Demand Value in Higher Education

[Editor's Note: A version of this post ran yesterday in the Albany Times Union]

The College Board reports tuition is up nine percent this year in inflation-adjusted terms, despite declining prices throughout the economy and stagnant median family income. Parents want to know why the sharp increase and why college costs so much in the first place.

The answer, in a word, is demand. Until we channel higher education demand in a more rational direction, tuition will continue to outpace inflation, grant aid, and family income.

Higher Ed Watch readers know that demand isn't the only factor driving tuition. College supply is relatively limited. Higher education is slow to embrace productivity gains seen elsewhere in the economy. Most important, states cut higher education funding to balance budgets, and colleges backfill those cuts by hiking tuition. Banks act as enablers, supplying big student loans to anyone willing to borrow.

But at its base, tuition rises because suppliers, including those who finance them, take advantage of high, under-informed, and often irrational consumer demand. As families shop colleges this fall, they would be well served to focus on value. The Department of Education can help by protecting consumers from the worst deals. We need a lemon law for colleges that cost too much and deliver too little.

Families are limited in their ability to assess the value of most colleges. Popular guides like US News & World Report rank only the top 10 percent of schools and focus on inputs like class size instead of outcomes like how much students learn. Families therefore rely on proxies, including the newness of non-academic facilities like residence halls and athletic fields, advertising, and price. It's the Neiman Marcus phenomenon. If it costs more, it must be better. Wrong.

It's not easy to compare colleges in terms of student learning because there isn't comparative testing at the post-secondary education level. But we can compare schools according to what consumers most want out of higher education: good jobs and financial security.

Congress recently required colleges to report average net price after financial aid. A private web site, www.payscale.com, lists average starting and mid-career salaries for graduates of more than 300 institutions of higher education. And the Education Department knows the percentage of students leaving each college who default on their student loans. With that information and more like it, Secretary Duncan can construct a "higher education p/e ratio," price of college to expected future earnings, for each school.

Consider SUNY Binghamton and Niagara University, for example, both in upstate New York. From a purely financial standpoint, Binghamton is a great deal. Its sticker price is approximately $17,000 a year, and graduates earn a median income of $52,000 within five years of separation, according to Payscale.com.

In contrast, Niagara's sticker price is $35,000 a year, and graduates earn a median starting income of less than $38,000 within five years of separation.

The lemons tend to be in the for-profit trade school sector. Not all trade schools are poor options, but we should make the really risky ones warn consumers in all marketing materials, just like politicians have to say they approve campaign commercials.

"Warning: One in three Acme College borrowers defaults on a student loan within three years of separation from Acme College. Acme graduates earn an average starting salary of $22,000 a year. Be careful before assuming substantial student loan debt to attend Acme College.''

True, higher education is about more than future income. Most music and art schools will have a worse higher education p/e ratio than science and engineering schools. That's fine. Students can and should still study music and art, and they should consider more than financial returns in choosing a college. But a well-publicized higher education p/e ratio will empower students who want to study music, art, or anything else to choose programs and institutions with a more informed eye.

Schools will want to be identified as good-value options and shudder at the prospect of being on a lemon list. To avoid it, they'll be less quick to raise tuition and more interested in making sure their students get good-paying jobs.

Until we nudge students toward good value options, tuition everywhere will march upward, unabated. We can slow that march though by helping families become better consumers in the higher education marketplace.

Michael Dannenberg, the founding Director of New America's Education Policy Program and Higher Ed Watch, is currently a Senior Fellow with the foundation.