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02/24/2008

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Dave

Professor,

The universities with large endowments will do what is in their best interests. To the extent that they fear losing the handful of exceptional candidates who eschew their schools for full scholarships at flagship state schools, they will follow the examples of Harvard and Stanford in waiving tuition for applicants whose parents' incomes are below a certain level. It's the non-exceptional students and their parents who often aren't acting in their own best interests.

The benefits of a college education at an elite school such as U. of Chicago may trump those of the an education at an average state school, but how many students attend expensive, but non-elite private schools? For many of them, the additional cost negates much of the potential return on investment of their education. Two years in a community college followed by two years in the best state school in their state that accepts them would probably result in the highest return-on-investment for most non-exceptional college-bound students. Even better would be to join the National Guard, if they have the aptitude for it, and if they live in a state where National Guardsmen get free in-state tuition.

Scott

Interesting argument. A useful comparison would be to track increases in federal student aid against tuition costs. I think you would find that rapid tuition increases have been to some extent subsidized by increased student aid.

Bob

As long as the government gives or guarantees loans and scholarships and students aren't paying out of their own pocket then education costs will rise. Just like health care costs when it doesn't come out of your wallet then the costs will rise. The free market has left university's as well as hospitals.

If you look at the ratio of employees to students you woudl find that for some colleges its a 2 student to 1 employee ratio....how inefficient.

Tucker

As a very recent grad I have to disagree with a lot of this. First the skill based technical change model that promotes college education as creating a greater return than previously. Unfortunately real wages for non-managerial workers with a bachelor's degree have stagnated or even slightly declined during the Bush presidency while real tuition costs have increased dramatically. This has actually led to a decline in the growth in demand for a traditional undergraduate education which might further exaggerate the rise in cost. Over the longer run since 1980 workers with graduate degrees or those in management have seen wages grow continuously but others only saw their wages grow during the 90s. Further a lot of growth in total wages was actually a result of higher salaried workers being paid more for working more hours.

As far as financing goes- it is highly dependent on the rates at which financing is available and institutions have set up relationships to automatically enroll students in financing with a particular bank often at poor terms with no other options. Financing can allow somebody to get reasonable terms on debt but really the only good way to do it was how my mom did it when she went back to grad school- she immediately moved all of the debt into my childhood home during a growing housing market. That isn't exactly possible for many grads. My brother just entered a more expensive liberal arts college and I'm guessing he's going to end up with $25,000 in debt at 8-9% from Bank of America, and that isn't easy to work off in what will probably be a higher inflation setting because of cost-push.

As to the endowment issue- the question in many cases just becomes what are the colleges doing with the endowment? I mean Harvard is second only to the Catholic church in terms of assets and what does the scale of that endowment help them with? I agree that a 5% a year rule would be overly restrictive but applied over a 5 year period a smaller endowment that is used should still be able to satisfy the demand that it is being used to further the institution and education of its students.

UC Davis Neuroscientist

The position of a college or university in the all-important US News & World Report rankings is strongly dependent upon endowment value. Therefore, there is a strong rationale to horde endowment as a high ranking enhances attractiveness for the best students and faculty, which leads to future success in the competition for gifts, grants and other sources of revenue. As long as endowent value plays an important role in the US News rankings, colleges and universities will have an irresistable incentive not to spend-down their endowments.

Ben

"The agitation about the fraction of endowment that colleges spend is driven in large measure by the rapid rise in tuition since the late 1970's."

It strikes me that the heart of the question is not simply the perplexing relationship between endowments and tuition, but the function of the university and the public expectation of that function. I don't believe that the source of the agitation is so much the result of the public's inability to perceive the final benefit of the education they are receiving, as much as a legitimate question surrounding the primary purpose of the university and its role in society.

If the university is primarily a research entity, probing the depths of scientific discovery while the students are allowed to bask in the glow of the illustrious faculty, then there should be no concern that the endowments are intended for new faculty positions, facilities, etc. If, however, there is some expectation that the university supply a democracy with educated citizens who have been equipped with the habits and discipline of thought and reflection, then we might begin to question the ratio of expenditure on the new, as opposed to the perennial. This might not be to the liking or benefit of faculty and administration, but it might be of value for those things which are essentially human.

Author, No Sucker Left Behind

I think that Dr. Becker underestimates the hardship created by student debt. A wide variety of studies have shown that debt is unmanageable for too many students. And many surveys have shown that this debt precludes career choices, the pursuit of graduate school, and even marriage and having children.

If one is willing to accept that a significant portion of college graduates are struggling in some fashion due to their educational debt, then it is reasonable to wonder if wealthy colleges should be required to disburse their wealth to the students who need it most.

Jack

Tucker sez: "My brother just entered a more expensive liberal arts college and I'm guessing he's going to end up with $25,000 in debt at 8-9% from Bank of America, and that isn't easy to work off in what will probably be a higher inflation setting because of cost-push.
sez: "

........... given that higher education is something of a societal good, one wonders why we're feeding our students to profit maximizing bankers. With bonds paying only a few percent it would seem that colleges could, and should, lend some of their endowment funds at close to bond income rates plus a little for defaults, especially as today's tuition would indicate the possibility of profit or a lot of overhead.

Well Tucker, yes we're in another round of cost-push inflation that is unlikely to respond to either Fed tightening or easing. Dare we haul out the word "stagflation" from the 70's? But! at least your brother will have the advantage of paying back with dollars even more worthless than those of today! Today, his $25k would almost buy a full size pickup truck, while just 25 years ago the same cost only $7,500

1212

www.bestmishu.com

Tony Oaks

When I was an undergraduate at the University of Chicago, I remember hearing Professor Friedman say several times that the only morally justifiable use of tax dollars was for the national defense and... education. (I remember he would always make a dramatic pause before he said "education" and then afterwards would smile like the cat that ate the canary.)

For an article from Friedman reminding us on why there should be some consideration for government support for education see this article:
http://www.schoolchoices.org/roo/fried1.htm

Your article ignores the question of whether it is better for legislatures to support education by directly funding state university budgets or by issuing vouchers to students so that they might choose where to go to school. Don't your arguements against help for individual students apply to government subsidies for universities as well?

Whether it is now "right" for government to tell universities what to do with their endowments, I am reminded that Professor Friedman also told us that if universities really did not want government interference in their activities they should not accept government monies. After years of billions of government grants it seems completely legitimate for legislatures to take a look at the endowment cookie jar and start to jawbone university tuition rates.

AC

Indeed, there are many good reasons for governments to be concerned that top talent researchers and students are becoming concentrated in only a few regions of the United States (E.g, Harvard, Stanford etc.) That said, it's not clear to me why a University should be forced to spend their endowments. The top privates spent a great deal of time and effort cultivating the relationships that produced those endowments and if anything, such commitment to higher education should be encouraged.

The root problem, I believe, has more to do with how to get state institutions of higher learning to deliver education to their constituents that is competitive with schools elsewhere. Specifically, state schools have historically conflated egalitarianism with research competitiveness and have consequentially failed at doing either particularly well.

Much of this problem could be solved by splitting responsibilities of the state campuses: for example, one "flagship" state school could serve as the economic/scientific engine that can compete globally with other top private and public schools for student and faculty talent.

A second state campus should focus on providing a competent teaching education to the majority of students at a relatively low cost. This is ultimately what a large segment of the college-going population wants. Of course, the state should offer a clean way for a person in the second school to move into the flagship school contingent on achieving certain levels of achievement. It is also critical that information gaps between rich/poor etc. are addressed before instituting such a system.

Fifty very strong flagship schools that compete at the highest level with the privates will do a lot to balance out a great many of the concerns that Grassley and the like may have.

GageParker

Direct funding of state university budgets is only one form of our current structure for government subsidy for education that Professor Becker has not addressed. This is not a place for hair splitting distinctions between "state" schools and "privates." With the possible exception of some lower tier schools, the so called privates have been wallowing at the public trough (research grants) for years.

At UofC we were taught that money is fungible. While tax dollars may not have been directly deposited into endowments, the availability of tax dollars surely enabled endowment growth.

matthew

The tragedy is the expenditure of resource at piss-poor institutions, independent of whether it comes from government, individuals, or philanthropy.Do they prepare a demos for self government? ... I wish.Do they pay economic dividends? ... perhaps as a grossly inefficient signaling device, with middling 17-year olds facing a million player prisoners' dilemma.

Owinok

This blog post should be recomended reading for University presidents. It is often worrying when part of the attraction of a school is the large endowment yet for some, the managers of the endowment fund make more money than is spent of research and scholarships. This is not the legitimate purpose of a university but that is no reason for compelling universities to spend that money quickly either.

Nathan

"My brother just entered a more expensive liberal arts college and I'm guessing he's going to end up with $25,000 in debt at 8-9% from Bank of America, and that isn't easy to work off in what will probably be a higher inflation setting because of cost-push."

Why not go to a cheaper state college instead if the debt is so burdensome? No one forced him to go to a more expensive college. I can answer for you if you'd like-it is (at least I hope) because he thinks the return will be higher for going to that liberal arts school (for whatever reason-so he can get into a better law school...or...whatever).

Tucker

Nathan- There are a few issues. First is upper-middle class norms where cost isn't supposed to be the concern of the student and the 'experience' of college is expected. So parents are expected to pay whatever cost there is and it is supposed to be affordable in the supply. Clearly this has broken down with demographically increasing demand has driven up prices. I don't think that he is paying more for better returns. He's paying for a higher quality liberal arts college experience, in the manner of individual attention, social opportunities and that sort of thing. But he doesn't fully understand the costs and I don't think that you should expect 17 year olds committing to a particular college to fully understand the long term costs. It is also partially that within the social environment of Northeastern suburbia state schools are lower status.

I think that some of the suggestions here are very good, particularly about having better flagship state schools. From afar California looks to have a better model than the rest of the country. There are really a host of problems increasing costs of tuition. Part is there is little price competition between schools, part is that loans have a profit margin attached that shouldn't be, part is the rising labor cost of post-graduate degrees and managerial positions.

Jeff

I find the debate on college costs very interesting.

When I was a high school senior, I did not go to an Ivy League school because I would be 40K in debt upon graduation(1980). I wound up attending a junior college, and then a state school. Since I am self employed, it made little difference on my outcome.

However, your choice of careers matters greatly in the calculation, with your expected income in that career.

If I were to go to that Ivy school, and went to Wall Street, the 40K debt would probably have been inconsequential. For sure, the 200K debt you would have today would be inconsequential given the high salaries and bonuses investment bankers receive. But had I chosen to major in sociology and done social work, the debt would have been significant because there just is not as much money in it.

The selection of school will open doors for you in certain communities. But in others, school selection makes no difference. The expected outcome needs to be factored into any decision.

As far as endowments, I agree with Becker. If a college maintains its high level of educating students, it should turn out graduates that will be continuously successful. If the college can get them to donate after their years are over, then endowments should not be affected much in the long term. I would be against any government mandate of spending a percentage of endowment. Limiting government interference in education should be a goal.

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