Education for fun and profit - Part 1

Occasionally a post comes along that stokes more than one reaction; one such is Yglesias from yesterday, a post called Making Money in Higher Education. In it, he comments on a post from Kevin Carey that takes for-profit college University of Phoenix to task for funny business with student loans, then says more generally:

I'm not among those who think that for-profit colleges and universities are necessarily bad. It's a free country and some institutions have put together a package of services that students want to buy. For-profits often seem to be focused on meeting the needs of their customers, particularly working and non-traditional students, in ways that traditional non-profits do not. But they also tend to be expensive and highly dependent on students borrowing a great deal of money to attend. Dropout rates at for-profits are often quite high. And if more than a quarter or a third of your students are defaulting on their loans within a few years of leaving, then pretty much by definition they weren't getting a sufficiently valuable service in exchange for their money.

Yglesias amplifies on this, as he is suspicious of for-profit education, saying this:

The managers of a traditional university may or may not take and opportunity to screw over their students for money, but the managers of a for-profit are obliged to screw you over. That could be counteracted by a desire to build a good reputation, but the nature of the higher education market is such that there’s no way these for-profits can ever be anything other than low-end options.

As I've said before, I don't generally read other people's comments until after I've written a post. This time I've made an exception, because I wasn't originally planning to write about this. But a lot of commenters are going back and forth on the "obliged" part, most against.

I think I get what Yglesias is trying to say here, but I don't think I ought to be required to interpret his words. He's essentially, in an inartful manner, expressing the view that all exchanges in an economy need to be win-win, that is, each party feels they're getting more value than they're giving. The students at U of Phoenix or anywhere else pony up their bucks, but that leads to a larger revenue stream down the road. The university makes money for shareholders by ensuring that the bucks paid cover the costs, with enough left over to pay executive salaries and add to stock price. (I think Yglesias is saying that the for-profit model obliges university executives to provide as little premium as possible, that is, they don't give away anything, and the students believe that there is still value-added...I think.)

Of course, there is an inherent uncertainty to the value a student gains, and a precise dollar figure isn't able to be calculated until long after the fact (OK, I know it can never be, but a whole lot of people "credit" their college with making them who they are). At the same time, the university has a short-term focus on raking it in NOW, so they do have a powerful incentive to magnify a student's potential gains and work the costs to the absolute margins.

And this is why the model is so new, and still being worked out. Because, in the past (as I return to a familiar theme of mine), the emphasis was on building a relationship, and markets and economic analysis deal very poorly with those things. The student was becoming a part of a community, one which continued to give back in certain ways, even beyond the intrinsic value of the education itself, and he or she was expected to contribute to that community through donations or buying merchandise or what have you. It was pretty much impossible to calculate the pros and cons of such a relationship, so it became more of an emotional response - if you "felt" that Siwash U had made your life better, going there was worth it.

Now, and it's not just because there are for-profit universities, that has changed for a lot of people. It's now a colder calculation, what's in it for me? That rationality implies a quicker payback is needed, that any student is going to have to see more than just a promise of an improved life - as Carey says, if a large number of students are defaulting on their loans, they aren't going to see that as a personal weakness undermining the obviously-great education they received, they're going to see the education as somehow deficient. That changes the relationship from, "Hail, hail, to old State U," to, "I want my money." This has huge implications for the way we do higher education, a topic I'll elaborate on in Part 2.