Archive for the 'University' Category

In Praise Of For-Profit Colleges

Tim Taylor cites a study showing:

Along with the flexibility to expand enrollments, for-profit higher education has shown considerable flexibility in teaching groups not well-served by traditional higher education. “African Americans account for 13 percent of all students in higher education, but they are 22 percent of those in the for-profit sector. Hispanics are 11.5 percent of all students but are 15 percent of those in the for-profit sector. Women are 65 percent of those in the for-profit sector. For-profit students are older: about 65 percent are 25 years and older, whereas just 31 percent of those at four-year public colleges are, and 40 percent of those at two-year colleges are.” In addition, for-profits are typically non-selective institutions, requiring only a high school diploma or a GED certificate.

Full article here. Of course, long time readers of my blog already know this.

In Defense Of For-Profit Colleges

One of the biggest blind spots of policymakers and pundits is the inability to take target market into account. For example, you can’t just compare the wages of employees at Hilton Hotels vs Motel 6′s and conclude that Hilton Hotels are superior because the employees are paid more. You have to take the companies vastly different target market into account. Motel 6′s target a much poorer and cost sensitive segment of the economy, and so it’s understandable that they pay their employees less. In addition, Motel 6′s also hire from a lower socioeconomic level than does Hilton Hotels, so again you’d expect their pay to be lower (in exchange for lower productivity, ie education, ability to speak English, etc). What seemed like a bad wrap for the poor without taking target market into account, turns out to be an overall net gain when it’s included (who doubts that from the poor’s perspective, Motel 6′s are better than Hilton hotels?).

The same blind spot is apparent in the Wal-Mart vs union run grocery stores debate. Wal-Mart caters to a lower socioeconomic class, by hiring and providing cheaper products to those at the lower end of the income distribution. So it makes sense that their employees are paid less than their union run grocery stores counterparts, who cater to a higher socioeconomic class. Seen in that aspect, Wal-Mart is no different than the Motel 6. And since it’s our ghettos and poor areas that are plagued by unemployment, empty lots and general lack of opportunities, the Wal-Mart model is a superior model for the ghettos and poor areas.

The same blind spot resurfaces when talking about for-profit colleges. When comparing for-profit colleges to non-profits, critics will primarily focus on graduation rates and default rates, taking nothing else into account. But what happens when you take target market into account?

For-profit colleges tend to cater primarily to the marginalized segments of society: working mothers, high school drop outs, older people trying to change careers, and people who are in a rush to graduate. In other words, the riskier segment of society. The very same people that the non-profit education system often ignores.

Seen from this perspective, it’s expected that for-profit schools will be worse than non-profits when it comes to student debt. It’s expected because they cater to riskier students, so they are going to have a larger variance of outcome – whether that is graduation rates, or student loan repayment. But catering to a riskier segment of the population is not something that should be punished, it should be encouraged. Lets remember, for-profits are actually doing what we berate businesses to do – serve those at the bottom, often forgotten by others. They are a lot better at helping students who may have messed up through high school and want to change their lives around.

And this is without even mentioning all of the other benefits that come from for-profit colleges vs traditional colleges. For example, a significantly shorter time to graduation (averaging 3 years, when non-profits are getting closer to 6 years – a huge gain in opportunity cost), more income oriented majors (even the worst of the for-profit colleges will never have such time wasted majors like Chicano Studies, for example) and a clear path towards graduation. All benefits that primarily help the marginalized segments of society.

In the interest of full disclosure, I should mention that I graduated from a for-profit institution. I got my BS in 3 years. Before that I was a high school drop out (in 10th grade) with about a 2.0 GPA. I had only a GED and no community college credits. I was also the child of a poor single mother, living in Compton, Ca. The group of friends I currently run with all have similar stories – all of us grew up poor, are minorities and graduated from the same for-profit college. None of us received any grants (my mom refused to fill out the FAFSA – she always hated anybody knowing how much she made and was convinced I would find out). More importantly, in the for-profit college I went to there were others – not a majority, but certainly a strong minority – in the same situation I grew up in. It’s the privileged kids that were the exception at the for-profit college, not the the poor minorities.

All of us, also, are currently successful engineers. We all make around 6 figures a year or more. All of us with just the bachelors degree from the for-profit college (I have some undergraduate and graduate work at UCSD, but never completed a full degree there). Without a doubt, graduating from that for-profit college was the single best thing I could have done for my life. Without it, my life would have been very different.

Update: Matt Rognlie makes a similar point here.

Quote Of The Day

“In this article about college funding, Kevin Carey says something that I’ve long believed, which is that government-supported financial aid doesn’t quite work how you might imagine: colleges can just raise their prices along with any aid packages that come along. The price tag for college is not fixed, and so what looks like a subsidy for low-income students can just end up being a way for universities to jack up their prices by a corresponding amount.” — Andrew Gelman

Quote Of The Day

“One way to quickly improve any university would be to eliminate the bottom 25 percent of teachers and replace them with online instruction from outside the university. Maybe online instructors cannot compete with high-quality in-person professors, but they can certainly replace the worst.” — Arnold Kling

The Cost Of University Subsidies

Thomas Sowell explains:

Those who want the government to provide subsidies to help meet the high cost of college seem not to consider whether government subsidies might have contributed to the high cost of college in the first place.

In any kind of economic transaction, it seldom makes sense to charge prices so high that very few people can afford to pay them. But, with the government ready to step in and help whenever tuition is “unaffordable,” why not charge more than the traffic will bear and bring in Uncle Sam to make up the difference?

The president of a small college once told me that, if he charged tuition that was affordable, even an institution the size of his would lose millions of dollars of government money every year.

In a normal market situation, each competing enterprise has an incentive to lower prices if that would attract business away from competitors and increase its profits.

Unfortunately, the academic world is not a normal market situation.

Some of the ways of cutting costs that a business might use are not available to a college or university because of restrictions by the accrediting agencies and the American Association of University Professors.

The criteria used by most accrediting agencies are based on inputs — essentially spending — rather than results for students.

Competition among academic institutions therefore seldom takes the form of lowering their costs of operation, in order to lower tuition. The incentives are all the other way.

Competition often takes the form of offering more upscale amenities — posh lounges, bowling alleys, wi-fi, finer dorms.

None of this means better education. But, so long as the customers keep buying it — with government help — the colleges will keep selling it.

The full article can be found here.

Quote Of The Day

“I’ve been asking myself that about student loans for quite some time. It’s still not clear to me how much, if at all, they benefit the students they are supposed to help. It seems at least equally plausible that they’re simply feeding the tuition inflation which makes it impossible for a normal kid to work his way through college–that is, that all the benefits of the student loans are not being appropriated by the students, but by the faculty and administration, and the non-borrowing students, who get to enjoy the shiny new facilities that tuition inflation helps pay for.” — Megan McArdle

Quote Of The Day

“I have never quite encountered an intrinsically less fair institution than the university, at least in liberal terms of egalitarianism and respect for the underclass. A full professor may damn Wal-Mart, but Wal-Mart would never get away with the two-tier system that the university in built upon: the PhD part-timer has no job security, sometimes no benefits, no privileges, and earns usually about 25% of the compensation that is paid to the full professor to teach the identical class. When one factors in the use of graduate assistants not merely to TA courses, but to teach them in their entirety, then you can appreciate the level of exploitation that the university is built on. And add to the notion that tuition has climbed higher than the annual rate of inflation, and the picture is complete of an institution that is entirely immune from public scrutiny.” –Victor Davis Hanson

Quote Of The Day

“Not only are government subsidies for government tuition unnecessary, they also victimize the truly disadvantaged people in our society: those who lack the educational qualifications to go to college in the first place (usually due to a combination of poor public schooling and a flawed family environment). These people pay some of the taxes that support subsidized tuition for college students who are likely to end up far wealthier than they are. They are also indirectly harmed by the diversion of public funds to tuition subsidies and away from other priorities that might do more to advance the interests of the truly poor. Government tuition subsidies are a classic example of a policy that redistributes wealth to the relatively affluent under the guise of helping the poor.” — Ilya Somin, Assistant Professor at George Mason University School of Law blogging at the Volokh Conspiracy

The Incentives To Raise Tuition

Kevin Carey, research and policy manager at Education Sector, writes in the Chronicles of Higher Education:

The fact that increased prices go hand in hand with more-selective admissions is all the better, since that leads to increased status, wealthier alumni, and higher rankings in U.S. News & World Report. In a normal market, businesses can cut prices to attract more customers. In the higher-education market, colleges have found that cutting tuition reduces demand, because the lower price signals lower prestige — and thus value — to prospective students. Ten percent of the U.S. News rankings are based on spending per student, which means that a college that became more efficient and passed part of the savings on to its customers in the form of reduced prices would see its status decline. Unsurprisingly, that hardly ever happens.

He goes on to argue that we need to ‘sever the iron bond between price and perceived quality’. A noble goal, but one that is sure to (and already is) meet strong resistance from the very powerful Washington higher-education lobby. For more on this, economist Robert Whaples working for the Teaching Company gives a short introduction on the economics of University tuition…and why it has gotten so high, see here. Just one more reason why I continue to believe that increasing university subsidies does not help the poor. See more here.

Is UCLA A Charity?

Long time readers of my blog know that I strongly disagree with those who argue that Universities need more government funding – especially elite Universities like UCLA. I’ve blogged on this in depth before, see here.

Robert Reich, former president Bill Clintons labor secretary, makes similar arguments in the Los Angeles Times:

Is Harvard a charity?
Most donations go to institutions that serve the rich; they shouldn’t be fully tax-deductible.

By Robert B. Reich
October 1, 2007

This year’s charitable donations are expected to total more than $200 billion, a record. But a big portion of this impressive sum — especially from the wealthy, who have the most to donate — is going to culture palaces: to the operas, art museums, symphonies and theaters where the wealthy spend much of their leisure time. It’s also being donated to the universities they attended and expect their children to attend, perhaps with the added inducement of knowing that these schools often practice a kind of affirmative action for “legacies.”

I’m all in favor of supporting the arts and our universities, but let’s face it: These aren’t really charitable contributions. They’re often investments in the lifestyles the wealthy already enjoy and want their children to have too. They’re also investments in prestige — especially if they result in the family name being engraved on the new wing of an art museum or symphony hall.

It’s their business how they donate their money, of course. But not entirely. Charitable donations to just about any not-for-profit are deductible from income taxes. This year, for instance, the U.S. Treasury will be receiving about $40 billion less than it would if the tax code didn’t allow for charitable deductions. (That’s about the same amount the government now spends on Temporary Assistance for Needy Families, which is what remains of welfare.) Like all tax deductions, this gap has to be filled by other tax revenues or by spending cuts, or else it just adds to the deficit.

I see why a contribution to, say, the Salvation Army should be eligible for a charitable deduction. It helps the poor. But why, exactly, should a contribution to the already extraordinarily wealthy Guggenheim Museum or to Harvard University (which already has an endowment of more than $30 billion)?

Awhile ago, New York’s Lincoln Center had a gala supported by the charitable contributions of hedge-fund industry leaders, some of whom take home $1 billion a year. I may be missing something, but this doesn’t strike me as charity. Poor New Yorkers rarely attend concerts at Lincoln Center.

It turns out that only an estimated 10% of all charitable deductions are directed at the poor. So here’s a modest proposal. At a time when the number of needy continues to rise, when government doesn’t have the money to do what’s necessary for them and when America’s very rich are richer than ever, we should revise the tax code: Focus the charitable deduction on real charities.

If the donation goes to an institution or agency set up to help the poor, the donor gets a full deduction. If the donation goes somewhere else — to an art palace, a university, a symphony or any other nonprofit — the donor gets to deduct only half of the contribution.

Robert B. Reich, author of “Supercapitalism: The Transformation of Business, Democracy, and Everyday Life,” was secretary of Labor under President Clinton.

The full article can be found here. However, though he makes good points, there are still some reservations I have with his solution. The economist blog also mentions very important objections to his proposal, see here.

So what is my solution? I propose we take the middle ground. If your goal is a higher percentage of minorities and disadvantaged youths attending college, then why not directly subsidize them?

As I said in a previous post on this, if I were governor (and kudos to the Governator for proposing this), the way I would structure the system is in one hand increase tuition for all students by capping state subsidies, thereby decreasing the tax burden of all state citizens, and in the other hand use a fraction of that money to help low income families, whether they be middle or lower class. This has the added benefit of directly subsidizing the poor instead of through the -often very inefficient – middle man of Universities. So under my plan the poor and middle class students at these Universities would most likely wind up with even more assistance than is currently done under the current method.

If subsidies are your goal, direct subsidies are almost always the more efficient method. So if you want to subsidies poor students who can’t afford education, directly subsidies them, not some institution that primarily caters to the rich and already well connected.

Update: More here and here.

The Power Of Competition

Gary Becker, Nobel Laureate in economics, in response to comments on a post arguing for the privatization of highways writes:

The USPO illustrates the worst of public monopolies. It has lagged virtually all the important mail delivery innovations in recent decades. It is grossly overmanned, and its employees are often surly and unpleasant. The need to subsidize mail sent to remote places is no justification for a public monopoly. Such mail can be subsidized-if that is desirable- without having a public monopoly. Simply subsidize Fed Ex or any one else for their deliveries to such places. Take away the protection of the law and subsidies, and the USPO would collapse within a short time.

Many public institutions in higher education offer very fine products, but that is because they face stiff competition from each other and from private universities. Eliminate that competition-as in Germany, France, or Italy- and one sees how ineffectual public universities become.

Phone service has become much cheaper, not more expensive, since the telephone market was opened up. It is far cheaper to make long distance calls, including international ones, than it was before. Imagine what the phone system would be like if ATT still had a monopoly: where would wireless, cable, and Internet telephony be? ATT would have used its political power to resist and handicap every one of these and other innovations.

The full post can be found here. His initial post is here. Richard Posner is here and here.

Abolish The SAT

So argues, persuasively and surprisingly, Charles Murray here.

Because upper-middle-class families produce most of the smartest kids, there is no way to reform the system (short of disregarding intellectual ability altogether) to prevent their children from coming out on top. We can only make sure that high-ability students from disadvantaged backgrounds realize that the nation’s best colleges yearn for their applications and that their chance of breaking out of their disadvantaged situations has never been better—in short, that the system is not rigged. Now, the widespread belief is that the system is rigged, and the SAT is a major reason for that belief. The most immediate effect of getting rid of the SAT is to remove an extremely large and bright red herring. But there are more good effects.

Quote Of The Day

“In other words, the Law of Unintended Consequences is as work. More aid means higher tuition, so the winners from aid programs are not students so much as educational institutions that increasingly live in the lap of near-luxury. The slowdown in participation growth actually probably is a good thing –too many, rather than too few, kids may be going to college as high dropout rates attest. But the way to optimize enrollments is not to drop money out of airplanes over student homes and then have colleges raise their fees sky high, which, roughly speaking is what we are doing now, and which the Democratic proposals will almost certainly aggravate”. –Richard Vedder, writing in the Center For College Affordability And Productivity blog

Bipartisan Government Waste

Here is a good list of spending cuts that both Republicans and Democrats can support:

Agricultural Subsidies: Everyone’s favorite whipping boy, and for good reason. These subsidies are a handout to rich farmers, and they raise food prices for everyone. $20 billion.

Social Security for the Well-Off: Social Security is not means-tested; people with substantial retirement income get full benefits. This is insanity; recipients did not “save” the benefits they receive; these benefits come from taxes paid by current working generations. Cut Social Security expenditure, say, 20% by introducing a modest degree of means-testing. $100 billion.

Medicare for the Well-Off: Same deal as with Social Security. Raise premiums, deductibles, and co-pays in a means-tested manner to save 20% of current expenditure. $60 billion.

Higher Education for the Well-Off: State governments currently operate colleges and universities in a manner that makes no distributional sense. Children of millionaires pay the same highly subsidized tuition as children in poverty. State governments should emulate the private sector by setting a high tuition rate and then offering discounts on a means-tested basis. $50 billion.

Pork: Although many “bridges to nowhere” are small potatoes, the number of potatoes is large. A recent accounting by Taxpayers for Common Sense estimated 2005 earmarks at $24 billion; most of this is pure pork. Adding big ticket items like manned space flight, Amtrak subsidies, mass transit boondoggles like the Big Dig, senseless flood control projects undertaken by the Army Corps of Engineers, and subsidized disaster insurance, not to mention state and local pork, would easily yield substantial savings. $70 billion.

“The grand total from this list is $300 billion annually, roughly the deficit projected for 2006″. The full article could be found here.

Quote Of The Day

“Someone asked why States like New York oppose for-profit colleges? As someone pointed out, the University of Phoenix had to fight hard to get accredited in many states, and is still denied the opportunity to enroll student In New York and about fifteen other states. I suggested in my post that the answer is opposition from public and private non-profit colleges that do not want the competition. It is common for companies in many industries to restrict the entry of competitors if they can. Why should traditional colleges be any different? They only express their opposition in more high-falutin and self-righteous language”. –Gary Becker, Nobel Prize Economist blogging over at the Becker-Posner blog on a post about For Profit Colleges

Quote Of The Day

To enjoy a charitable exemption from taxes, an institution must not only have a purpose deemed worthy (such as promoting education, health, religion, the arts, and so forth), but must also devote all its resources, including income on endowment, to its charitable purpose. The nondistribution constraint is indeed constraining, because it means that the institution cannot raise money in the equity markets. [A non-profit University] can compete with profit-making competitors only if it can attract investment from donors. Generally, this requires that it have many affluent alumni, as they are the principal donors to colleges and universities (partly out of gratitude, partly for the less altruistic reason that they derive prestige from having attended a distinguished institution and they want to help it maintain its distinction). There is a chicken and egg problem. To attract children of well-to-do families, and other children who have good earning prospects, the school has to offer an attractive program, good living and athletic facilities, and a distinguished faculty, but all those things cost money, which is hard for a nonprofit institution to raise unless it already has wealthy alumni. This may be why the very successful nonprofit colleges and universities tend to be quite old. They have had a long time to “grow” alumni who make generous contributions. Brandeis University, founded in the 1940s, is one of the few prominent private universities that is not very old–and it has had great trouble building up an endowment (though in part this is because of the elimination of Jewish quotas at other prominent universities–those quotas were one of the major factors in the decision to create Brandeis)”. –Richard Posner, blogging over at the Becker-Posner blog on For-Profit Colleges and Universities