May 25, 2011

in higher education?

In the wake of an enormous bubble in the housing market, some in the blogosphere have pointed to problems with higher education as indicative of a similar bubble. And though people in the Knox community are concerned about rising costs, a traditional “bubble” may not be the case.

A higher education bubble, whatever it may look like, would have different characteristics than a housing market bubble.

“Higher education is very different than the bubbles that we’ve experienced most recently in the housing market, and prior to that, with people talking about a tech bubble,” Assistant Professor of Economics Jonathan Powers said. He said that with the tech bubble, stock prices did not reflect “potential future earnings,” and in the housing market, home prices were growing more quickly than incomes.

The April 13 Economist blog post “The latest bubble?” outlines investor Peter Thiel’s reasoning for the existence of such a bubble in higher education: “Tuition costs are too high, debt loads are too onerous and there is mounting evidence that the rewards are over-rated.”

But again, this is not apples to apples, and the advertised price is not necessarily that which is paid.

What price is right?

According to Vice President for Finance Tom Axtell, Knox has been on the low end of tuition increases compared to a group of what he called “peer institutions.”

“For over a decade, we have increased our fees between three and five percent at times when a lot of our peer institutions have been significantly higher than that,” Axtell said.

He continued to make the distinction between total price and what students actually pay. Knox has a relatively high proportion of students who do not pay that full price.

“What we’re really interested in is access, which is a function of net price, not sticker price,” Axtell said.

Director of Financial Aid Ann Brill noted that increases in financial aid tend to offset tuition increases, and soon there will more pressure on the college to come up with those aid sources.

“Every year we spend more money on awarding aid to our students,” Brill said. “And in fact, over the next couple of years, we’re going to have to recoup the loss of federal grant programs.”

According to Brill, the federal Academic Competitiveness Grant and SMART Grant will dry up in the coming years, and there have been recent decreases in available Monetary Award Program (MAP) funds through the state of Illinois.

“From my perspective as a microeconomist, increases in tuition combined with increases in financial aid give schools a greater ability to practice price discrimination, which isn’t necessarily a bad thing,” Powers said. Rather, the college is better able to charge each student the price he or she is able to pay.

Axtell pointed to net tuition, gifts to the college (via the Knox Fund) and the endowment as the three main revenue sources, and any increase in the endowment would take pressure off of increases in tuition. This may add a layer of importance to President-elect Teresa Amott’s efforts to increase the endowment.

The economics of a degree

“One element of the value of education is the expected future income that students get,” Powers said. “From everything I’ve seen, there’s an increasing premium to having a college degree, which doesn’t suggest to me the existence of a bubble.”

Though Powers acknowledged that the benefits from a college degree are more than just financial, he pointed to degrees as a means by which employers can screen through an applicant pool.

“The college degree has value simply as a signaling device,” Powers said. “In economics we have signaling models where the value of a college education, in this model, is not from anything that you learned, but just that you made it through.”

Will degrees always carry value?

The weight of the wage premium and the validity of the degree as a screening device depend on the manner in which employers perceive an applicant’s degree. Those at Knox are confident that a degree from Knox, or from a comparable liberal arts institution, will retain its status.

“If you look at a lot of the leaders in both the public and the private sectors, a lot of those folks are products of a broader, liberal education, not a vocational education,” Axtell said.

Brill pointed out that for most students who leave the college before completing their degrees, financial restrictions are usually not the case, as students generally cite other reasons for leaving.

“Students are bearing a larger part of the burden in financing their own education … Even if it means having to borrow an extra loan, you’re going to do that because you see the benefit down the road,” Brill said. “I think the experiences we have at a liberal arts institution are unique and special.”

Powers, after acknowledging his bias as an employee of a liberal arts institution, spoke to the value of such a degree.

“[Liberal arts colleges] do valuable things, and I think many employers recognize that,” Powers said. “My brother … worked for a large investment bank, and as they were hiring young research analysts, would prefer the English major from a liberal arts college who wasn’t scared of numbers to the finance major at Wharton, the top undergraduate business school, because of the way their minds have been trained.”

Charlie Megenity
Charlie Megenity (formerly Gorney) is a senior double majoring in political science and economics. He previously served TKS as managing editor and as co-news editor while working as the weekend reporter for The Galesburg Register-Mail. Over the summer of 2012, Charlie interned in Wisconsin with, an online hyperlocal news source, where he covered the August 2012 Oak Creek Sikh temple shooting; he will return to Patch during the summer of 2013. He is also the journalism editor for Catch magazine.. Charlie has received three awards from the Illinois College Press Association for newswriting and design, including a first place award for front page layout. He was the 2013 recipient of the Theodore Hazen Kimble Memorial Award in Journalism for a feature story published in The Knox Student. His work has also appeared in The Huffington Post.

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