Changing Higher Education

Harvard inaugurates its Initiative for Learning and Teaching

ON ONE HAND:

The good news is that Harvard is beginning to play a public leadership role in increasing student learning! The Harvard Initiative for Learning and Teaching (HILT) had its inaugural event, a symposium, on February 3. HILT was founded as the result of a generous $40M gift from Harvard alumni Gustave and Rita Hauser. The invitation only event brought in several outside luminaries with considerable expertise in learning, such as Physics Nobel Laureate Carl Weiman, and around 300 people from the Harvard community including Harvard's own luminary in the field, Eric Mazur.

The poor state of undergraduate student learning over all has been chronicled in many books and studies (see an earlier discussion here).  One of the most readable of these books was written by Harvard's own Derek Bok - Our Underachieving Colleges, so the issues are not unfamiliar at Harvard itself. As Bok (and many others) pointed out, the problem is not that there aren't many well documented ways to greatly increase student learning, it is that these methods have not been adopted widely by colleges. The powerful forces of the status quo have dominated teaching and learning.  

Harvard's Clayton Christensen (also at the symposium) and BYU-Idaho's Henry Eyring (CE) recently published The Innovative University: Changing the DNA of Higher Education from the Inside Out. In it, they focused on the development of Harvard over the centuries to show how the evolution of colleges from small local entities to huge research universities produced changes both positive and negative for society and the students themselves. Among the changes was that student learning played a ever decreasing role in the reward systems of the institutions. Thus, the learning (or lack-of-learning) results described by Bok and others becomes an understandable outcome of the growth of the research university.

CE argue that most institutions are, at their own level, seeking to emulate Harvard in ways that they can. While CE's focus on the uniqueness of Harvard as a role model might be considered to be a bit overdone, it is nevertheless true that the research universities are at the very pinnacle of the higher education prestige ladder, and of course, Harvard is certainly to be found in the very top echelon of the research universities. It is not unexpected that many, if not most, institutions have an understandable desire to move up the prestige ladder, thus, indeed, becoming more "Harvard-like".

So Harvard is certainly a very visible, very important role model in higher education. While it cannot dictate change in higher education, it certainly provides a fantastic bully pulpit from which to promote an important point of view.  And significantly increasing student learning is of critical importance in this time of globalization and change. Thus the "better learning" movement has to cheer the appearance of Harvard on the stage with HILT. 

BUT ON THE OTHER HAND:

There is a downside, however. As CE argue, teaching and research actually are carried out following very different business models.  Research shows that organizations that run multiple business models simultaneously incur very significant overhead due to the complexity of balancing those models. CE argue that much of the high cost of higher education can be traced to the multiple-business-model nature of the business, and the resulting high overhead. 

More negative than the high cost, in many ways, is the reality that if multiple business models are carried out together, the resulting constraints imply that no one of the business models can be optimized.  In the research university (e.g. Harvard), the research business model is optimized as much as possible within the constraints, meaning that the teaching business model is greatly suboptimized. Or to put it into a more concrete articulation, for a faculty member, doing research conflicts with teaching, and the system rewards doing research most highly. Thus teaching (and learning) will naturally suffer, and this will be particularly so if doing teaching more effectively requires that the faculty member consecrate additional time and energy to learning a new field (pedagogy).  

So this new Initiative suggests increasing the optimization of the teaching component somewhat - which almost certainly will decrease the optimization of the research component.  At the simplest level, if the faculty member spends more time and effort on teaching, less will be spent on research. Some faculty will undoubtedly suggest that they can maintain research levels if they have lowered teaching loads reflecting the additional time requirements for learning new approaches (which are often more challenging for the professor than the old, if truth be told). This will mean that cost/student for the students they teach will go up, thus increasing upward pressure on tuition - another no-no. Former Tufts President and now member of the Harvard Corporation Lawrence Bacow summarized this box well at the symposium:

All ways of improving the teaching/learning environment will only add costs to our system. That can’t go on forever. These things come to an end and usually it’s not pretty.

It may well be that Harvard is rich enough to find a way to thread this needle - maintain  its high research profile, increase learning outcomes, and control costs - without making any major changes in approach. But for most institutions, this needle will only be threaded through major changes that address the very high costs of the multiple simultaneous business models and the current lack of significant economies of scale. 

So the danger is that Harvard is taking up a leadership role in increasing learning - and offering a model that only it can afford.

 

The State of the Union on college costs

So let me put colleges and universities on notice: If you can’t stop tuition from going up, the funding you get from taxpayers will go down. Higher education can’t be a luxury. It is an economic imperative that every family in America should be able to afford.

Barak Obama, State of Union 2012

Does this speech signal that the time has finally arrived when the government - which pays a good part of the bill - will step in to limit the rapid and seemingly never ending growth of tuition? In normal times, the answer would likely be "yes" given that politicians from both sides of the aisle have been introducing bills that would cap tuition in one way or another for almost a decade.  Thus, we might expect to see a quick moving bipartisan effort.

These, of course, are not times when bipartisan efforts go very far, so Obama's statements will probably push Republicans into fierce opposition to the idea. The response of Representative Virginia Foxx, the North Carolina Republican who is chairwoman of the House Higher Education subcommittee, is probably a pretty good representation of what we will now hear from the Republican side:

The president is saying that people can’t afford to go to college anymore, and that just simply is not true. Tuition is too high at most schools, but it isn’t the job of the federal government to punish those schools. It’s very arbitrary, and the president sounds like a dictator.

So this probably won't be the tipping point for this issue. But before the higher education community breathes a sigh of relief, its members should note that a President of the United States views the issue as important enough, with enough broad voter appeal, to put it into a State of the Union address, and he is continuing to speak about it at public events. It would be surprising if we didn't hear a lot more over the next two years about the relationship between tuition increases and taxpayer support. And, despite the negative initial overall response of Representative Foxx, it should be noted that she agreed that tuition is too high at most schools - hardly the position that makes a strong ally in this matter. 

The reported responses from the academic community to Obama's speech, sadly, fall pretty much as one would anticipate -The current system is close to perfect, and any constraints (fiscal or administrative) will lead to declines in educational outcomes. This is indeed the likely outcome if educational institutions try to handle the constraints without changing their basic approach.  

However this speech makes it increasingly clear that the reality must be faced - it is simply not possible for higher education costs to increase at 3% above inflation forever, and the end of the period of rapid increases is getting closer. Educational leaders that refuse to come to grips with this reality are ensuring that the negative outcomes they describe will indeed occur.

It is highly likely that the changes that will be required will involve things that most people in traditional higher education find undesirable because they break with comfortable traditional standards of "how things should be done". But the economic realities of the United States (and most of the rest of the world) are such that "undesirable" actions have been, are, and will be required of almost every segment in order to transition to new, viable configurations. Does higher education have the leadership to rise to the challenge of this kind of tranformative change, or will it simply sink into mediocrity while defending the status quo?

Potential disruptors in the higher education space. II

In an earlier post, I described some potential disruptors in the higher education space. In this post I would like to add another set - several non-profits that are trying to provide essentially free education : the Khan Academy, the University of the People, and the Saylor Foundation  .  

The Khan Academy's self-description is straightforward:

We're a not-for-profit with the goal of changing education for the better by providing a free world-class education to anyone anywhere.

It does this through over 2700 10-20 minute long videos on a huge number of K-16 subjects. Most videos are made by the founder Salman Khan, but some come from other sources. Individuals can simply go to the web site and start learning. However, by signing in, the student can access a number of tools that help to visialize progress and the growing knowledge map. Similarly, teachers who use Khan material can get class statistics. 

Both the University of the People and the Saylor Foundation focus on college-level courses. They both make use of the fact that there is an enormous amount of educational material now available for free on the the internet. They repackage this material into majors, and incorporate it into their individual educational approaches.

The University of the People, founded by Shai Reshef, describes itself as:

.. the world's first tuition-free online university dedicated to the global advancement and democratization of higher education....University of the People offers a unique learning experience that combines educators, collaborative learning, information technologies and the internet.

At present, the University of the People offers study in only two fields: business administration and computer science. Each of these fields has a dean and a board of advisors who define degree requirements. Basic course material is assembled from open educational materials, some from the Open Courseware Consortium,  and given to course designers who modify and enhance the materials.  An in house group develops assessment standards for the degrees. Peer to peer learning is considered core to the approach, so students in a course are divided into groups of 20-30 that work together online on weekly assignments. Each group has an instructor who facilitates the peer to peer process by e.g. assuring that it is working towards correct outcomes, and suggesting other sources of information as needed. There are 5 terms in the year, with courses starting only at the beginning of the terms in order to create these cohorts. Admission is almost but not quite "open": applicants must be 18 or over, have a high school diploma, and be proficient in English. Although there is no tuition, there probably will  be in the future rather small charges associated with taking the exams. Students who successfully complete the degree requirements are awarded a bachelor's degree by the University of the People. The University is not accredited, but the website says that it is seeking accreditation at this time.

The Saylor Foundation was founded in 1999 by Michael Saylor.  It's mission is:

...to make education freely available to all. Guided by the belief that technology has the potential to circumvent barriers that prevent many individuals from participating in traditional schooling models, the Foundation is committed to developing and advancing inventive and effective ways of harnessing technology in order to drive the cost of education down to zero.

At present, Saylor is focusing on  working to identify, develop, and organize the material a student needs to know in order to earn the equivalent of a degree in any of the top ten majors in the United States. The foundation works with faculty and  peer-review teams from various higher education institions to package primarily open license educational materials into degree level programs. Learning goals for each course and each program are well described on the website. Any person can sign up for a course at any time, and it does not appear that there is any peer learning involved at present. It is not clear whether Saylor intends to offer a degree to students who succeed in passing the prescribed courses.

Saylor is collaborating with both p2pu (one of the potential disruptors described in part I of this series) and the University of the People to create and share courses, and some of Saylor's math courses come from the Khan Academy. Thus there seems to be a community working with some cooperation towards similar goals.

Both the University of the People and Saylor are providing the equivalent of degree programs, but lack accreditation. With current accreditation approaches, which depend almost exclusively on inputs (number of full time faculty, library facilites, etc.), accreditation for institutions of this type will be very hard to obtain. Yet, if accreditation were to focus on outputs e.g. what students actually learned, we might find that institutions such as these would fit well into the "outcomes" spectrum of accredited institutions.

I have not looked at a University of the People course, since one apparently needs to matriculate in order to do so.  The courses of both the Khan Academy and Saylor are rather rudementary in terms of use of pedegogy and technogy compared to what one finds in well funded online programs.  Thus, at this point in their development, the disruptive component of this group is not likely to be in the format and approach of the education being offered. Rather, it is likely to be in their demonstration that in this new era where information and content is everywhere, a reasonable college education can be produced at very close to zero cost.  

Cost and price in higher education, again

These administrators are like cookie monsters… They seek out all the resources that they can get their hands on and then devour them

Ronald Ehrenberg in Tuition Rising

As economic conditions around the country (and world) impose increasing limitations on funding for higher education, it is worthwhile to review some of the major reasons that higher education costs are so high and rise so rapidly. An understanding of these reasons is critical to making rational responses that preserve (and perhaps even strengthen) important components of institutional mission. This is, of course, a subject that has been extensively written about over the past several decades by many authors, but since responses to the current economic situation seem to generally ignore what is known about the problem, perhaps another brief review is justified. Interested readers will find my many earlier takes on this issue collected here. 

The quote above is basically a brief restatement of what is known as Bowen's Rule, which appeared in one of the earlier (1980) extended studies of cost in higher education. Bowen pointed out that budgeting in higher education is basically the inverse of that which occurs in most industries: first you see how much income you can raise, then you spend it all in pursuit of an elusive goal of "excellence" and brand. I put excellence in quotes because it is a concept that primarily is internally defined by academe itself rather than by its customers.

Interestingly, however, a recent work by Christensen, Horn, Caldera and Soares (CHCS) called Disrupting College showed that many of the cost issues in higher education actually correspond extremely closely to well - studied cost issues in other industries. Turns out there are cookie monsters everywhere! I will lean heavily on their analysis, because it gives a somewhat different perspective and brings in data from other industries that demonstrate the difficulties of finding simple, minimalist solutions to cost problems.While the terminology used may be offensive to some in higher education, the insights to be gained are, I think, worth the discomfort that may result. 

I want to focus on research universities, because that is where much of the public debate is focusing. Both cost and price are of importance, of course. I will not differentiate between public and private research universities, because in reality, most of the difference between the two sectors comes in how the price is allocated to different types of customers. To a high degree, the costs are the same in both sectors, and by Bowen's Rule, the prices are therefore the same (or vice-versa).  As I mentioned in the first paragraph, it is important to consider both why the cost is so high, and why the cost has risen for three decades at an annual rate well beyond that of inflation.  

 **********

First, why does higher education cost so much? CHCS lay the problem squarely at the feet of our intertwining multiple missions of teaching, research, and social growth of students:

There are three generic types of business models: solution shops, value-adding process businesses, and facilitated user networks. Each of these is comprised of its own value proposition, resources, processes, and profit formula.Universities have become conflations of all three types of business models. This has resulted in extraordinarily complex—some might say confused—institutions where much of the cost is tied up in coordinative overhead rather than in research and teaching. 

CHCS identify research with the solution shop model, which focus on diagnosing and solving unstructured problems; teaching with the value-adding process model, which uses resources and processes to turn incomplete inputs into more complete outputs of higher value; and social growth with facilitated user networks in which participants exchange things with each other. 

This conflation of different models in the university causes a big problem, since research in corporations show that mixing different types of business models in one organization is extremely expensive - it demands a mix of resources (including personnel) and processes that is very inefficient and expensive when looked at from the perspective of any of its component models. In fact, the overhead costs in such mixed-model organizations can dwarf the actual production costs. And, according to CHCS, this is just the real cost problem in a research university: 

Our best guess is that the overhead burden rate in conventional universities is between 4.0 and 5.0. In other words, universities spend four to five dollars on overhead for every dollar spent in teaching, assessment, and research....

Traditional universities trying to emulate the prestige of Harvard are structured ....in order to optimize the “solution shop” activities of their faculty. The value-added process activities of teaching students are sub-optimally force-fit into this structure.

And, one must add, the social growth- facilitated user networks are similarly sub-optimally fit into the structure. One must also emphasize that the solution- shop research activities of the faculty are simply optimized within the constraints of the existing multi-model organization, rather than in an absolute way. Most faculty will tell you that all that teaching and service seriously interferes with their research! 

Most of what has been written previously about the cost of higher education can be fit into this framework. What seems to be important to me about this perspective is that it tells us that corporations known for efficiency (relative to universities, at least) have the same cost issues when running a "conglomerate" organization. Thus, the problem is not that universities are inefficiently run, it is that they are built on a model that intrinsically carries a huge overhead.  The model itself will have to be changed in major ways in order to reduce costs appreciably.

Let me turn briefly to price and how it relates to this picture. The price that captures everyone's attention is that which is attributed to the educational component - tuition and fees, plus State support for educational activities in the public sector.  The other prices of major importance for the university are the prices charged to funders of research (primarily government and corporations), and room and board, which covers a component of the socialization activities. Given market forces that limit the prices that can be charged in each of these areas, the sum of all of these prices is not sufficient to cover all of the costs of all of the activities in these areas that the university wants to have. As a consequence, additional resources must be found e.g.philanthropy, patents, to balance the books.

Universities don't keep their books in a way that makes it easy to calculate how costs are allocated to the various functions, but it is clear that cross subsidization of activities is at the core of budgetary operations. Thus, the "educational function" actually carries many of the costs of social growth, e.g. recreation centers, student affairs, as well as of faculty research. The most obvious example of the latter is the very significant increase in cost and loss in productivity that comes when teaching faculty who teach four or more courses per semester are replaced with much more expensive research intensive faculty who teach two or fewer courses per semester. And, it must be noted, there are no data that suggest that student learning at the undergraduate level is better when such a replacement is made - this is simply part of the optimization of the "solution shop" activities mentioned by CHCS, and an example of the excess overhead that appears in this mixed model. In the end, however, what purports to be the price of the educational function is, in reality providing significant price subsidization for other activities of the university.

*******

Let me turn now to the reasons behind the rapidly increasing cost of higher education - 3%/year above the CPI for the past three decades. One traditional explanation also looks at the corporate side, and points out that enterprises whose major costs are for highly skilled workers who move in a broad market tend to see costs rising faster than the CPI.  Simply a question of paying competitive salaries for desirable workers. Some have argued that although this cost increase is real, it has been mitigated by turning to low cost graduate students and part time adjuncts for more teaching.  This is certainly true for some institutions, but universities have not uniformly turned to this solution. Thus some portion of the average increase probably still is due to this effect.

CHCS provide us with an alternative/additional explanation of the rapid cost rise based on corporate data: 

Our observation has been that as a general rule, head-on, sustaining competition among competitors with comparable business models, which lack economies of scale, drives prices up 6 percent to 10 percent per year in nominal terms.

Universities certainly all have comparable business models, and we lack economies of scale, so this shoe seems to fit. In our case, our sustaining competition has been called an arms race of ever upscaling athletic facilities, student services, lecture halls, big-name professors, etc. And, in addition some part of sustaining competition for higher education generally is mission creep - adding a master's degree to an undergraduate institution, etc. So the good news here is that higher education has actually kept price growth in better control than the corporate sector since we only grow at a nominal CPI plus 3% rather than the 6-10% found by CHCS! The bad news is it seems to be a universal effect seen across very different industries with very different drivers, so getting rid of the effect is probably not a reasonable goal.

If one sees price containment as absolutely necessary in the current reality (as I do), then one must look at the obvious caveats contained in the quote above: all competitors have the same business model, and there are no economies of scale. Thus an organization that hopes to contain real increases in price (as opposed to cost) either will have to try a very different business model, or find economies of scale, or both.

********* 

The discussion above certainly does not suggest that universities should not try to improve efficiency and productivity by e.g. adopting approaches such as have been described by the National Center for Academic Transformation that demonstrate increased learning outcomes while decreasing costs by the order of 40%. Such innovations should be part of any program to control costs.  However, because overhead costs dominate the actual cost of teaching, such improvements will lead to only marginal decreases in total costs. Larger decreases will depend on more aggresive changes to the basic business model.

The CHCS analyses strongly suggest that in organizations having a conflation of business models similar to ours, no individual business model is optimized. This opens the possibility that through rational but creative reorganization and adoption of new procedures, we could create a model in which the efficiency and effectiveness of each and every one of our missions was increased - at a lower total cost.

In this day when we hear constant warnings of approaching doom from our academic leaders as they look at ever more constrained resources, this analysis suggests that doom is only inevitable if the leaders lack the vision and resolve to look beyond the current model.  Studies in other domains strongly suggest that we can achieve better outcomes with less - with leadership.   

What will The College of 2020 look like?

Prediction is very difficult, especially about the future

Niels Bohr

(Note: the following was first published as an invited contribution on The College of 2020 in parts 1 and 2. I reproduce it here for the benefit of my readers by permission of the editors of the College of 2020)

What will the College of 2020 look like? It probably will be similar in at least one way to the College of 2011 -there isn't any one archetypical College of 2011 and there won't be any one archetypical College of 2020 either. US higher education consists of about 4,500 accredited colleges of 2011 with an incredible diversity of sizes, approaches, missions, and resources. I would expect the same to be generally true in 2020, with some important caveats: I think there will be significantly fewer accredited colleges in 2020, and the mix of sizes, approaches, missions, and resources will be quite different from today.

These changes will be driven by two forces that push from different directions, but each leading to increasing fiscal constraints on higher education. On the one side, local and national governments are finding it increasingly difficult to support higher education at traditional levels. There a world-wide movement towards decreasing the role of government in providing social goods, and the US reflects that movement. In addition, other governmental costs such as health care, prisons, and retirements are growing rapidly and squeezing out areas such as education. On the other side, all of higher education utilizes a model whose costs over the last 30 years have steadily grown about 3% a year above CPI increase. In the tuition-dependent private sector, tuition has grown apace, i.e. roughly CPI plus 3% every year for the past three decades. The costs of higher education are reaching a point where government, parents, and students are beginning to question if the product is worth the price. The answer is increasingly "no" for private institutions that have lower brand value, but the "no" likely will move upstream in the value ladder over time as costs increase until only a relatively small number of high brand value private institutions are immune. On the public side, the answer is increasingly, "no, not given our fiscal constraints" no matter what the brand value of the institution.

Thus what we will likely see over the next decade in higher education is an attempt to create models that provide high educational value (often, perhaps, higher than at present) with less cost per student. So to imagine what the future might look like, we need to understand why costs are so high and increase so rapidly, and how that can be changed. Oversimplified, a few reasons for the high costs are:

• In this world in which institutional aspirations are increasingly homogenized around a model set by the richest institutions, there is a continuing "arms race" to upgrade and increase teaching, recreational, living and dining facilities; expand student activities and student services; and broaden curricular options – all very costly "improvements"
• Physical plants are generally are very expensive for the number of students served
• Increased bureaucracy is needed to manage the growing fruits of the arms race and ever increasing government regulations.
• Arms race expansions of the breadth of course offerings lead to lowering the average number of students/class, thereby decreasing teaching productivity (students educated divided by teaching costs).
• Colleges increasingly are being asked to remedy the educational failings of secondary education, and this diversion to a non-core mission adds a costly overlay
• Teaching approaches have varied little over the centuries and consequently there currently is little room for increased productivity in this core function.
• Costs tend to increase faster than CPI in any sector where costs are driven by personnel costs, the personnel are highly skilled, and no productivity increases occur.

Another significant driver of educational cost increases has been attempts by many institutions to move up the brand-value chain by increasing emphasis on faculty research. This results in significant cost shifting from faculty research into undergraduate education e.g.:

 

• Research faculty command higher salaries than teaching faculty and those higher costs are spread over fewer students because of reduced teaching loads. Thus teaching productivity gets a double blow.
• Research facilities and instrumentation are more expensive than teaching facilities, and research sponsors and donors seldom if ever pay the complete costs of building and maintaining those facilities and purchasing this instrumentation, leaving costs to be covered by unrestricted funds – which are generally primarily tuition income.
• Government regulations and the bureaucracies needed to respond to them go up exponentially as research comes in, and research funding almost never covers these costs completely, again adding pressure on unrestricted funding.

Different institutions will begin to respond to the financial constraints in different ways depending on their particular conditions and missions. One of the most widespread responses, however, is likely to be a stepping back from the increasingly homogenized view of what "quality" means in higher education. Perversely, "quality" is not currently defined by learning outcomes for students, but by costly surrogates such as quality of student services and amenities, quality of physical plant, quality of faculty research – in short, the elements of the arms race which is defined by reference to the richest educational institutions. Lowering overall costs will require in most cases that institutions define their own unique educational niche – stepping back from the rich-institution inspired arms race. This entails sharpening and redefining institutional missions in order to create niches that are both valuable for students and society, and fiscally sustainable. Different institutions will deemphasize components of the present arms race in different ways, and will create some new, less expensive value propositions in their stead. For example, one component of the response of many may be to narrow their curricular focus to a relatively few popular majors, or to focus on pre-professional training. Happily, many will probably decide that a key component of their new value proposition will be an increased focus on learning appropriate to their new sharpened mission, and on demonstrating that effectiveness. Thus the colleges of 2020 may well show a much wider aspirational profile than what we see today, and one which is more focused on demonstrated learning rather than surrogates.

Another response that likely will be widespread is to increase utilization of physical plant. This can be done by admitting more students, possibly moving to year-around operations. Of course, this only is beneficial if savings on plant are not spent on increased instructional costs. For many institutions, this will mean that faculty will be expected to teach more courses and forego summers away from campus- and many students will have the opportunity (and obligation) to break out of the traditional fall-spring academic year. Online learning will also likely play a major role in enabling more students to be taught without increasing plant or instructional costs proportionally.

In fact, one response that will be almost universal is greatly increased use of technology to improve both productivity and learning outcomes. In particular, online (and blended) learning likely will be a central component of cost cutting, increased learning, and increased access. For stronger brand institutions, targeted use of online and/or blended learning will lead to increased learning outcomes, greater student satisfaction, and better utilization of faculty. It will also be used extensively for projecting the brand beyond the current geographic boundaries of the institutions. For weaker brand institutions, the same uses will be found, but with much more aggressive implementation required in order to achieve fiscal sustainability. For example, groups of weaker brand institutions might jointly share an online curriculum, and differentiate themselves through individual tutoring support and student-life amenities.

Online learning of all types and levels of quality will become readily available as colleges and corporations rush into one of the few areas that holds promise to increase productivity in higher education. A number of these programs will involve visible, major scholars working with the best experts in pedagogy, and have demonstrated high learning outcomes. The widespread availability of such programs will provide a major challenge for institutions that provide a "generic" education that can be easily and cheaply replaced by a high quality online program. (In fact, many of these low brand- differentiation institutions already have significant financial problems because they have few competitive advantages.) These low-brand- differentiation institutions will need to change mission and approach in order to create a differentiated niche that provides value and competitive advantage. Many will not be able to respond creatively in a timely fashion, and will not survive.

Lower ranked research universities will find it increasingly difficult to afford their current profiles - research universities are by far the most expensive form of higher education yet invented. In addition, overall research funding is likely to fall significantly over the next decade, thus making many lower ranked programs even less viable. Options will range from completely leaving research and totally changing faculty profile, to intermediate scenarios that involve a larger teaching faculty and significantly smaller research faculty. Overall, the value proposition for this group of institutions likely will shift in the direction of high quality student learning.

All of this is on the cost side- but some additional changes will work on the side of the price students pay to get a degree. Numerous institutions probably will emulate the Western Governors University and move to competency –based evaluations that enable students to move through the system at their own pace. Such approaches allow students to acquire knowledge from many sources, including work or online programs of their choosing, and get credit from the "home" institution by demonstrating competency. Bologna-like approaches will also provide educational outcomes measures that will greatly facilitate transferring of credit from one institution to another, thus providing a diversity of different cost pathways to a degree. As a consequence, many four year institutions may find that their first two years have been "hollowed out" by less expensive two year organizations specializing in quality transferrable core courses. This loss of enrollment in the more profitable core courses will put additional pressure on the budgets of the four year institutions, thus forcing additional mission change.

So for 2020 – increased diversity of institutional missions, greater use of online and blended learning, 12 month academic calendar, fewer research universities, increased transfer opportunities, not all existing institutions will still be around, and student learning will be a key differentiating factor. Now what was it that Bohr said about predictions?

A bad 4 years for family income, a good 4 years for college prices

Gordon Green and John Coder recently published an ominous report entitled Household Income Trends During the Recession and Economic Recovery. In it, they looked at real (inflation corrected) median household income over the period beginning in December 2007 when the most recent recession began, through the recovery which began in June 2009, ending in the near-present, June 2011. Over that period December 2007 until June 2011, median real household income fell  by 9.6%.  I will talk about some of the details below, but would first like to compare what happened to price in higher education over that period.

I have written about what has happened to real average published tuition and fees in private non profit colleges and universities over an extended period ending with the academic year 2010-2011, based on College Board Data. I haven't found data for the AY 2011-2012 from College Board, but NAICU reports from their surveys that the increase for 2012 over 2011 is 4.6% in constant 2011 dollars. Putting this together with the previous College Board data and the CPI increase 2010-2012, one find that the percentage increase in real average published tuition and fees for these institutions going from 2007-2008 until 2011-2012 is 10.6%.

Combining these two data, one sees that the percentage of median real family income required to pay the average real tuition and fees increased over this four year period by 22.3%! 

Obviously "published tuition and fees"  differs from what is actually payed for many students, and many will say, as does the College Board, that increased student aid narrows this income gap. However, as I pointed out recently, much of this increased student aid is in the form of loans. In fact, the loan component has been increasing at about 2% a year above inflation for several decades, only slightly lower than the increase in published tuition and fees. While the loans are important, and enable many to attend college who could not attend without them, they are nonetheless a component of the price of college ultimately paid by the student and so should not be considered to be "aid". 

As detailed in this report, the temporal nature of the decline in family income is astounding.  Most of the decrease came not in the period of the recession itself - but during the subsequent "recovery". The period from Jan 2009 to present shows an almost uninterrupted sharp decline in family income. In addition, there are caveats and details everywhere that emphasize that no family is "average" or "median". There is a wealth of data in this report looking at different segments of the population and how their real income has be impacted by the downturn.  

Suffice it to say that almost every group studied shows a significant drop in earnings - including families headed by someone with a bachelor's degree. However, families headed by someone with less than a college degree generally see a significantly larger drop in real income than do the bachelor's degree families. Although family income is not one of the variables studied in this report, other studies show a strong correlation between educational attainment and household income. Thus, the large drop in income for lower educational attainment families, along with the continuing rapid increase in tuition and fees, combine to suggest that the issues of access for children of lower income backgrounds are rapidly becoming even more serious.

It is well worth looking at the entire report, and considering how its details might inform future pricing decisions in higher education.  

 

Brief update on StraighterLine, one of my potential disruptors

In a recent post, I described several organizations that seemed to me to be potential disruptors on the higher education space.  StraighterLine, which focuses on offering introductory college coursework on line, is one of these.

StraighterLine has now issued its first "report card", a survey of their students. The survey looked at such things as student satisfaction, convenience, perception of course rigor, and whether the student was able to obtain credit from a college of their choice for the StraighterLine course. In brief, the students seemed highly pleased with the courses on all parameters. Importantly, over 90% of those who sought college credit for the course were able to obtain it.  

The response rate to the survey was modest, and it would have been nice to see some validity discussion in the survey. Nevertheless, the report card indicates that StraighterLine is finding strong student approval of its method of offering an inexpensive way to get college introductory courses online, and that those courses are being recognized and accepted by traditional institutions.  Sounds like a good step along the path of disruption! 

Moody's looks at student-debt problems

Moody's Analytics has published a very nice analysis of the student loan situation by Cristian Deritis :

In this study, we examine the rapid growth of the student loan industry over the past few years, the weakening performance of loan portfolios, and what these trends suggest for future performance and lending volumes.

I will not go through the interesting analysis here, but simply show two very powerful graphs from the paper, and jump to the conclusions. The first of these graphs shows the rapidly growing student loans balances, which continue to grow although total loan balances have been shrinking:

The second graph, similar to many I have shown before, demonstrates a major driver behind this growth in loans - higher education tuition increases compared to increases in other sectors:

Always impressive how increases in higher ed costs outpace the rest of the pack! However, if there is one assumption in this analysis that I would challenge, it is that this type of increase in tuition relative to other sectors will continue for another 10 years at least. As I have often indicated in earlier posts, I think society will find a way to prevent continuing increases of this magnitude, and I don't think it will take 10 years to do so.

Deritis suggests a number of factors relating to the significant increases in student debt. Among these are decreases in state support for higher education, endowment losses, demographic changes, rise of for-profits, and government continued support of student loan programs even when other types of loans were drying up. Deritis argues that in many cases, government incentives have lead to undesirable results.

Based on analysis of all available data, Deritis suggests that future defalt rates are likely to rise significantly.  His conclusions give food for thought:

 The long-run outlook for student lending and borrowers remains worrisome. Unlike other segments of the consumer credit economy, student loans have not demonstrated much improvement in performance despite some improvement in the broader economy. Origination volumes have remained elevated and are projected to continue to grow with rising demand.However, there is increasing concern that many students may be getting their loans for the wrong reasons, or that borrowers—and lenders—have unrealistic expectations of borrowers’ future earnings. Unless students limit their debt burdens, choose fields of study that are in demand, and successfully complete their degrees on time, they will find themselves in worse financial positions and unable to earn the projected income that justified taking out their loans in the first place.

Update on Perspectives on the elephant of college pricing

A year and one half ago I wrote a post called Perspectives on the elephant of college pricing. In it, I looked at the increasing cost of higher education from three perspectives: the public's view; the student and parents view; and the college view.  In all cases, I focused on private, non-profit four year institutions. Given the changes in the economy since that post was written, it seems worthwhile to give a quick update on each of these perspectives.

THE PUBLIC'S VIEW

In this section, I looked at increases in published tuition, fees, room and board over time, compared to changes in family income.  These numbers are those most often used in discussions of the price of higher education, and so help to form the general public's view of affordability.

In the earlier post, I showed data demonstrating that real (inflation adjusted) family income had been essentially flat over the past 20 years for all but the highest quintile.Over the same period, inflation adjusted average published tuition, fees, room and board climbed 68%. In fact, this rate of increase was considerably higher than the rate of increase in family income even for the highest quintile. Thus, for almost every family, the cost of higher education as shown by the published price has increased enormously over the past two decades as a fraction (or multiple) of family income.

Most recent data simply extends and reinforces this conclusion.  The latest Census Bureau report adds data on 2009: it shows that real family income at all quintiles was essentially unchanged from the 2008 data used in the previous post.  Tuition, fees, room and board went up 4.3% for 2010-2011, according to the College Board, while CPI increase for the 12 month period ending July 2010 was 1.2%. Thus the real increase in published price was about 3.1%. Somewhat lower than the 20 year average increase of about 3.5% a year, but not super when family income stayed essentially flat.

So, for this view - more of the same - college is pricing itself out of the reach of most families.

THE STUDENT AND PARENT VIEW OF THE ELEPHANT

The data get more complex when viewed from this perspective - there is both good news, and bad news.  Obviously, the focus here is on what is called the the net price of education -published price minus aid - and the kinds of aid involved.  The College Board estimates that for 2010-2011, as in recent years, the net price actually stays pretty flat due to estimated increases in aid. However, they give no breakdown of grants vs loans in the aid numbers in 2010-2011. There was a big jump in Federal grant support in 2009-2010 that brought the grant/loan number slightly above 1/2 for the first time in several years. Of course, 2010-2011 has not been such a great year for the Federal budget, so that fraction may have decreased somewhat in the most recent year.  In any case, roughly 1/2 of all aid is in the form of loans.  Thus, the College Board characterization of "net" is actually only net if one views the loans as a gift that need not be paid back - other, stodgier folks might consider "net" to reflect the real total cost to the student, which includes paying back the loans with interest. 

In any case, if one plots the total of the net price as defined by College Board plus the loans to be repaid (as was done in the previous post), one finds a number that increases at roughly 2% a year above inflation for the past few decades. College really is costing more each year. And, according to recent reports, this increasing cost is reflected in data that shows the Class of 2011 graduates have the highest debt load ever -  up 8% from last year.

THE COLLEGE VIEW OF THE ELEPHANT

For the college, the pertinent questions are: 1) did we make our class?; and 2)how much of the published value of the tuition did we have to give back to student in order to make the answer to 1) be "yes"?.  A significant fraction of the grant aid that students get comes from their college, which creates a pool for such aid from such sources as endowments, gifts - and a fraction of the tuition it receives. This fraction of tuition that gets recycled as aid is the discount rate.  So what is happening to the discount rate in these turbulent times?

NACUBO reports in their recently released 2010 Tuition Discount Study that things are not looking good in this area:

The average discount rate (defined as institutional grant dollars as a share of gross tuition and fee revenue) for first‐time, full‐time freshmen jumped from about 39 percent in 2007 to an all‐time high of 42.4 percent in 2010; the rate for all undergraduates reached 37 percent, also the highest ever recorded in the NACUBO TDS series. In addition, the share of first‐time freshmen receiving institutional grants rose to nearly 88 percent, but the average grant award as a share of the average tuition and fee price fell from 52 percent to 49 percent, which suggests that colleges and universities were awarding smaller grants (relative to tuition and fee “sticker” prices) to a much larger number of students......

Net tuition and fee revenue fell 0.3 percent in 2008; it grew less than 2 percent in 2009 and just under 3 percent in 2010 (these rates compare with the long‐term annual average of 4.3 percent)....

The study also found that on average just 10 percent of fall 2009 institutional grants were funded by restricted and unrestricted endowment earnings, which suggests that most institutional grant aid is “unfunded” (that is, institutions do not have a dedicated revenue source to support their institutional grant expenditures and thus must use gross tuition and fees to support these expenditures).

The  increases in institutional grant aid were, of course, not the result of concerns for the financial difficulties of parents and students. Rather, they reflect what institutions felt would be necessary in order to fill their classes, thus warding off even larger financial losses. 

So from the perspective of the college, the model of rapidly rising published tuition is not working so well, either. Aid is increasing so rapidly that it is eating up the real increases in income needed to sustain the current business model of higher education. It is worth noting that the roughly 3% increase in net tuition in 2010-2011 is well above the 1.2% increase in CPI. Thus, even this real increase in income is insufficient to stave off the the very visible hiring and salary freezes, deferred building plans, etc. that have marked the past year in higher education. 

*******

The situation from all perspectives is obviously greatly exacerbated by the current unusually bad economic times. Pressures to increase discounting have been enormous for many institutions, especially those whose selectivity is lower. Economic times eventually will get better, of course, but NACUBO warns that it may be some time before institutions see the year‐to- year gains in net tuition revenue they experienced before the beginning of the economic downturn. In fact, there are increasing indications that there may not ever be a return to such gains for many institutions.  There are serious questions being raised by the general public regarding whether higher education produces a value equal to its cost. This issue will hit those institutions that are "non-elite" most strongly, and make it increasingly difficult for them to raise tuition at the historic rate.   It also may well be the case that the American public will be more cautious in taking on loans in the future, and thus will look much more carefully at the concept that a loan is really decreasing the net cost of education (as the current terminology implies). Should this happen, it could significantly raise pressure to raise grant aid, leading to higher discount rates.

All in all, the data clearly indicate that the current cost/price model of higher education is working less well with each passing year from each of the three perspectives. Is it time to start thinking of sustainable alternatives?

 

 

 

What does society have to pay for a student to get a bachelor's degree?

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.