While the price of college has been rising almost as fast as health insurance, graduation rates have stagnated. The Obama administration has responded with a new higher education plan, based on developing a new ratings system for colleges, to be ready before the 2015 school year. The hope is to unleash market forces on the cosseted ivory tower: students (and families) will shop around for better quality and lower cost, driving the colleges to greater efficiency and quality.
Good luck getting agreement on a ratings system. Different students want different things from higher education. And government should only be supporting some of those things.
Some information will likely help some students. Figuring out the actual net cost, present and future, of a particular college is not easy, particularly since colleges often obscure it. And knowing a college’s graduation rate may help too: A recent study found that students enticed, by a small scholarship, to attend a lower graduation rate college were 34 percentage points less likely to graduate. Of course, it’s hard to post information without colleges responding perversely, by say, lowering graduation requirements.
What about the over-arching new ratings system to be developed with input from “students and parents, state leaders, college presidents, and others”? These groups are unlikely to agree—with each other or amongst themselves—about what a ratings system should measure.
A recent parody illustrates the problems. A father describes his realization that his son should not go to inefficient, low value-added Columbia but rather high value Cal State Fullerton. The son is devastated but told, “The Data-Driven have to be strong.” (Full disclosure: Baruch College of the City University of New York, where I teach, is ranked third nationally in the Bang for Your Buck college rankings.)
Why do the son (and the real Dad) prefer Columbia? First, education is partly consumption, not just financial investment. Which college will be more fun? Where will you get to interact with famous researchers and enjoy intellectual discussions? Second, education is partly about networking: Who will you meet? Will your fellow students provide good connections for jobs well after graduation?
But even if you focus on just the financial return—earning more money—from attending a particular college, some part of that is not from what you learn. It’s from signaling to employers that you are the kind of person who can get into—and stay the course at—Columbia. If you can get into Columbia, then it doesn’t need to add value to you in order for you to be attractive to employers. (Full disclosure: I used to teach at Columbia.) In fact, some studies suggest that someone who got in to Columbia could earn as much by going to Fullerton State. But whatever the truth, most people think you’d earn more at Columbia.
What ironic Dad and his son want is a prestigious school, just because it’s prestigious. For signaling, it does not matter why it’s more prestigious: faculty research, winning sports teams. School colors would work if colleges had to struggle to get a prestigious school color.
But should the government help provide information—and eventually more subsidies to places with more prestige, better networking and greater consumption value? Why should government (meaning, all of us) spend so much money ($220 per year) on higher ed?
The main reason is that we can all be more productive as a country: constantly adapting precise, complex manufacturing; writing clear, compelling prose; understanding foreign cultures we are trying to sell to; writing innovative computer code. And some part of higher education does do that. As a country, we want to encourage—and subsidize—adding to our stock of human capital, as we economists call it. While I would probably pick Columbia for my imaginary child, if I had the money, my personal observations suggest that it is Baruch’s teaching that adds much to our human capital stock—and at impressively low cost.
Government funds higher education for a second reason: reducing our sky-rocketed and sky-rocketing inequality. We want to help those from less well-off backgrounds. Helping less-well-off prospective students identify affordable signaling and networking opportunities serves that purpose. But only for the few who displace other better-off students. Prestige is a zero-sum game, not a way to help the vast majority of the left behind.
The Obama administration is not going to be able to develop a ratings system that satisfies these many stakeholders, who want different things from higher education. It should focus on a ratings system that serves our country’s interests as a whole, increasing our total stock of human capital.
DahliaRemler 
The rising cost of higher education is a curious phenomenon.
Have faculty pay scales been rising more rapidly than average pay due to shortage of the required skilled talent? Hardly, if anything there is a surplus of PhDs and colleges and universities are relying more and more on adjuncts who get paid little. In addition, tenure is all but a thing of the past. Where academics in the past accepted modest pay in exchange for job security so that they could pursue their intellectual interests, they face the insecurity of multiple positions with limited income.
Nor are capital budgets burdening most colleges or universities. The great building boom when campuses were expanding and new institutions were being built to meet the rising demand of baby boomers ended long ago in the 1960s. When the echo boom generation came along in the national strategy was for students to compete individually for acceptance at supply constrained institutions.
The final curious piece in the rising cost equation is the Student loan program, which enabled students to indenture their future income in order to pay for their education. In the past colleges and universities could only tap into the student’s parents current income and savings and the generosity of successful alumni. With the student loan program colleges and universities were now able to extract the full value of the education from the student.
So we have rising demand, constrained capacity, improved pricing power and cheap labor. If Universities were for profit organizations the owners would be getting rich. Since they are non-profit institutions the college and university non-academic overhead has simply become bloated.
Robert, Thanks for your comment. You make a lot of good points, but I disagree with one part: the shift towards non-tenure-track labor has been very large in a flow sense, but the stock of tenured and tenure-track labor is still large and dominant. According to the Delta Cost Project, a significant part of rising higher education costs is health insurance premiums (for full-time faculty and administrators)! You also hear a lot about the growth in administrators, with a lot of fighitng about the value of their services. But I think some of those administrators are very valuable (e.g., career placement, safety, counselling, IT support), while others are essential in our litigous and regulated society.
Having said all that, the idea you put forward that higher ed is collecting monopoly rents that they choose to spend on high status (for faculty) research probably has a lot of truth. And your point that all that financial aid made students (and families) indifferent to the price and maybe that is changing now. If so, a ratings system would be appreciated. But what should be rated?
Thanks again for commenting and I would love to hear others’ thoughts.
The questions that needs to be asked about the growth in spending on administration is not whether or not it is valuable but 1) whether or not it is cost effective and 2) whether or not it is aligned with the objectives of the institution. To answer these questions one needs to look at what the constraints are on the marginal dollar being spent.
If the constraints are market driven economists have tools for investigating and answering such questions. If, however, the constraints are political in nature the analysis of the constraints on the marginal dollar becomes muddier. If the political constraints are external as with state run institutions you get one set of answers, which are externally driven. If it is an independent non-profit institution the politics are largely internal (depending on the size of the endowment).
The question that has to be asked within such politically constrained budgeting processes is the extent to which the process results in the production of the valuable educational experience for which the students and their families are going into debt, and to what extent it produces other things, like a bloated bureaucracy that produce marginally valuable tangential services at high cost or funds the political process required to perpetuate the bureaucracy’s own existence.
Unfortunately, to an outsider, the forces with political clout seeking to enhance the educational objectives of these institutions seem few and far between. And from the point of view of a parent touring campuses the marketing objectives of the administrators seem more closely aliened to those of Club Med than with those of an educational institution. This may be a misperception, but if so it is one that the institutions are doing little to correct.
Robert, You’re completely right about comparing the value of the administrators to their costs, of course. It must say something about some of the faculty debates that I have been in that just pointing about the benefits seemed sufficient to me… I am not as clear that we economists have tools to investigate everything that is market driven. There are a lot of market failures that are not clear. Is a status tournament that is completely driven by individual (student!) preferences, with unclear forces driving changes in what is high status, something that we can investigate and say with confidence whether it is best for society? Speaking from inside the industry, a lot looks confusing to me. As for the Club Med amenities, they seem to me aimed at attracting student who pay full tuition or close to it.
>>The following is not by me but rather from a tenured professor at a state university located somewhere between the two coasts and a very close friend, who is not into blogs but does, frequently, e-mail his opinions. <<
I agree that the development of some sort of college rating system is not well thought out, and will likely lead to disputes and confusion as to whether 7.6 rating of college A is better than a 7.9 of college B because of some trait of the former. Bad numbers yield bad policy and bad conversations.
Of course, judging from my own experience, the administrators are using the wrong numbers for our graduation rate due to a fictitious denominator – and I am sure that our administrators are no worse than others, which is to say, pretty bad.
The quest for a single number rating is illusory; so how about a string of, say, 6 or 8 numbers each describing one diagnostic characteristic of a college or university?
Such as:
1. Research intensive or not Carnegie I, II, etc
2. Ratio of grad to undergrad students
3. Number of different majors offered at bachelors, masters, doctoral levels
4. Number of full time faculty in the school's largest and smallest academic majors.
5. Ratio of full time administrators to full time faculty
6. Ratio of full time faculty to part time/adjunct faculty
7. Total salary of all administrators compared to total salary of all faculty
8. Total general fund costs of the school's athletic program compared to total general fund costs of the school's library system
9. Diversity of the undergrad student body by family income, geographic, etc
And so forth.
We can and will argue whether we should use 5 or 50 descriptors, but the use of descriptors vs. the use of a simple minded single number index is preferred, if only because the subsequent arguments about any two colleges will at least have its basis in facts rather than manipulated indices.
OK, there is my two cents. For a professor, Obama is not good at explaining things. He should talk to Bill more often.