That Old College Lie

Monday, December 21st, 2009

Claiborne Pell — of Pell Grant fame — died at age 90 earlier this year:

What the encomiums to Pell failed to mention is that his grants have been, in all the ways that matter most, a failure. As any parent can tell you, colleges are increasingly unaffordable. Students are borrowing at record levels and loan default rates are rising. More and more low-income students are getting priced out of higher education altogether. The numbers are stark: When Pell grants were named for the senator in 1980, a typical public four-year university cost $2,551 annually. Pell Grants provided $1,750, almost 70 percent of the total. Even private colleges cost only about $5,600 back then. Low-income students could matriculate with little fear of financial hardship, as Pell intended. Over the next three decades, Congress poured vast sums into the program, increasing annual funding from $2 billion to nearly $20 billion. Yet today, Pell Grants cover only 33 percent of the cost of attending a public university. Why? Because prices have increased nearly 500 percent since 1980. Average private college costs, meanwhile, rose to over $34,000 per year.

It’s all part of that old college lie, Kevin Carey says:

The average graduation rate at four-year colleges in the bottom half of the Barron’s taxonomy of admissions selectivity is only 45 percent. And that’s just the average–at scores of colleges, graduation rates are below 30 percent, and wide disparities persist for students of color. Along with community colleges, where only one in three students earns a degree, these low-performing institutions educate the large majority of Pell Grant recipients. Less than 40 percent of low-income students who start college get a degree of any kind within six years.

Are colleges just enforcing high academic standards? Hardly:

A 2006 study from the American Institutes for Research found that only 31 percent of adults with bachelor’s degrees are proficient in “prose literacy” — being able to compare and contrast two newspaper editorials, for example. More than a quarter have math skills so feeble that they can’t calculate the cost of ordering supplies from a catalogue.

America’s higher education has a reputation for being the best in the world, but this is driven by the high quality of a few prestigious institutions and their students. No one really knows how good most colleges are — how well they teach and how much their students learn:

The information deficit turns college into what economists call a “reputational good.” If you go to the store and buy a shirt, you can learn pretty much everything you need to know before you buy it: the material, where it was made, how to clean it, and so on. College is different. You’re paying up-front for professors you’ve never met and degree programs you probably haven’t even chosen yet. Instead, you rely on what other people think of the college. Of course, some students simply have to go the college that’s nearest to them or least expensive. But if you have the luxury of choosing, in all likelihood, you choose based on reputation.

If college reputations were based on objective, publicly available measures of student learning, that would be okay. But they’re not, because no such measurements exist. Instead, reputations are largely based on wealth, admissions selectivity, price, and a generalized sense of fame that is highly influenced by who’s been around the longest and who produces the most research. Not coincidentally, these are the factors that drive the influential U.S. News & World Report rankings that always rate old, wealthy, renowned institutions like Harvard and Princeton as America’s best colleges.

The influence of reputation is exacerbated by the fact that most colleges are non-profit. For-profit institutions succeed by maximizing the difference between revenues and expenditures. While they have strong incentives to get more money, they also have strong incentives to spend less money, by operating in the most efficient manner possible. Non-profit colleges aren’t profit-maximizing; they are reputation-maximizing. And reputations are expensive to buy.

The economist Howard Bowen wrote the classic treatise on how reputation-seeking influences university behavior. He called it the “revenue-to-cost” phenomenon. Essentially, colleges don’t figure out how much money they need to spend and then go get it. Instead, they get as much money as they can and then spend it. Since reputations are relational — the goal is to be better than the other guy — there is no practical limit on how much colleges can spend in pursuit of self-glorification. As former Harvard President Derek Bok wrote, “Universities share one characteristic with compulsive gamblers and exiled royalty: There is never enough money to satisfy their desires.” Inevitably, much of that money comes from students.

The information deficit rewards and sustains these inclinations. In the absence of independent information about quality, consumers assume that price and quality are the same thing. At the trend-setting high end of the market, higher education has become a luxury good, the educational equivalent of a Prada shoe. These are unusually nice shoes, of course, just as Harvard is an unusually good university. But in both cases consumers aren’t paying for quality alone — they’re also paying extra for scarcity and a prominent brand name, the primary value of which is to signal to the rest of the world that they’re rich and connected enough to pay the price.

While most colleges aren’t in Harvard’s league and never will be, they pay attention to industry leaders. Luxury schools set standards for faculty salaries, student amenities, and other expensive things that ripple through the higher education sector as a whole. The status-seeking mindset is infectious. Colleges all want to become more important, and they all know how to get there — spend and charge more.

Indeed, they have little choice. Ten percent of the U.S. News rankings are based on spending per student, with additional points for high faculty salaries and other costly items. If an innovative college found a way to become more efficient and charge less while maintaining academic quality, its U.S. News ranking would actually go down.

Carey argues that publishing more data on college outcomes would result in a better market, but Arnold Kling notes that this presumes that the problem is on the supply side — that colleges want to hold back information:

The Masonomics view is that the problem is more on the demand side — the role that signaling plays in creating perceptions of value.

A point that I keep making about higher education is that it is, like the Harvard-Goldman filter, a form of recursive credentialism. To get certain jobs, you need certain credentials. And the most important credential of all is that you must signal your support for credentialism.

A commenter by the name of agnostic adds that supply and demand are both at work in the higher ed bubble:

The big problem on the supply side is that, just as with the recent finance bubble, managers of assets (the college officials who admit and oversee students) are paid according to volume of assets managed — more students means more tuition and more donations (and maybe more grants if those new students are from “disadvantaged” groups).

They are not paid according to ROI or anything like that. So it wouldn’t matter if we did what Carey says and publish more data like probability of flunking out, probability of graduating in 4 years, loss given flunking out, etc.

These incentives push sub-elite colleges to take in as many students as possible, just as banks took in whatever garbage they could get their hands on.

And as Charles Calomiris pointed out in the context of finance, the true demanders of grade inflation, re-centering of the SAT, etc., is the buy side. If it were the sell side — students, their teachers, parents, etc. — every buyer (college) would know it was a joke and adjust the grades and scores they received accordingly.

Rather, the buy side wants students with inflated grades and test scores because sub-elite colleges need to pass similar regulatory hurdles to admit students — maybe not as formalized as financial reg rules, but still, you can’t admit a bunch of students whose average GPA and SAT is 1.0 and 900. Inflate them to 2.0 and 1000, and would-be regulators or castigators of college admissions boards now have less of a basis to complain.

Hell, the colleges even cherry-pick the best score you got on each sub-test of the SAT. If you take it more than once, only your best math score shows up and only your best verbal, even if on different tests. That’s a smoking gun that the buy side is driving grade inflation, not the demand side.

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