition steadily rising along with a slew of new fees each semester (a very common way for schools to raise revenue without increasing tuition, especially when facing decreased state funding). But I'm still paying a tiny fraction of what an Emory education would have cost me, and I feel like I'm getting more than my money's worth. And as the campus comes of age, the caliber of student is rising. GSU is no longer a safety school for many students. To be in the top quartile for undergrads, you now need an 1180 or better on the SAT.

Beyond the 4-year public universities, the 2-year community colleges have also been benefiting from the HOPE. In Georgia, as well as across the country, applications to community colleges have been rising. This is partly due to the demographic bubble (3.4 million high school grads in 2008 and 3.2 million in 2009), but also due to the enhanced quality and perceived value of these institutions. Community colleges have excellent student-to-faculty ratios, and one third of community colleges in the country now boast some kind of honors program. Because of the economic and demographic changes underway, the median age of students attending community colleges has dropped from 27 in 1990 to 23 in 2008.

In addition to attracting younger students, community colleges have been attracting more ambitious and harder working students, who are drawn to the bargain prices and the likelihood of transfering to 4-year universities, where they will ultimately receive their diplomas. Schools such as UGA and UVA have established feeder relationships with public community colleges. Graduates from the 2-year community colleges can make their way to the 4-year universities and save a bundle in the process. This is a very similar relationship to the one that Emory has with Oxford College. Many of our finest tutors took the Oxford-Emory route, saved tens of thousands of dollars on tuition, and ended up with the same Emory degree as those who paid full retail for 4 years. Not to mention these students loved the smaller class-sizes and more intimate academic environment at Oxford.

Though community colleges are amazingly affordable, some parents are ambivalent about having their children remain at home while they attend college, potentially depriving their children of the "college experience" and the chance to grow in an environment independent of the family. But in many societies, staying at home for college is extremely commonplace. In Europe, it is very common for students to complete their studies in their home towns, and all of my cousins in Montreal knew that they were going to stay home for CGEP and University. It's simply a different system. And everyone seems to turn out just fine; it's simply a matter of expectations. As we, as a society, shift to more on-line learning options, it may become more and more conventional for students to stay at home while pursuing educational opportunities. Students may opt to stay at home and work while studying for a degree. Brick and mortar institutions will be competing more and more with on-line offerings, and the brick and mortar institutions will soon be offering more on-line options of their own. I can only imagine the changes that will take place in the world of education when Harvard offers its first fully on-line degree.

Value versus brand

With the wide array of educational options, many parents grapple with the question of value. The notion of value clearly extends beyond the domain of economics, but it is unusual to assess the value of an education without taking into account economic considerations. Education is clearly an investment. An investment into a child: a child's growth, maturation, chances for success outside of school. For measurement's sake, it is easy to reduce things to a purely financial equation, but I'd be remiss as an educator to advocate pursuing this route when exploring appropriate educational options for a child. Children are not commodities. And their needs are very particular. But as a student of economics, I cannot help but take some interest in the question: Are the name schools worth the price-tag?

Attending one of the top 50 schools in the country will set a family back roughly $50k per year for room, board and tuition. Factor in travel, membership fees, and other incidental expenses, and you are looking at $60k each year. So a prestigious undergrad degree will cost roughly a quarter of a million dollars. I have witnessed parents negotiating with their children whether to attend UGA on the HOPE or pony up hundreds of thousands of dollars to attend a name school. Parents have offered their children simple alternatives: If you attend UGA, we'll throw in the SUV you've been asking for (and likely have something left over to help with grad school). If you attend the name brand school, that will empty the educational savings account, and that's all we can do. All things considered, the SUV and UGA is a bargain for the parents.

But is this short term thinking? Is there a real benefit to attending the name schools? Would I choose to drop $250k to attend Penn? I'm not sure. I loved my four years there, but I don't know if it is worth the full price tag, or if I would have paid for it out of my own pocket. When it came time for me to go to grad school, I looked at the top programs in the country and those that were local, I looked at my bank account, and I headed straight to GSU. The price of the eight years for my Masters degree and PhD combined will probably be the same price as one year of my undergraduate education. And I don't feel like I'm getting short changed on my graduate education. I've been exposed to some brilliant minds at GSU, and I have learned a lot.

When I ask myself, where did I learn the most throughout my 21 years of education (and counting), the answer is clear: high school. I can say without reservation that my education at Pace was more important to my development than my education at Penn or at GSU. Over the course of 4 years of high school, I had teachers take me under their wings, push me, challenge me, and invest deeply in my education. The degree of their impact on me was heightened by the continuity of having the same teachers for multiple years and seeing these teachers 180 days a year in small classroom settings. When resources are constrained, many parents weigh the costs of private school tuition against the costs of college. Where should one invest one's resources? Do the formative years in high school set the stage for academic performance in college and beyond? Many parents I have worked with have opted to send their children to "name" private high schools, but then go on to send their children to public universities. For many, this works out very well. So much depends on resources and the individual needs of students.

When I look at my family, my sister opted for a bargain undergraduate degree, attending the University of Texas Honors Program, with a scholarship for in-state tuition; her full degree cost less than one year of my undergraduate education at Penn. And with her solid GPA and boards, she was accepted into Harvard Law, Duke Law, and other top schools. She opted for Duke Law, completed her JD and has been a successful lawyer ever since. Did she need a brand-name undergraduate degree to be successful? Obviously not. Millions of the most successful Americans did not attend prestigious undergraduate institutions.

But that's not to say there's no value in attending a name school. A report by the Wall Street Journal explored the differences in income levels for students graduating from different colleges at various points in their careers. The study is provocative, and shows that on average, students from the name schools will see higher salaries. Perhaps the cool quarter of a million is justified over a life-time of earnings. Or perhaps the students attending the name schools come from higher income families, with more connections and opportunities, leading to higher incomes.

And is it better to go for the "name" undergrad, or go for a value undergrad and a "name" graduate degree as my sister did? Parents and students continue to debate these questions. Of course, money is just one tiny piece of the puzzle. Some of my colleagues and professors in the Department of Education at GSU would cringe to read my economically reductionistic analysis of education, oversimplifying a complicated issue. And philosophically speaking, when it comes to placing a student in an appropriate academic environment, "fit" is a much more important factor than finance; I've been espousing this position with parents for years. But parents must consider both the money and the fit when managing family finances and trying to give their children the most advantageous educational opportunities.

Continued price inflation in the educational sector?

Can we expect the price of an education to come down any time soon? Before the recession was felt so deeply across the educational sector, there was talk in Congress about forcing the deeply endowed universities to divest of some of their endowment to reduce tuition costs. But that conversation has been quiet of late.

Colleges have seen no reason to drop their prices as the crush of applications continues to rise. The law of supply and demand operates here just as in any other industry. When demand vastly exceeds supply, an organization can raise its prices. It can continue to raise its prices until eventually a point is reached on the supply-demand curve, when families begin to vote with their feet and seek out lower-priced options. But we are not there yet. When schools are turning away tens of thousands of qualified applicants, there is still room to price higher. And the most selective colleges have been doing a fabulous job stimulating demand for their services and maintaining their selectivity ratings. The number of applications should not be dropping off any time soon, nor should prices for education be coming down.

Americans love name brands, and we love education. There is a belief in our society that education matters most of all. When immigrants find their way to our country, they often look to education as the great equalizer, the path towards success in this country. As our nation transitions further into the information age, the pressure to be well-educated and well-trained should only continue. We would be wise to be well-educated consumers of education, and seek out educational options that serve our values and keep us on financially solid footing.