My A.T. Still University Experience : personal finance

What's Wrong with For-Profit Schools?

SteveFoerster — Thu, 29 Oct 2009 17:30:00 GMT

“It is not easy for men to rise whose qualities are thwarted by poverty.” — Juvenal

Currently on the forum there's a discussion about whether there's a big difference between for-profit and non-profit schools. A link was posted to this article in the Washington Monthly that takes for-profit schools to task, essentially calling them predatory and that they have conspired with evil Republicans to exploit unsophisticated prospective students in order to enrich themselves while leaving those students with unmanageable debt that recent legislative changes have made almost impossible to discharge in bankruptcy. Whew!

And you know what? There isn't zero truth to this. Many schools are far more expensive than they need to be to break even, or even make a reasonable profit. Consider your typical online course. Let's say it costs you a thousand bucks. (I know, some are even more, but it makes the math easy.) And let's say there are twenty students in the course. Adjunct instructors don't usually get paid more than two thousand dollars to teach a university level course, so that's where two of the students' tuition is going. What about the the rest of the eighteen grand? Sure, there's overhead, you need to have support staff, and office space and computers and supplies for that staff. Preparing reports for the accreditors takes a lot of time, and you need people to help with that, okay. But does all that really cost nine times as much as the person who actually does the lion's share of work by teaching the students? Color me skeptical, but I say there's a heck of a lot of profit in there.

But before you start to think that I agree with the Washington Monthly that the profit motive is eeeeevil, let me add a few other ingredients into this witch's cauldron of debt creation.

First, non-profit schools often cost just as much as the most expensive of the the for-profit schools. In fact the most expensive ones cost even more: Check out the list of the 100 schools with the highest annual tuition rate. For a bunch of schools that are supposedly non-profit, don't those rates seem kind of steep?

Second, much of the blame lies with the federal student loan system. The left-of-center Washington Monthly blamed the Bush administration and Congressional Republicans, but there's no one in Washington with clean hands when it comes to this broken system. It was, after all, Democrats who sent the reauthorization of the Higher Education Act to Bush's desk last year. And while that reauthorization did include a few baby steps toward making things easier for students, they did nothing to address the systemic problem that making it artificially easy to access student loans means that tuition rates will inevitably rise to soak up all that extra money that's become available. I guess they were too busy trying to protect their buddies in the entertainment industry, and I do use that term loosely.

Third, and perhaps most importantly, if for-profit schools are works of the devil, then why is it that they're also standing up to be part of the solution? As I've remarked before, companies like Straighter Line and for-profit schools like Penn Foster College and Andrew Jackson University are leading the way when it comes to providing solutions for students that are extremely low cost. In other words, the profit motive has more than one side — it leads some schools to charge as much as they can, yes, but it also leaves them vulnerable to other schools that come in and undercut them to attract their students away.

So no, there's nothing inherently wrong with for-profit schools. Some of them charge a lot, aided and abetted by Uncle Sam, and others of them see that situation as an opportunity to attract students by charging less.

Next up, I protest the imprisonment of fellow blogger Kareem Amer.

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Panel Discussion On Skyrocketing College Costs

SteveFoerster — Wed, 07 Oct 2009 20:33:00 GMT

“Universities share one characteristic with compulsive gamblers and exiled royalty: there is never enough money to satisfy their desires.” — Derek Bok, former president of Harvard University

Yesterday I went to the Cato Institute, a think tank here in Washington, D.C. that promotes civil liberties and free markets. They had an event called Taking Control of Spiraling College Costs, where a panel of experts gave their various reasons for why they think that college is so expensive and what might be good ways to counteract that trend.

This particular event was co-sponsored by the Pope Center for Higher Education Policy, and two of the panel speakers were affiliated with them. One, economist Robert E. Martin, is the author of a recent policy paper called The Revenue-to-Cost Spiral in Higher Education. In it, he outlines a number of suggestions as to why higher education is different from other industries, and how those differences translate into costs that increase so much more quickly than other things in the economy.

Cato also had some relevant policy papers. One, Making College More Expensive by Gary Wolfram, is subtitled, "The Unintended Consequences of Federal Tuition Aid", and explains why Pell grants and federal student loans may put college within reach of more people in the short term, but inevitably makes it more expensive for everyone in the long term. This point was echoed by most of the panel members as a big problem, but they seemed to understand also that changing the way this is done would be politically infeasible even if Congress and the Obama administration were interested in scaling this back, which given their recent expansion of direct student lending, is clearly not the case.

There was another view on this present, however. Kevin Carey, Policy Director at a different think tank called Education Sector, argued that radically decreasing federal aid to students was not the most effective way to control costs. He suggested that colleges and universities needed to be required to be more transparent in how they spend their money. The panel did all seem to agree that many colleges and universities spend an inordinate amount of money in non-academic ways, such as athletics, and recreational facilities like the University of Missouri's resort-like Tiger Grotto. But other than Mr. Carey, no one on the panel thought that transparency would be much of a deterrent to needless spending when there was so much money coming into the system.

All in all it was an interesting event with good points made by all panelists. I'm not sure whether any of the solutions presented were likely to be considered by policy makers, though. I'll stand by my earlier belief that college costs will be reduced indirectly, by the continued rise of alternative approaches like low cost DETC-accredited schools, initiatives like Straighter Line, and so forth.

Next up, I finally get around to wishing Gandhi a happy birthday.

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Does UC Berkeley Need A Bailout?

SteveFoerster — Mon, 28 Sep 2009 04:25:00 GMT

“Alexander Hamilton started the U.S. Treasury with nothing, and that was the closest our country has ever been to being even.” — Will Rogers

It seems that nowadays everyone gets a bailout or a stimulus of some kind. We covered Wall Street so that they didn't have to suffer for their mistakes. Same with banks, after all, unlike individual taxpayers, they're too big to fail. Auto makers make cars no one wants? No problem, taxpayers will pick up the tab. But even after all that, if a 150-year-old organization with three billion-with-a-B dollars in the bank that owned over ten square miles of valuable real estate suggested that they too might need a hand out, wouldn't that finally be something that fails the straight face test?

Evidently not, because that organization is the University of California at Berkeley. Yesterday in the Washington Post there was an op-ed from Robert J. Birgeneau and Frank D. Yeary calling for the federal government to start funding the operating costs of a few prominent state universities with a strong history of academic research. Given that the two are, respectively, UC Berkeley's chancellor and vice chancellor, it has to be one of the more transparently self-serving suggestions even in this shameless era.

Let's put their suggestion within the context of two questions. First, should federal taxpayers be taking on another funding responsibility right now? Well, in a recent column by Richard Rahn, the economist presents a laundry list of federal spending items that are spiralling out of control, but summarizes our current situation by saying, "In just the last eight months, the Congressional Budget Office estimates of the amount of additional federal debt to be held by the public grew by an astounding $4 trillion for the 2010-19 period; and that the amount of federal debt held by the public grew from $5.9 trillion to $7.5 trillion in just the last 12 months."

The problem with debt is that either someone eventually has to pay it off, or else we must pay interest in it, month after month, year after year, until the end of time or the U.S. dollar, whichever comes first. (I know which way I'm betting.) But let's say for argument's sake that we accept Birgeneau and Yeary's call for an infusion of taxpayer cash into higher education. Are universities like Berkeley really the place to spend it?

I would argue that community colleges are a better investment. We're in a so-called economic recovery that doesn't actually involve people being able to find jobs, making it a recovery that only an economist could love. In that tough environment it's community colleges that are picking up slack, becoming the place that workers go to retool their skills in a changing world. Like public universities, community colleges have also been hit hard by state budget cuts. The difference is that since they make differences in the lives of ordinary people rather than the elites like Berkeley does, community colleges don't end up with an endowment larger than the annual budget of a small country. In other words, unlike schools for the privileged, community colleges actually have to pay as they go.

Put simply, Berkeley, you don't deserve a bailout, you wouldn't really need it even if you did deserve it, and we couldn't afford it even if you did need it. The rest of us are making do with less. Surely if we can do that you folks can put all those researchers to work to figure out some way to use your three billion dollars to keep the lights on.

Image courtesy of Anders Sandberg

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Are We In An Education Bubble?

SteveFoerster — Mon, 21 Sep 2009 17:22:00 GMT

“No bubble is so iridescent or floats longer than that blown by the successful teacher.” — William Osler

Recently I've been talking about the high cost of a college education, some emerging lower cost options, and why tuition rates might generally be so high. It's a subject that really interests me, and one that concerns us all.

So since I've had that on my mind, I was intrigued by this recent Yahoo! Finance article that suggests that maybe we're seeing a lot of bubbles, but that one of them is an education bubble — it's number six on the list. And it's not the one one; there have been a number of articles in the mainstream media and blogosphere asking whether tuition rates are going up in an unsustainable way, and whether that means a crash in prices is coming.

Now, you remember bubbles? First we had the dot-com bubble, where stock prices kept going up and up and up, only to crash down in a meteoric debacle where instant millionaires became instant paupers. Then, more recently, we had the cause of the current global recession, a housing bubble in the U.S. where easy access to irresponsible mortgages pushed housing prices up and up and up, only to crash down to the point where even little people like me might even be able to afford a house, if only any of the banks were still lending money.

So for those of us laboring under ever heightening tuition rates, it's a reasonable question to ask whether we could now also be experiencing an education bubble. I think we are, but not one that's similar to those other financial bubbles, as there are some unique circumstances that apply to higher education in the U.S.

One way this bubble-like trend could end would be that tuition rates drop dramatically, like stock markets and housing prices did. As discussed here recently, the federal student loan system artificially makes prices higher, but while I may have remarked on how that system isn't well designed, no one thinks it's going away any time soon, and that means that we shouldn't expect a sudden dramatic drop in price.

Another way for things to change would be for prospective students to respond to high tuition rates by deciding not to go to college. But there's a very strong belief that permeates this country that going to college is part and parcel of success in life. Who was the last president who didn't talk about going to college like it was the end all and be all? Warren G. Harding maybe? I personally think that too many people feel like they should go to college regardless of whether their goals mandate it or not, but I recognize that it would take a major cultural shift for people to stop valuing that Bachelor's degree the way they do.

The final way things could go, and the one I think is most likely, deflates the bubble rather than pops it. That way is for alternatives to expensive traditional schools that are somewhat integrated with the old higher education system to become more popular. I mentioned some of these a while ago; I'm talking about services like Straighter Line and nationally accredited schools like Penn Foster College and Andrew Jackson University becoming more and more mainstream, and with many more like them finding ways to elbow their way into the higher education marketplace. I believe these alternatives are game changers, and that in the next decade unless the traditional schools get control of their tuition rates, these alternatives will become more and more prominent.

After all, one way or another tuition rates can't keep outpacing inflation. Something has to give!

Next up, are electronic textbooks worth it?

Image courtesy of Tim Lindenbaum

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Your Student Loan: Made in China?

SteveFoerster — Sat, 19 Sep 2009 17:35:00 GMT

“A billion here, a billion there, sooner or later it adds up to real money.” — attributed to U.S. Senator Everett Dirksen

Recently I wrote about some reactions from the higher education marketplace to the incredibly high cost of a college education, specifically the inexpensive courses offered by a company called Straighter Line that are accepted by a number of colleges as transfer credit, and low cost DETC-accredited schools like Penn Foster College and Andrew Jackson University.

An important question, though, is why college costs so much? And even more, why do distance learning programs cost so much when classrooms, furniture, faculty offices, whiteboards, student lounges, dorms, parking lots, and the like aren't necessary to produce and run online courses?

Some people who study economics and finance argue that the way the federal financial aid system is set up is partly to blame. By making it almost guaranteed that most applicants will have access to large loans that cover even a high tuition rate, the system sets a sort of price floor, where schools that are out to maximize profit can charge much higher rates than necessary without losing customers like they would in a free market. It's made even easier for students to rack up student loan debt since none of it has to be repaid until the student is altogether out of school. That sort of setup is one where it's very easy for students to lose track of how much borrowing they're doing. (Pop quiz: How much do you owe in student loans right now?)

Of course, the answer isn't as simple as saying, "Oh, well then just end student loans." I know this from personal experience, in that I have a lot of bills to pay, and if it weren't for student loans I don't see how I could have gotten as far in my education as I have. At the same time, I can't help but think that the system might be better if students borrowed the money from banks and credit unions without Uncle Sam as a middleman. Without the federal government guaranteeing that loans would be paid, lenders would have more incentive to consider how well a student might be able to repay later, and accordingly cap how much is available. That may sound bad, but if that's the way lenders are doing business, colleges will have little choice but to cut costs and keep tuition reasonable, or else all their students would have to transfer to more affordable institutions.

But needless to say, this is not an era in which lenders are on people's good side, and the U.S. federal financial aid system is actually going in the opposite direction. This article in today's Washington Post announces that the Obama administration is going in the opposite direction. Rather than borrow money from private lenders with the feds guaranteeing the banks that the money will be paid back, now students will be borrowing money directly from their seemingly inexhaustible Uncle Sam.

So in this case it's the banks who are the middlemen being cut out, not the government. Very well, but it's an interesting time (yes, in the Chinese sense, as we'll see) for the federal government to be adding to its list of spending. The annual deficit is at a record level, it should be a trillion dollars this year. That's money that the federal government is spending that it has to borrow. It borrows the money from a number of places, the UK, Japan, Venezuela, Saudi Arabia, and so forth, but the largest creditor is China, which is all flush with dollars thanks to Americans' insatiable appetite for inexpensive Chinese goods. The end result is that from now on, when you borrow money as a federal student loan, you're indirectly borrowing it from OPEC or the Chinese government.

So my friend CWE suggests that as long as we're cutting out middlemen, why not get rid of one more? Rather than get a student loan from the federal government, why not skip them and just borrow the money directly from the Chinese? To make things easier, the feds could sell them one or two of the banks that they've been bailing out lately so that people who need a student loan would have a convenient local branch of a Chinese-owned bank where they could get the cash they need.

When I put it that way it sounds crazy, right? Just consider, though, how close it is to the truth!

Happy borrowing, America!

Next up, are we in an education tuition bubble?

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