Readers need to be very careful when reading the article which said College Board: US student loans are dropping, but cost of college is still rising

If people just read the title of the article, she or he may get very misleading information.  From the title alone, a reader may not be able to know which US student loans (per capita or aggregate) are referenced.  This kind of misleading article title has been around for many decades.  Instead of providing an honest assessment, the report got twisted.  Even the title of the article is so illogical–the two clauses of the title contradicts themselves.  Increasing student loans have a positive correlation with rising tuition.  Therefore, it surely irrelevance when the student loans dropped while the cause of the loans to drop, i.e., college tuition is rising–a Fallacy of Relevance type of logical error.

The fact that US student loans dropped is in TOTAL or AGGREGATE need to be added into it.  Decreasing of total students loans in the US occurs because of the negative reactions from the American public and not from any other reasons.  The society gets tired of supporting college reckless spending.  The consumers get smarter than ever before by not supporting (read: buy) those colleges that have acted recklessly by keeping the cost of education higher every year with no viable reasons in decades.  As results, consumers’ (students and their family) willingness-to-pay have finally hit the wall.  In economic jargon, they become indifferent toward having a college degree or not.  At that point they may choose to attend a trade school.  When people gets smarter, then they can see that the charged price of the services or products that the college is trying to sell is much higher than its value.  In other words, it is not worthy to spend that kind of money, when the buyers (students and their family) cannot get anything out of it, but debts that they need to bear for thirty years.  The coming of consumers’ adverse reaction is predictable and has been expected for many years.  Even people with less economic theory background understand the impacts of charging too much for something too little will harvest negative consequences in the future.  Some US colleges have dug their own grave.  It is just a matter of time which among them will soon be buried to the hole that they have patiently and diligently dug for many years.

When enrollment dropped 70 percent from the target, then one knows that the end is near for some.  This is one of the most important reason why the total of US students loans has declined by 13% as suggested the College Board.  Declining in college student enrollment is the driving factor behind the College Board story.

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Let us continue our analyses on the FTE and Spending Analyses which was posted before.  Supposed, Campus D’s spending is the same with the revenue it has generated.  Applying the IRI paradigm enables one to look beyond the numbers.  Analyst applying the old IR concept usually will stop and conclude that College A, at location D did a good job by balancing its revenue and expenses.  However, if one digs deep-down, then the story could be VERY different.  After further analyses, one may find that the actual spending varies among different programs.  To illustrate this important IRI mindset, let us expand the example that we have analyzed before and add other information at the program level as shown in Table 2 below.

There are three programs that have not been managed appropriately and these programs are A-3, A-5 and A-8.  The management has to be able to use such a simple approach to identify which program that needs to be streamed line.  This table is very important and can be used as an unbiased yardstick during the program review.  After this step was done, then one can move on to identify the causes of inefficiency in the second round of the analyses.  The second step consists of analyzing in detail what activities or processes that are redundant and can be eliminated without disrupting services provided to the students.  Some people call step two as the LEAN process.  The concept is borrowed from manufacturing industry and TQM (Total Quality Control) field.  None of LEAN or ABC costing that we have previously discussed were ever known in the past (old IR).  Again, after we introduced the NEW IR paradigms or Institutional Research Intelligence (IRI), US colleges start to see the need to move away from the reporting (old IR) and to apply the new management tools that are in line with IRI principles.  That being said, the transition from the old IR to IRI can only be done by those institutions that can see the future and not the past supported by a big data expert.

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Data supported by rigorous analyses have shown and confirmed that the current US education system will not sustain unless dramatic changes are taken.  While the evidences are clear, some colleges however, are still operating under the BAU mindset. Therefore, the decision to make a change depends on how far the management wants to make the change.  College decision makers can make whatever decision they want, and of course with all the consequences.  There is a clear trend that they, the administrators move around when the reckoning (accreditation) days get closer.  Hoping from one institution to another is one of the many practices that college administrators usually do when it comes to avoid accountability.

In this opportunity, AAEA would like to introduce a way where US colleges can apply to navigate the new sea of competition and regulations.  The cost saving, in no doubt needs to be done.  There are many ways to do it.  For example, one may need to cut the operating cost based on where it occurs.  In other words, a particular college can break down its expenses based on the activities or one may need to break down the cost by program or by any other possible measurable way.  In the real world, it is easier to break down each activity and to relate it with a specific location.  Supposed College A has five campuses as shown in Table 1 below.

These are the cost centers that generate revenue.  In order to apply the cost analyses, one needs to know the expenses at each cost center at each location.   As shown below, location H is the champion in generating the revenue.  While it looks good, the number only shows part of the story.  Without information of what is the total spending on that location, one cannot make any conclusion.  It will be good if total expenses are lower than $11 million.  Even under such a case, it does not necessary mean that each activity at that particular location has been managed in the most efficient way.  For example, if 50 percent of revenue is spent to pay non-teaching activities at Location H while it is 10 % in location C for the same category, then the decision makers surely can say, something fishy may have happened at location H.  The efficiency (spending to revenue) ratio tells it all.  If the ratio is greater than one at location A, then appropriate action needs to be taken.  The same principle can be applied to any unit within College A.  Some people call such an approach as ABC costing.  It all about wise business practices–whatever you want to call it.  The hardest part will be to control the administrative or overhead cost, and AAEA suggests to  combine standard costing and ABC concept to deal with the issue.

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Again we heard the unfortunate situation where the young Americans were cheated left and right, and from north to south.  Recently we learned more from CFPB (Consumers Financial Protection Bureau) how students get cheated when paying their loans.  Not only that they have to deal with the ever increasing college education cost, but they also have to deal with other financial burdens in the loans repayment period.  How should Uncle Sam deal with this reality?  If the country can send the first human to walk in the moon, why can’t it deal with the skyrocketed college education cost, student loans and other negative financial impacts related to paying back the loans?  The student loans problem must be very difficult (yes, you read it right–VERY DIFFICULT) to be solved.  It must be more difficult to overcome the challenges compared to those of preparing Neil Armstrong as the first human to step on the moon.

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It was just announced today that French Economist and MIT graduate Jean Tirole won the 2014 Nobel Economics Prize.  His research has helped society to understand many social and economic issues.  The most important of his contributions as cited by Royal Swedish Academy of Sciences is on market failure when only few players are in the market.  In other words, even when one of the important assumptions of perfect competition is not met, then the industry or market is said to be inefficient.  On October 6, 2014, exactly a week before the 2014 Nobel Prize was announced AAEA has brought and discussed the issue of industry/market failure that is happening in the US higher education.  Industry failure can be avoided, minimized or improved through the “right” regulator’s intervention.  The Association has mentioned the needs to step up both academic and financial accountability and assessments efforts on Title IV eligible higher education institutions that have received federal (aid) funding.  The existing and implementation of current regulations can be improved significantly.  The negative effects of fruitless regulation are pretty clear, the society as a whole is worse off.   Even the US colleges themselves are facing financial trouble as recently reported through Gallup and Inside Higher Ed survey.  Students and their families have to bear all the student loans which will reduce their future purchasing power.  Not including in such a case of students who cannot finish their degree because of their campus and program closures.  The multiplier effects of such a disposable income reduction are significant on the ability of loan borrowers and their family on meeting their basic (consumption) needs such as housing, foods and others.  Keep implementing ineffective regulations will make things turn from bad to worse.  It is pretty interesting to see, after this blog was made public, Mark Cuban confirmed what the Association has long hypothesized on the potential of student loans impacts on the US economy.

It is always interesting to discuss about honesty, integrity or trustworthiness especially in today’s world.  Though the seeds of these great characteristics have been embedded into humans when they are created, as time passes by, the seeds can grow or die or may get corrupted for many reasons.  When short-run profit is more important than delivering and satisfying customers’ satisfaction in the decision making process, then the actors’ actions might negatively affect the interests of the whole society.  Should we blame Jevons, Carl Menger and Leon Walras and other followers of Neoclassical Economics ideas for the current system has left consumers to be worse-off?

One can observe the dying seeds are occurring in the US education system.  The regulator has very noble ideas how to make the country strives in the world and how the country’s competitiveness in the global market can be maintained and improved through education.  This burning desire motivates the regulator to design education policies so that national dream can be achieved.  Letting various for-profit and not-for-profit institutions to actively participate in the process show another side how great Uncle Sam is.  However, with the skyrocketed of college education cost and massive student debts, it seems that American public’s trust on the involved parties have been betrayed.  The entrusted seeds of these great characteristics have been corrupted in all directions.

The great ideas to make the US to be one of the most educated countries in the world fall short because lack of integrity of the actors.  One just cannot assume that the great seeds will always grow in the right direction.  Lacks of supervision and accountability in all sides of the isles have created a perfect storm.  The storm is so powerful and it has caused almost impossible even for the best and most experienced captain to prevent the ship from sinking (over 1400 pages pdf file). The American public knows that the current system is unsustainable or in the economic jargon—Pareto optimality is out-of-reach.  However, no one really knows how, when, where to start and what need to be done?  There are senses of helpless, giving-up, surrender and confusion.  The phrase to-big-to-fail is often cited to justify the condition.  Please keep in mind that even though we have the traffic-light, the society still needs the law enforcement to make it effective.  Perhaps, the time has arrived for the US to have ESCC (Education Standard and Compliance Commission).  Such compliance is badly needed so that Pareto improvement can be attained.

Sure enough that Caltech is ranked number one by Times Higher Education magazine of Great Britain, according to a survey released on October 1, 2014.  AAEA published its research finding on September 21, 2014 which shown that Caltech is the only higher education institution among the top ten US Colleges and Universities published by US NEWS which is less dependent on the regulator’s financial support.  Based on the Association studies using national data published by NCES, in no doubt that Caltech is the only institution among the top ten schools that is less dependent on Government’s support.  While other schools’ financial independent steadily dropped in the past ten years (2000-2010), Caltech’s dependency is improving over time.  The Times Higher Education has used different yardsticks to come out with the rankings, while AAEA only use two measures, but the data and analyses point to the same direction.

It is pretty interesting to see how the ranking report could have positive impacts to the American public.  One day after the Times announcement, the University of Chicago, who fell from the top-ten ranked school last year reacted to make the PR damage control (hopefully this is not the case).  It announces today (October 2, 2014) that the institution is embarking to enroll more economically disadvantaged students.  The policy will include elimination of loans from aids packages. Notes the word “embarking” was carefully crafted and used in the announcement.  Readers need to pay a close attention on what the school administrators really mean when they say thing.  Will they actually do it?  Who knows?  However, if one looks at its Government Financial Dependency Ratio of 75%, there is a good chance that the school’s administrator will not be able to keep his or her promise.

Public pressures surely have positive impacts.  However, it will be better if US higher education institutions more proactive instead of reactive to help solving the students’ financial burdens.

Congratulations to Caltech for a job well done.

After posting the first article, the Association continues to share its research finding to the American public on the related topic.  Using the last ten-year data (2000-2010) AAEA has calculated the number of new higher institutions who have entered the industry.  Please note that not all new institutions were captured in the analyses, especially programs that were offered on-line and after 2010 academic year.  Therefore, one needs to be aware that the actual number of supply increase might have been significantly higher than what the Association may have used in the analyses.  On average, there is evidence of positive supply growth.  If this growth is higher than the demand, then one might expect it will affect both the intensity of the competition and the price of higher education services.  According to the law of demand and supply, the price should be affected in a negative way.  However, in reality that never happened.  Instead, it moves toward the other direction.  The regulator’s policy on student loans during the period of analyses may have played important role to avert the law of the market to function effectively.

When thing works against the logic, it is just a matter of time until the law of the nature makes important adjustments.  Market corrections are happening right now.  Some current examples are:

1. The closures of Corinthian and Anthem’s Colleges.
2. Financial troubles of the Art Institute.
3. CFPB’s financial investigation on ITT for Predatory Lending.
4. Declining student enrollments.

The US regulator has finally realized the unintended negative effects of current student loans policy and is trying to amend them through the CAR.

While only the DOE knows how big the excess supply is, outside observers can only see the symptoms of saturated industry. From other studies, we noticed that the so-called private colleges either profit or not-for profit may experience the hardest hit on their future financial survival.  Naturally, if the source of funding does not come from the tax payer’s, then the risk of going under are much higher compared to those institutions which are backed by the state revenues.

Recently Inside Higher Ed conducted its annual survey in conjunction with researchers from Gallup and collected information from 406 admissions, enrollment and student recruitment directors.  The results of the surveys showed that 61 percent of them failed to meet the enrollment goals by May 1.  The report stated further that about 32 percent of the enrollment directors responded that they continued and actively recruited applicants way beyond May 1, even though these students have made up their mind to attend the institution of their choice.  The condition is even worrisome for the so-called private colleges where the enrollment targets were missed by 71%.

Based on AAEA’s previous studies, the Association is not surprise at all to find out that the Gallup survey results confirmed AAEA’s previous findings and analyses which were shared to the American public more than a year ago.  As of today, there are 760 (Yes, you are right seven hundred and sixty) unfilled positions under the admissions and enrollment category listed on the site.  If you have the exceptional skills to help one of these institutions to hit their enrollment target, you probably could find a spot.  If demand for higher education services are declining while college freshmen recruitment intensifies, perhaps, college down sizing cannot be avoided!  This is another proof that Adam Smith’s invisible hand is working to correct the market.