America’s College Funding Debacle Has Deep Roots
From tuition-free college to student loan forgiveness, the Democratic contenders to challenge President Trump are floating many proposals to address the troubled U.S. higher education system.
Those troubles are legion — essentially, education costs that have been rising at several times the rate of inflation for decades; increasingly onerous debt burdens taken on by students (now totaling $1.5 trillion); and increasingly poor outcomes for many in terms of degree completion and job placement (40% of recent college graduates are working jobs that do not require a college degree).
College Costs Have Far Outstripped Other Consumer Goods
Source: Federal Reserve Bank of St Louis
Many Millennials and members of Gen Z have experienced the worst of these dysfunctions, and are the most enthusiastic supporters of the radical policies being offered as solutions by the newly invigorated progressive wing of the Democratic Party. While we have doubts about some of the proposed solutions, we certainly understand these young voters’ frustrations. They feel that the relentless inculcation of “college as a path to success for all” was a con game, and in many ways, it is hard to argue with them.
We note, however, that the current crisis has been brewing for a long time. It is really a set of unanticipated consequences of policy decisions stretching back to the Johnson administration of the mid-1960s. Essentially, Federal student loan guarantees, though created with the noble intention of making college more accessible for more students, ended up creating perverse incentives, as institutions boosted enrollment, relaxed admissions standards, and raised tuitions. Those trends were exacerbated when the Federal government began loaning money directly, and also when income-based repayment programs were introduced — which encourages students to take on debt irrespective of likely future salary, schools to raise tuition still further, and ultimately leaves taxpayers on the hook.
In these pages we have often commented on the coming transformation of education. The following organic developments are some of the emerging solutions for more effective and efficient higher education:
- The replacement of one-size-fits-all degrees with more practical micro-degrees focused on specific competencies;
- The advent of massive, open, online courses (MOOCs) with an option for certificates of completion; and
- Partnering between high schools and corporates to train young workers and bring them into the workforce in a more direct and practical way — a paradigm modelled in part on the very successful and effective vocational and apprenticeship programs that are common in Europe.
The political battle over education, like that over healthcare, will continue to play out. Our perspective on both is that the policies most likely to be successful will be those which rely on incentivizing sound behavior by individuals and institutions, and those which clear the way for new and innovative solutions, rather than those which double down on the centralized policies of the past which helped create the present debacle.
Investment implications: Many investors use a portion of their savings to fund educational expenses for children or grandchildren. Being aware of trends in education expenses and outcomes can provide valuable insight for decision-making as increasing numbers of high school graduates explore other options for their education and career than a traditional college trajectory. Major tech firms, including Alphabet [NASDAQ: GOOG] have dropped requirements for new hires to have college degrees, a sign to us that aspirants to some technical fields may already be served better by alternative educational venues.
