Monday, 30 January 2012

The Problems of Higher Education and the College Bubble

The Occupy Wall Street protestors meander through the cold streets during the 2011 winter. Corporate greed, crony capitalism, income inequality, and corrupt politicians anger them. They have united their voices and screamed for change. They interrupted political speeches, boycotted the large banks, and in one cases, shut down the Oakland California seaport. Although participating in the protest movement, the college students remained silent about greed in higher education. When did colleges and universities become exempt from public criticism? Unfortunately, university leaders are just as greedy as the Wall Street bankers are. This blog outlines the greed in higher education and the financial storm that will unravel the college bubble.

One sign of greed is the rapid tuition rises for higher education. Tuition increases have greatly outpaced inflation. For example, I graduated with a bachelor's degree from a small liberal arts college, Northern Michigan University, in 1993. I paid roughly $2,000 tuition per year. In 2011, this university charged about $8,000 per year. If the university increased the tuition at the end of the school year, then the administrators increased tuition 7.5% per year. On the other hand, the average U.S. inflation rate ranges from 2 to 3% per year, far below the tuition increases. Unfortunately, my university is typical of higher education because most U.S. colleges and universities increased their tuition at similar rates.

The rapid rise of tuition does not tell the complete story. College administrators created a variety of fees to extract additional money from students. Most universities and colleges charge application fees for admissions, library fees, computer lab fees, building maintenance fees, etc., continuing ad nauseam. Unfortunately, administrators boost both fees and tuition. When a university or college experiences a little financial trouble, they create new fees to generate more revenue source. Unfortunately, some institutions charge fees that rival the tuition, and some college administrators are disingenuous. When a university or college reports a tuition increase to the public, they often are quiet about the rising fees.

Leadership in universities and colleges deliberately skew statistics. Looking at my alma mater, Northern Michigan University, the State of Michigan appropriated roughly $39 million for Fiscal Year 1992, which climbed to $45 million for Fiscal Year 2011. Although the State of Michigan is mired in a perpetual recession since 2001, the state government still increased my university’s appropriations. Thus, the university gained an extra $6 million in funding, amounting to a 0.75% annual increase. If the inflation rate is 3%, then the State of Michigan reduced its funding by 2.25% in real terms, or 0.75% subtracted from 3.0%). Similar to the U.S. federal government, a program's budget increase just became a decrease. Consequently, university leaders never report their state appropriations, nor show the state appropriations over time. They must show statistics where the state harms and underfunds higher education.

University officials often quote the startling statistic, the state funding percentage. For example, the State of Michigan provided 60% of funding to Michigan universities in 1987. By 2011, the state only provided 18% of a university's funding. Thus, the State of Michigan is cruel, heartless, shortsighted. Then a state winds up with an uneducated workforce, and it can never attract the high-tech industries, but we know the truth. The State of Michigan did increase its appropriations to its public universities and colleges during tough times. Two factors could worsen a state's funding percentage. First, a university increasing its tuition faster than state funding increase causes the state funding percentage to fall. Second, a university enrolling more students receives more tuition dollars. If the state funding remains constant, then the state funding percentage drops. Consequently, university and college leaders use misleading statistics to grab greater state funding, which suspiciously sounds like greed.

Greed rears its ugly head, when private businesses produce and sell goods and services on a university campus. The university and colleges lease retail space to fast-food restaurants, coffee shops, stores, and travel agents. In 2003, Oklahoma State University experienced a budget crisis, and the administrators boosted tuition by 24%. Furthermore, the administrators forced a coffee shop owner to leave the student union because a national chain offered to pay more for the lease then she did, and the chain did not want competition. Furthermore, universities and colleges have thousands of students (i.e. consumers). The administrators enter into contracts with particular suppliers such one beverage company. Then only that company’s sodas are available on campus, and in turn, the beverage company bestows gifts and endowments upon the university.

The higher education leaders often misrepresent tuition increases. For example, they claim they will boost financial aid if the university can raise its tuition. On the surface, this sounds reasonable, but it does not hold once you peer under the surface. For example, if a university increased tuition by $10 million and subsequently offered $10 million more in scholarships, the university does not collect more funding. A university would never do this. However, if the students would receive more scholarship money from outside the university or would apply for more student loans, then the university receives more money from the tuition increase (assuming the university does not lose students). Thus, financial aid coming from the university's pocket book would never keep abreast with the tuition increases.

Administrators increasing tuition force students to accumulate debt. Students, on average, have borrowed $25,000 in 2011, doubling from 1993. Unfortunately, some students do not realize federal student loans are not grants, and they must be repaid. We can estimate the monthly loan payment by the Rule of 100. If a student owes $50,000, then he or she pays roughly $500 per month (just divide loan balance by 100). Some professionals, such as PhDs, lawyers, medical doctors, and dentists accumulate student loans in excess of $100,000. Using the Rule of 100, their monthly payments would exceed $1,000 per month. Finally, the government claims it will forgive a student loan after twenty years of repayment. However, if a student defaults on the loan, the 20-year limit does not apply.

A federal student loan is worse than dealing with a loan shark. The U.S. government imposes drastic penalties that can haunt a student, who defaulted. First, the student cannot file for bankruptcy because a bankruptcy court cannot discharge federal student loans. Second, the loan holder, the U.S. Department of Treasury or SallieMae, often add fines and penalties, which could double the loan balance. The loan holder will capitalize the interest, which means, the lender adds the unpaid interest onto the loan balance, causing it to grow. (I strongly disagree with this practice because if a loan can never be forgiven, why can the government double the loan balance.) Third, the seven-year rule for bad debts does not apply to student loans. A student could be plagued with bad credit as long as he or she is in default. Fourth, the government excludes the students who defaulted from federal contracts and programs. If the student becomes a dentist, doctor, or professional, then a defaulter cannot see patients, clients, or federal employees who are insured by the U.S. government. Finally, the U.S. government may withhold tax refunds, garnish wages, or garnish Social Security Benefits. Thus, student loans can shackle a student for the rest of his/her life.

Greed shows up in school spirit. Freshmen are happy and proud to move away from their parents, and they begin their studies. They often buy their school's clothing and knickknacks. The universities and colleges own the trademarks for their logos and names, and they collect a percentage of sales from every t-shirt, clothing, or knickknack, blazoned with the university’s logo. If the college or university has a popular sports team, a university or college receives a 10% royalty for every trademark item sold, netting the institution with millions of dollars per year. Finally, every college and university have an Alumni Association, which encourages the college graduates to join and donate money to the university. Although I received a good education from Northern Michigan University, I will never donate money to this institution. I remember how those greedy bastards in the administration acted, when I owed the university a $100. An administrator threatened to withdraw me from the university halfway through the semester. (I experienced similar problems with my alma maters, Oklahoma State and Texas A&M; unfortunately, it’s all about the money.)

Administrators in higher education greedily collect their tuition dollars and squeeze anyone associated with the university or college for money. Greed is not necessarily bad, depending where they spend this money. Administrators often claim the university raises tuition to hire more professors and improve the quality of education. However, this is partially true. First, a growing trend is administrators hire more adjunct faculty (or part-time professors) or enroll more graduate students who teach the low-level courses. Adjunct faculty and graduate students earn low salaries, have few fringe benefits, and reduce a university's cost. Second, universities and colleges pay salaries unequally. At one college where I taught, the salaries ranged from $30K for an English professor to $100K for a finance professor. Finally, the golden rule for colleges and universities is the more distance between the employee and the classroom, the greater his or her salary. Consequently, the sport coaches, presidents, provosts, and deans earn the highest salaries on campus.

Administrators often proclaim the higher tuition and larger fees help support more research. Administrators transfer tuition and state funding to build new laboratories and research facilities because the research universities are the best U.S. universities. However, administrators do not reveal the full story. The administration encourages the scientists, researchers, and professors to find external funding to support their research. In some cases, a professor's longevity at his or her university depends on his or her ability to obtain research money. Professors must apply for grants from corporations and governments. Consequently, administrators force professors to finance their research with outside funding sources.

Higher education leaders use tuition and state funding to fund sports programs that can easily cost millions of dollars for a large university. In some cases, a coach of a popular sports team could earn a higher salary than the university president earns. What does sports have to do with educating students? Absolutely nothing! However, the university operates as a business. If the revenue from game tickets, merchandise, and advertisement exceed the sports program’s cost, then the university should keep the program. Unfortunately, many universities and colleges without a popular NCAA team subsidize their sports programs with tuition and state funding, diverting money away from education, and the classrooms.

The tuition and state funding, unfortunately, support the university leaders. Usually colleges and universities have layers upon layers of senior management. The upper management consists of the president, provosts, and deans. The university or college president earns a salary ranging from $200,000 to $500,000 per year with many perks. One perk is the president lives in the campus mansion for free. Other leadership positions include the provosts and deans whose salaries range from $100,000 to $200,000 per year. Although salaries in higher education are not on par with bankers' salaries on Wall Street, the salaries show the same trend. Universities and colleges cut costs by hiring more adjunct faculties or enrolling more graduate students. Moreover, administrators create new positions, such as a lecturer that pays a lower salary than a professor. Towards the top of the hierarchy, salaries for deans, provosts, and presidents are soaring.

Salaries for presidents, provosts, and deans will continue to rise because institutions stopped promoting faculty to leadership positions within the university. Thus, the United States has a shortage of leaders, causing many vacancies Then the administrators boost salaries to attract applicants from rival universities, instead of promoting within their ranks. Usually, a president, provost, or dean works at the college for several years until they transfer to a higher-paying position at another university. Before the 1990s, presidents, provosts, and deans would work for one university for their whole life. At one small university where I taught, the president's position was vacant for two years. If the university can survive without a president for two years, then the university has a great opportunity to eliminate a position, saving the state and students some money.

Colleges and universities find themselves in a difficult position in 2012. Although people flock to higher education to upgrade their skills during a recession, we are in the fifth year of the 2007 Great Recession, and no economic recovery is in sight. Higher education keeps raising the price of their service until the service becomes unaffordable. Any further tuition increases could cause students to flee. Many students do not want a college degree while they accumulate debt in the thousands and cannot find a job in a bad economy. The albatross of student loans may also haunt universities and colleges. If the 2012 college graduates cannot find jobs and start defaulting on student loans in large numbers, subsequently the U.S. government will restrict future loans. Then the U.S. government would end the era of easy loan money.

Universities and colleges cannot rely on foreign students to finance their budgets. Foreign students pay the full cost of their education, and college costs have become prohibited. Furthermore, the financial crisis is reducing the number of rich foreign students who can afford to pay high college tuition, and they have other options than to study in the United States. They can enroll in less-expensive universities in Europe or Asia, and these countries have easier visa requirements. Finally, a Chinese analyst stated in January 2012 - Although education in the United States and Europe are considered superior, and students will find better-paying jobs in their country with a U.S. or European degree, those students may not do better if they had stayed in their own country for an education. Once they include the education costs, the return to their education becomes negative. Many public universities and colleges charge foreign students between $30K and $50K per year for tuition.

The United States is caught in a college bubble. Universities and colleges have inflated their costs to unsustainable levels. Decreasing student enrollment will cause a financial tsunami that will devastate many colleges and universities. Unfortunately, universities and colleges evolved into bureaucratic institutions employing large armies of staff. Once funding starts decreasing, massive layoffs would follow. Some colleges and universities will not survive a contraction. One firm estimated 30% of U.S. universities and colleges will fail and disappear within five years. The Ivy League and well-funded public universities will survive the college bubble, but the expensive private universities, such as University of Phoenix, Kaplan University, and Devry will be the first casualties of the college bubble. University of Phoenix and Kaplan University already reported a 40% decline in enrollment for 2011. (These private for-profit universities took greed to a new level, and they deserve their own blog). Furthermore, several law schools reported 10% declines in enrollment for 2011. Some law school graduates are suing their alma maters because the law schools misrepresented the job placement statistics.

This blog's purpose is not to scare students away from higher education. This blog just illustrates that universities and colleges are greedy moneymaking ventures similar to their Wall Street counterparts. The only difference is higher education has fooled the public; they are profit institutions hiding behind their nonprofit status. The cost of higher education has exploded and has become unaffordable to students. Therefore, students must view higher education as a long-run investment, especially before they decide to accumulate thousands of dollars of debt.

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