School for Scandal: An Insider’s Look at How and Why Colleges Rip Off Students, Parents, and Taxpayers

 

 

Full disclosure. 

 

I’m a retired professor of Economics.  I was a full-time professor but also taught as an adjunct at other colleges. I taught both traditional age day students and adult night students. I designed and taught online courses. I was on my college’s budget committee for many years and twice served on the accreditation review committee.

 

Before becoming a professor, I was an economist and strategic planning manager at three large corporations, a consultant to small businesses, and ran a small company. I’ve been on the boards of five nonprofit organizations.

 

What Does Your Tuition Buy?

 

There is a private college near me that charges full-time students tuition an average of $40,000 a year (after discounts off of list price). About $4,000 a course.  The professor is paid about $8,000 to teach a course (half that if the professor is an adjunct).  Assuming 20 students in the course, each student is paying $400 to listen to the prof.  For 10 courses a year, tuition going to the professor is about $4,000. 10% of the total.  What does the other 90% buy?

 

First of all, the classroom. But off-site classrooms can be rented cheaply in such places as libraries and office buildings. Community colleges and for-profit colleges often do this. Many other nonprofit colleges do this for some of their adult courses. Even cheaper, online courses. 

If you are a science major, hopefully you are getting a state-of-the-art science lab, for which you might have to pay extra (even though the lab was probably built with federal government funds).  

 

You are also buying a whole bundle of goods and services that the college offers outside the classroom. This college has a modern gym and pool. You are saving $50 a month so you don’t have to go to a comparable gym and pool a mile away at the local YMCA. You are buying psychological counseling (strangely, health services usually cost extra), tutoring, cultural events, social and athletic events, networking opportunities, career counseling and other services. You get to play sports. You get a sticker to put on the rear window of your parents’ car. You get access to an excellent library, which might not be worth much to you, given the Internet. What is all this worth to you?  It depends (if you’ve taken an economics course, you knew I would say that somewhere in this blog).  But I doubt if all this adds up to anywhere near $36,000 a year. $144,000 for four years. Down payment of a nice house or two Tesla model Y’s.

 

Room and board are extra. Many colleges also charge extra for parking.

 

Go to the administration buildings.  You will probably be amazed at how many people it takes to run a college.  How many vice-presidents, deans, associate deans, assistant deans, directors, assistant directors and onward down the bureaucratic food chain. Marvel on how nice their offices are. Many make more than the average professor. Notice particularly the size of the admissions department and read in the annual report how much the college spends on marketing. This is a very competitive industry. (Liberty College, a large evangelical Christian college, employs 300 marketers.) Marketing and retention are huge expenses at for-profit colleges and many nonprofits. It takes a lot of money for my local college to convince a few hundred students to come there. The ones who choose to go there pay for all this marketing.

 

But the most valuable thing you are buying is a degree. A credential to put on your resume. Colleges form a self-regulating (self-accrediting) cartel that determines who can give credits for learning and issue a college degree. Inexpensive alternatives are forbidden. A few accredited for-profit colleges strip away much of the auxiliary services, charge lower tuition, and still make a profit. They also strip away the cost of full-time professors. Most nonprofit colleges only exist because of massive taxpayer subsidies and/or endowment funds financed by wealthy private individuals. 

 

Consumer Choice?

 

Unlike virtually all other goods and services that you buy, you have no choice of which ones you want to buy (pay for) and which ones you don’t want to buy. 

 

This is a strange business. The buyer (student) has virtually no say in the courses offered, the requirements for a major or graduation, when the courses are taught, or the material they contain.  The immediate service provider, the professor, is often tenured, which means he can’t be fired for incompetence/laziness/not learning new knowledge/senility. You can’t complain. It also means he can pretty much choose what courses he wants to teach.  

 

What is Your Undergraduate Degree Worth?

 

So, hopefully, you’re mostly buying the middle-class admissions ticket.  But wait.  So are a whole lot of other students.  The college industry has been until recently one of the great growth industries in America (and one of the worse managed but that doesn’t matter). Until 2010. Since then, the number of full-time undergraduate college students has been declining. Most costs are fixed until there is a financial crisis. Tuition will continue to go up, as will student loans.

 

Then you have to go to graduate school.  This is where professional education gets serious.  You have to choose a narrower field of study and really learn it. Unfortunately, you (and/or your parents and the rest of society) have already spent $160,000 to get you there.  And you better be successful because you probably will have additional student loans to pay back. (The average student loan for law students is around $150,000.)

 

If you earn a graduate or professional degree, most employers could care less where you got your undergraduate degree.

 

For-Profit Colleges

For-profit colleges. Low graduation rates and high student loan amounts. Like other dubious hustles, they spend a lot of money on late-night TV. Massive recruitment costs, no standards. The business plan is to rip off the federal government (taxpayers), which provides student aid and subsidized loans. They spend a lot of money on political lobbying so that there will be no government standards or oversight. Many went out of business when the federal government finally began cracking down on fraud and limiting new student loans. Some student loan forgiveness, although only a very small percent of the total. The only positive result of all this is that the founder of the University of Phoenix spent some of his personal fortune to promote legal marijuana. 

 

College Management

 

Over the last few decades, tuition has gone up at a much higher rate than overall inflation. Overhead administration expenses have gone up faster than the total direct costs of the actual education. Management has responded by cutting back the cost of instruction. Most courses are taught by adjunct (part-time) professors, graduate students, and teaching assistants. Cutting back cost often also means cutting back quality of teaching and learning. But since there are no standards, there is no way to measure quality or effectiveness.

 

Many nonprofit colleges look to adults returning to college to balance their books. Adults usually pay full tuition. The tuition is often paid by the adult’s employer. Adults usually come at night and are usually taught by adjuncts. Adults required none of the services offered to day students. So marginal costs are near zero, added variable cost very low ($3,000 to $4,000 for an adjunct) and profit margins are very high. 

 

Some colleges have adopted the University of Phoenix model, even for full-time day students. Design a course in detail and hire an adjunct to teach it. The prof is told exactly what to teach at each class session and is given the exams (multiple choice and computer scanned). In addition, with tuition costs so high and thus high amounts of student debt after graduation, students cannot afford a “liberal arts” education. They need a marketable degree. Math departments (and their profs) are retooled as Computer Science departments, Art departments become Computer Graphics departments, English departments become Communications departments, Biology departments become Environmental Science departments. The most competent professors usually teach at the graduate level.

 

Cost and Benefits to Students

 

In many cases, course content has been made easier. “Grade inflation” is a reality; the average grade for all colleges is somewhere between a B and a B+. It is virtually impossible to flunk a course unless the student drops out. In many colleges, students who flunk a freshman course get a grade of NC (no credit) or NG (no grade) rather than an F.  

 

Professors, especially untenured profs, know that the administration expects them to give high grades. The reason is obvious; the administration doesn’t want to lose any tuition revenue.

 

I once taught a course at a prestigious and expensive university in New York City. The students were young adults going at night; most were highly motivated and did well in the course. But some of the students did no work and expected at least a B. After warning them, I gave some Cs and a few Ds. A full-time professor sat in one of my classes as part of my review. She gave me an outstanding review. After the course was over, I was called into the office of an assistant dean (classic flack-catcher). After a short speech on the university’s high academic standards, she informed me that profs did not give adult students any grade below a B because many of the students’ employers (mostly big financial institutions) only give partial reimbursement if the student received a C and none if the student received a D. I was not asked back to teach another course.  

 

One consequence of more students and much higher tuition is that federal and state governments, finding it increasingly difficult to pay for their underfunded pension plans and other programs, have cut back on student aid as a percent of tuition. In some states, total student aid has been cut back. The result has been skyrocketing amounts of student loans, aggressively promoted by college “financial aid” departments. As of April 13, 2022, 43.2 million borrowers owed $1.75 trillion. (There are fewer than 100 million households with head of households under the age of 65.) The average student loan balance is $39,351; the average monthly payment is $393. (Official government figures cited in https://www.credible.com) Many loans are in default. Even if the borrower declares bankruptcy, the student loan is unlikely to be forgiven. Student loans are forever. Recent student loan forgiveness, mostly for students ripped off by fraudulent for-profit colleges, is a very small percent of the total

 

Many two-income families are also two-student-loan families.

 

Conclusion

 

I doubt there will be any radical changes to improve the quality and reduce the cost of undergraduate education in the near future. Technology was hyped to do this but instead dumb versions were used to design online courses. Like any cartel, college administrations (and tenured faculty) are resistant to change. Actual tuition paid might go down if third-party payers (government, corporations, parents) begin to negotiate more aggressively.  Real reform will probably only happen if there is an industry-wide financial crisis.

I think that recent advances in AI have the potential to radically change (and improve) college education.There is, for example, an AI program that not only is a personal tutor but learns from the student's questions and answer what the student's learning style is. But for this to happen, the entire system will have to radically change. Maybe a financial crisis or federal budget fiscal crisis could be the impetus. Or introduce competition outside the current cartel. Maybe students and parents will organize for change - better education at a lower cost. Imagine- student protest demonstrations in favor of their own self-interest. Only an economist could think of something this unlikely.

 

The American higher education system looks a lot like the American health care system. Both are huge, expensive, and inefficient, although the health care industry has been very innovative. Both depend critically on third-party payers. The difference is due to demographics; the college education industry is showing no growth or low growth in the number of customers while health care is still a great growth industry (double the number of senior citizens with Medicare or Medicaid in the next 20 years). Both, however, could be in financial trouble is there is a crisis in government budgets, or a general financial crisis. Since senior citizens make up about 40% (and growing) of the people who actual vote in general elections, guess which of the two industries will see their government aid cut first.

Updated 4/24/24