where human capital arguments make headway

Higher education has become dependent on human capital arguments to justify its existence. The new gainful employment rule for for-profit colleges, announced yesterday by the Obama administration, reminded me of this. It clarifies what standards for-profits have to meet in order to remain eligible for federal aid, which makes up 90% of many for-profits’ revenues.

Under the new standard, programs will fail if graduates’ debt-to-earnings ratio is over 30%, or if their debt-to-discretionary-earnings (income above 150% of the poverty line — about $17,000 for a single person) is over 12%.

Now, we could have a whole other conversation about this criterion, which is really, really, weak, since it no longer takes into account the percent of students who default on their loans within three years. By limiting the measure to graduates, it ignores, for example, the outcomes of the 86% of students who enroll in BA programs at the University of Phoenix but don’t finish in six years — most of whom are taking out as many federal loans as they can along the way.

But I want to make a different point here. More and more, we are focused on return on investment — income of graduates — as central to thinking about the value of college.

This goes not only for for-profits. There is increasing interest in tracking the earnings of all college graduates over time. Virginia has gone the farthest on this front, but there is a big push in this general direction: to rank and evaluate colleges based on the earnings of their students after graduation.

Some people are mostly interested in making this information available to students so they can make more informed decisions before choosing a college or a major. But for many the fantasy is using this kind of data to reward or punish colleges based on the earnings performance of their students down the road.

Again, even setting aside the question of whether income should be the main purpose of college, we could have a whole conversation about about selection effects, whether we want to punish schools that graduate a lot of teachers and social workers, and so on. This fantasy is messy at best.

But I want to point out two things here.

One is that the idea that college as an investment with a calculable wage payoff is really relatively new.

The other is how odd it is that this has become totally pervasive in higher ed and yet is not so prominent in K-12 education.

To the first point. Yes, people have long gone to college for practical purposes. To enter an occupation, to gain upward mobility, to better their lot in life. I’m not suggesting that people used to go to college for the sheer love of knowledge and now they’ve suddenly become practical.

But what is newly pervasive is a sense of college as a financial investment on which one can calculate returns — both at the individual level and the societal level. In 1968 economist Armen Alchian argued in the New Individualist Review that free college was a terrible idea — based significantly on the claim that “college calibre students” should be able to “borrow against their future enhanced earnings.”

At the time, this was a pretty extreme position. The California Master Plan — which established the principle that some form of higher education should be available to all, implicitly assuming that free tuition, rather than the availability of debt, was the way to achieve that — was only eight years old. (It’s worth noting that Alchian was a professor at UCLA.) The 1970 debate in California over a $150/year increase in student fees — a nearly 50% increase — was really intense.

And this shift toward thinking of college as an investment was quite slow — in part because low-cost higher education meant that many families didn’t have to think of it that way. As late as 1990, tuition and fees at UC were still only $3300 a year (in 2014 dollars). (They’re currently $12,000.)

But the other point, and maybe the more interesting one, is that while this kind of calculation has become completely normative in higher ed policy (which is not to say I think that’s a good thing), it still hasn’t in K-12 education. And this is true despite the increased emphasis on student choice, the spread of for-profit charter schools, and so on.

I can think of two reasons this might be. One is that it’s just much harder to even think about measuring. We have at least a perception that colleges (or the state) could track graduates and their incomes over time. And though many students attend multiple colleges, we are assuming, I guess, that the college you get your degree from gets credit (or blame) for your income down the road.

But many more people change schools during the thirteen years of K-12 education, and we don’t assume that just because your degree comes from Pleasant Valley School District means that PVSD alone is responsible for your long-term income. On top of that, K-12 lacks the program differentiation (e.g. humanities vs. engineering) that drive much of the interest in higher ed returns.

The other reason, though, is that free K-12 education is deeply institutionalized as a right in this country. Because it seems like the argument for individual financing of K-12 education is nearly as good as it is for higher education. The wage returns to the first thirteen years have to be large. Maybe the externalities from K-12 education are greater? Not sure. But I can’t imagine they’re larger than returns to the individual — what kinds of jobs are there for someone who can’t read at a basic level, or add and subtract? And if that’s the case, why not make people pay for K-12 education (individually, rather than through taxes), making debt available for those who can’t finance it themselves?

And yet we don’t really see that argument being made. (At least widely; I’m sure someone’s making it). The assumption of publicly financed K-12 education as a right is much deeper. The period in which free college was seen as a similar right was brief (1960-1990?) and never really universal (not all states were California). But public high school became universally available in the early decades of the twentieth century, and free primary education predated that considerably. Both the idea of free K-12 education and the interests and institutions surrounding its free-ness are of much longer standing.

There has been some erosion in this principle over time — more public schools are instituting fees and requiring parents to pick up the tab for supplies, for example. But at its core it seems pretty stable.

On the other hand, I don’t think many people in higher ed saw this coming, either.


Written by epopp

October 31, 2014 at 3:39 pm

4 Responses

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  1. With regards to gainful employment rules, I like that they don’t adjust for selection effects. Trying to control for selection effects in higher ed is conceptually confused and the unadjusted numbers are more informative. Suppose for the sake of argument that 100% of the variance in post-college income is in selection. In such a scenario it would still be worthwhile to withdraw funding from colleges that systematically recruit students who are not prepared to do college-level work and can not realistically be brought up to speed with a reasonable amount of remedial instruction. It may be harsh to admit that people who read at an 8th grade level should not go to college (a least not until they first improve they improve their skills), but it is obviously true and if a school makes it their business model to recruit such people and collect tuition from federally-subsidized/guaranteed debt, then I think we can do without that school even if we could somehow demonstrate that the poor outcomes of its students are entirely attributable to their ex ante qualifications and not at all to any deficiencies in “value-added” by pedagogy.

    Also, I agree with you that it’s ridiculous to limit this to graduates given that the real problem with higher ed is attrition and this is especially true the lower you go down the selectivity ladder.



    October 31, 2014 at 4:36 pm

  2. It probably makes sense to ignore selection effects if what you’re interested in is making sure for-profit colleges don’t put people into $40,000 of debt to get minimum wage jobs. It becomes more of an issue if your goal is to compare whether (say) Virginia or Virginia Tech is giving students/the state the most bang for its buck. Which is what some people are aiming for.

    That’s not to say you could usefully control for selection effects, just that it’s a bigger problem in the latter case.



    October 31, 2014 at 4:42 pm

  3. agreed



    October 31, 2014 at 4:52 pm

  4. Lots of work being done in this area right now with audit studies. Michael Gaddis, Dave Deming, John Nunley, just to name a few.



    October 31, 2014 at 5:43 pm

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