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.

In the past a couple of weeks, the American public was so caught up with the college ranking following the announcement of US NEWS and other similar studies from different organizations.  For a while the public forget about the country $1.3 trillion student loans issues.  Analyzing data made available by the NCES, AAEA looks from different angles on the so-called Top Ten US Universities.  The Association compares net tuition revenue after institutional grant aids and the institution respective total general & education expenses.  For detailed of the variable used in this study, please see footnotes on each figure.  Higher Federal Government Dependency Rate (FGDR) reflects the respective institutions are less independent on the government support.  The graphs below show except for Cal-Tech, it is truly amazing to see that most of these schools’ FGDR deteriorated over time (please click the graph for a larger view).  However, after the 2008, one can see FGRD has increased which could be interpreted as that US colleges are less dependent on federal government financial support which could be caused by less funding availability from the government aids or due to tightening up of federal aids requirements such as SAP.  But dependent more on contributions received from non-government sources such as alumni and other donors.  Decreasing in funding received from private donors was offset by rising the tuition in order for them to operate at the previous year’s level.  This analysis could be one of the many possible explanations why the elite schools such as Harvard launched a capital campaign in September 2013.  Perhaps, this in one of the reasons why after 2008 financial crises, the amount of student loans increased at their fastest rate.

The latest news on student loans can be read here.  All efforts that have been done so far on reducing student loans were great, but they can be characterized as reactions after the facts that little can be done to change them.  What the country needs are preventive actions and not reactive ones.  The results will be more profound if the prescribed medicine is not just for curing the symptoms, but the real cause of such a cancerous disease.  AAEA has shown again and again what some of the real causes of such skyrocketed student loans!  Among them are:

1. Self-centered interests.
2. Over paid college administrators and full professors’ salary.
3. Lack of management and financial integrity which have caused over spending, campus and program expansions.
4. Obsolete system and campus culture such as tenure system, just to name one.
5. Poor implementation of accountability policies in the past.

These are only a short list of what has caused the problem.  Lack of Accountability is the three words that one can use to sum all the factors up.  The student loans problem occur because all the involved parties may have compromised the implementation of such accountability policies.  The regulations may have been written, and good on paper, but never got implemented at the level where it supposed to be.  Compromising, lack of funding, lack of experts and trained personnel to carry out such accountability through rigorous compliance audit which have happened over a long period of time have grown out of control (over 1000 pages pdf file) and caused the $1.3 trillion debts.   AAEA has proposed to have a new governing body, Education Standard and Compliance Commission that will conduct both financial and management audit and relate such findings with college accreditation and federal financial aids before the problems arise; and not after the facts which is more difficult, if not impossible to cure.

The Association is not surprise to learn what is happening in California State University System as recently discussed in the News.  In fact, the direction to only admit and enroll transferred and qualified students from Community Colleges is the new reality and is the future model for 4-year higher education system in the entire US, and not just in CA.  Short in funding is cited as the main reason that triggers the Cal-State system to admit more Community College transferred students in substitution of admitting freshmen.

Many months ago, AAEA has written in its blog on this new model, new direction and new reality that most if not all of 4-year higher education organizations in the US will have to chew and swallow in the near future.  The fact of the matter is that, this may be the most efficient model given the condition that the country is facing the reality where we are leaving in right now.  Repetition of offering the same services, general education (GenEd) courses or classes should be minimized decades ago, and not just now when the budget and resources got squeezed.  In fact, the inefficiency and over expansion (translated into higher college education cost) have finally reaped adverse consumers’ reaction. Potential students and their family are more cautious when making their future investment choices which result on declining first-time full-time (freshmen) student enrollment.  In addition of showing negative buyers’ reaction, reduction in freshmen enrollment and state budget may tell or confirm the following stories:

1. Current US higher education system is obsolete i.e., needs to adapt to the new realities.
2. The state’s legislators are more aware and may not just rubber-stamp on the school administrator’s requested budget.  Rather, and hopefully they studied it thoroughly.
3. Tax payers are getting tired to support school administrators’ reckless decisions i.e., who have abuse the public’s trust.
4. Declining resources to support public institutions with lack of financial accountability and integrity.
5. Future higher education in the US will be grouped just into 2 systems i.e., Community Colleges System (offer freshmen, sophomore and trade classes) and University System (offer upper level classes leading to Masters or PhD degree).
6. Finally, the market system and Adam Smith’s hypotheses are at work to correct the industry inefficiency.
7. The extra money generated from the new and more efficient system can further be channeled to reduce the tuition and fees at 2-year community colleges.  Meaning more economically disadvantaged and talented students can get their higher education at a reasonable price.  Therefore, larger proportion of the  working class family can increase their probability to achieve the Americans’ dream.
8. Performance based funding will be more popular in months to come.

When for-profit college business models were launched years ago, popularized with its on-line offered services, it got cheered by many enthusiasts including the Wall Street. In this opportunity, AAEA will analyze how the adjusted daily stock prices have evolved overtime of the parent companies who run these randomly selected for-profit institutions, without any special interests on AAEA side–this is just another research we are continuing on doing and presenting to the American public.  The stock of these three companies’ are publicly traded at the New York Stock Exchange under the code COCO, EDMC and APOL, respectively for Corinthian Colleges, EDMC (Education Management Corporation) and Apollo Group.  Corinthian Colleges parent company runs several different higher education institutions such as Everest College.  Institute of Arts campuses are under EDMC’s management, while the University of Phoenix is managed by Apollo Group.  Recent dynamic that is happening surrounding for-profit education institutions trigger these analyses.  The question that one might have: Do for-profit college business models become obsolete?  Will the same chaos ever happen on not-for-profit private schools that can not survive the CAR?

Applying a simple education analytics, IRI Intelligence and big data approaches, the Association pulled series of adjusted closing of the respective institution’s stock prices from Yahoo Finance® as shown below.  The sole purpose of these analyses is just to give a simple and general idea on what could happen in the industry to the general public.  The Association never claimed that the results be used in any short or long-term or any other forms of financial investment decisions.  In contrary, through this simple approach, we would like to show the potential power of big data approaches and education analytics applications in the decision making process.  Because the nature of such a short study, rigorous statistical analyses (both econometrics and time-series i.e., unit-root tests are not conducted).  Therefore, readers need to be aware of potential flaws and limitations, such as a lower R-square.  The Association and its researchers never suggested that readers have to take any particular position in any forms in the market nor did we suggest anything beyond what we have stated about the purpose of this particular research project.

Now we know the culprit behind the student loans problem.  The next question would be what are we going to do about it?  Previous research and studies that have been done by the Association is nothing but to diagnose the root of the problems.  To avoid unproductive debate and unnecessary discussions, the Association used NCES Delta Cost published data.  Econometrics and applied statistics have been used to analyze this information and the results have been shared to the American public several months ago.

Using these data, AAEA is able to statistically show positive correlation among student loans; tuition & fees; total administrative cost; full-professor salaries and money spent on public services.  The results of this study, among other evidences pointed out that student loan increases move toward the same direction with education cost increases (positive correlation).  If this nation really wants to keep its future education system to be one of the best in the world, while keeping its price affordable to majority of its citizens, then players in the industry need to cooperate and make every possible efforts to keep the product reachable to its consumers (students) and not artificially affordable through federal student loans.  In the process to reach such goals everyone needs to sacrifice and take their fair share.  Right now, this is not happening.  In contrast, most of the burden has been shifted to the students and their family.

What are the strategic implications of such studies?

1. College tuition needs to be controlled and this has been done by the regulator through the CAR which will be implemented in 2015 academic year.  Several other components as explained below as well as SFT can be added later to expand the CAR or expanded CAR (eCAR).
2. In addition to the planned CAR four components, federal loans could be awarded based on the ratio of money spent on administrative (overhead) expenses and the amount of net revenue generated only from tuition and fees, excluding any other revenues which may be generated from contributions or donations.  This could be the fifth component of the CAR.
3. The six component of the expanded CAR (eCAR) could include the ratio of total administrative expenses to total liabilities in addition to liquidity and solvency ratios.
4. Include the ratio of total administrative expenses to total student drop-out from the program (fall-to-spring or fall-to-fall semester).
5. Includes the ratio of total administrative expenses to total students graduated from the institution within normal completion time plus maximum two extra semesters.
6. The same ratio calculations can be applied on full-professor salary as well.
7. To make sure that every player in the industry will comply with the rule, the country can establish ESCC (Education Standard and Compliance Commission) which has two branches.  Each division concentrates on different areas i.e., (1) audit & financial accountability and (2). Program assessment & accountability. This new structure will energize current regional accreditation entities such as SACS, HLC and other regional accreditation agencies so that they can do a better job.