Jorge Klor de Alva and Mark Schneider have just published a paper -Who Wins? Who Pays?: The Economic Returns and Costs of a Bachelor's Degree- that will certainly cause considerable controversy and discussion. While there are many aspects of the specifics of the study that undoubtedly will be challenged and refined in the future, in a very real sense the great significance of the paper is that it introduces a perspective to the ongoing discussions of higher education that is new and critically important.
National and state governments obviously are struggling to come to grips with the new era of constrained budgets. As they have tried to simply continue the old paradigms of higher education and its support into this era of constraint, results have generally been quite negative. Resulting higher education cuts have led to significant decreases in the numbers of students who can be accepted and educated in most state systems. Often the cuts have been deepest at institutions that serve primarily lower income students. On the private side, the recession has pummeled many endowments, and the sector depends on annual tuition increases that average inflation + 3.5%, a model that faces increasing resistance. Federal student aid support to all sectors is facing increasing scrutiny, with some of Obama's goals for increases being scrapped before the budget wars really start.
One of the major problems that all of the individuals, agencies and legislatures face as they seek to find new and sustainable directions for higher education that serves its various constituencies is simply lack of data, which then leads to a lack of understanding of the implications of aspects of current funding paradigms.
The authors of this paper focus on a very interesting, key question for policy discussions - what is the real net cost to government of providing education at various types of institutions? While it should be obvious that the government should not simply decide to support the lowest cost educational provider, it should be equally obvious that the government cannot make rational cost-benefit analyses without knowing the answer to this central question. Along the way to answering this question, the authors look at several other questions that are also interesting: what is the return to a student for obtaining a bachelors degree, calculated according to the type of institution?; and what is the return to society via tax receipts from these same students? Again, tax receipts do not describe the total value to society of a college education, but are nevertheless useful description of one parameter in the value equation.
The analysis on return to students provides some interesting comparative numbers for different types of institutions sorted by for-profit, public, private non-profit, and selectivity. The type of analysis done, while common, considers only institutional characteristics and not the characteristics of the students that lead to their choices. As emphasized in research described in a previous post, these student characteristics are likely to be very important in determining income. While several studies grapple with the issue of student characteristics in looking at variations of income between graduates of colleges of different quality, I know of no studies that incorporate such characteristics in looking at differential between no-college and college earnings. In any case, these earnings results are provocative, but suggest the desirability of a more detailed analysis involving student characteristics. Similar comments can be made regarding the tax calculations. (This issue of student characteristics is noted by the authors in a footnote, as well.)
Calculating the cost to taxpayes for a college degree is a complicated matter, as the authors ably point out. The obvious cost is the direct support in the form of state educational appropriations to public colleges and universities, and governmental support for student financial aid. A cost not usually considered, however, relates to the tax breaks that non-profit higher education (as well as other non-profit organizations) receive. Thus, for example, there is a hidden taxpayer cost relating to the tax write-offs associated with donations to non-profit higher education. Similarly, endowment investment returns, real estate, income from sales, etc are exempted from taxes for non-profits at a cost to the taxpayers generally. On the plus side of the leger, interest on student loans (and ultimate repayment of the loans) decreases the net cost to the taxpayer, as do the various taxes paid by the for-profit higher education sector on their operations. The data for all of these components are not easily obtained, as one might imagine, but the authors do a good job at assembling a credible set. (The authors are very careful to describe the sources of all of their data, and the details of the calculations that they carry out so that other researchers can verify and improve on their results as appropriate.)
Results of this calculation of taxpayer cost per degree as a function of institutional type are quite interesting. Table 3 of the paper shows that society obtains a positive return (i.e. a profit, not a cost) on this calculation of about $6,000 per degree for students at for-profit institutions, which are all categorized as non/less competitive. For the non-profits in the categories of non/less competitive, competitive, very competitive, and highly competitive, the costs to the taxpayer per degree are relatively constant: for the public sector, between $61K and $74K per degree depending on category; and for the private sector, between $8K and $9K per degree. For the most competitive category, however, the costs to the taxpayer take a jump: $108K in the public sector; almost $59K in the private sector. Obviously, on the private side, a major contributor to this increase at the most competitive level is related to forgone taxes on the very large development successes of this group, but both groups are particularly successful in attracting government largess in a number of areas.
The data used to reach these conclusions are certainly not unambiguous, but the general outlines of the conclusions are very likely correct. Calculations such as these give policy makers an important new perspective to consider as they create a new higher-educational paradigm that best serves the multiple constituencies of students, employers, and society at large. By focusing on the cost to taxpayers rather than the more traditional cost to student, the authors have provided important input for conversations that focus on providing the best possible educational opportunities and outcomes within the limitation of what society can now affort to support.