Higher Education

There is growing concern in America about higher education. A degree has always been considered the key to a good job. But rising fees and increasing student debt, combined with shrinking financial and educational returns, are undermining the view that university is a good investment.

Concern springs from a number of things: steep rises in fees, increases in the levels of debt of both students and universities, and the declining quality of graduates. Let’s start with the fees. The cost of university per student has risen by almost five times the rate of inflation since 1983, making it less affordable and increasing the amount of debt a student must take on. Between 2001 and 2010 the cost of a university education soared from 23% of median annual earnings to 38%; in consequence, debt per student has doubled in the past 15 years.

At the same time, universities have been spending beyond their means. Many have taken on too much debt and have seen a decline in the health of their balance-sheets. Moreover, the securitization of student loans led to a rush of unwise private lending.  Despite so many years, universities have done little until recently to improve the courses they offer. University spending is driven by the need to compete in university league tables that tend to rank almost everything about a university.  Universities cannot look to government to come to the rescue. States have already cut back dramatically on the amount of financial aid they give universities. Barack Obama has made it clear that he is unhappy about rising tuition fees, and threatens universities with aid cuts if they rise any further.

In 1962 one cent of every dollar spent in America went on higher education; today this figure has tripled. Yet despite spending a greater proportion of its GDP on universities than any other country. Wherever the money is coming from, and however it is being spent, the root of the crisis in higher education comes down to the fact that additional value has not been created to match this extra spending. Indeed, evidence from declines in the quality of students and graduates suggests that a degree may now mean less than it once did.

One might argue that this shouldn’t matter so much since students are paid a handsome premium for their degree and on the whole earn back their investment over a lifetime. While this is still broadly true, there are a number of important issues. One is that it is easily possible to overspend on one’s education: just ask the hundreds of thousands of law graduates who have not found work as lawyers. Another issue is that the salary gap between those with only a high-school diploma and those with a university degree is created by the plummeting value of the diploma, rather than by soaring graduate salaries. After adjusting for inflation, graduates earned no more in 2007 than they did in 1979.