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Recruiting Intelligence

The only report you have to read to understand financial trends in education

The US Treasury Department is keeping an eye on education debt. Why? Most of the debt is guaranteed by the US government and will become a liability for the US taxpayers in case of default. But the recent report considers many more aspects than the implications of debt default. This Treasury report "The Economics of Higher Education" is a very concise and excellent analysis of the current trends. Figure 1 is the graphic representation of what could be the single biggest challenge for US academic institutions. Your customers, students and parents, cannot afford your product and services anymore. Is that where we are heading? We will try to summarize the situation. But before you read further, know that there are a lot of economic factors here with complicating inter-relationships. Some of our readers might just want to skip to the end where we explain why this stuff is important and what it means to our jobs.

So, to summarize:

  • During the past two decades, the student population has almost doubled. Remember 70-20-10; this is the rough ratio of students attending public, non-profit and for-profit education institutions.
  • The economic return for getting a higher education degree remains high and provides a pathway for individual economic mobility.
  • Gross tuition has increased significantly, but increases in net tuition have been milder.
  • Over the past decades, the cost of funding for higher education has been shifted from direct taxpayer support, in the form of university subsidies and grants, to students with taxpayer guaranteed loans.

We are balancing the micro- and macro factors. As individual institutions, regardless of the ownership and organizational structure, we are trying to attract the most appropriate students ("best") and provide the highest quality service with the best education outcomes, however difficult that is to measure. As a society, we have an overarching need for a well-educated population for economic, political and societal reasons.

Graph 1

Source: The Economics of Higher Education, U.S. Treasury Department, Dec. 2012

Read graph: the left hand axis shows the level of debt borrowed every year by students and the right hand chart shows the number of borrowers.

We have two drivers of the debt level: 1) the number of individuals taking on debt and 2) the average debt assumed per person. The number of borrowers has increased significantly during the past ten years driven by more students entering the system, higher private contribution to the costs and stagnating household incomes, along with lower home equity. These factors reduce the available alternative funding for families/individuals seeking higher education.

Interesting enough, we see two phases of the growing challenge, which have hit the public media only during the last years: 1) The average level of student debt started rising between 1992 and 2002, while 2) the absolute level has increased more dramatically during the past decade with more borrowers at the higher average debt levels.
The second chart (below) shows a different historic perspective of college entry and graduation rates by age cohorts and parent's income. The data shows a clear correlation, the higher your parent's income, the greater the likelihood that you will enter college and the greater the likelihood that you will graduate.

Source: The Economics of Higher Education, U.S. Treasury Department, Dec. 2012

So What Does All This Mean?

Our view is that education is a great investment for the individual and society provided that students graduate and they can reap the benefits by playing a meaningful role in our economy and society. Many other factors matter, but are secondary, such as how graduates manage their employment prospects and debt levels, just as you would manage any of your financial investments.

As education paths and institutions become more diverse, the decision making process will be more challenging for each individual. Institutions will have to do even more to explain their benefits and assist in this life-long learning path employees are now following to maintain competitive skills. Certificates and other continued learning is becoming increasingly popular as a route to career advancement. And since these programs are shorter in time and require less investment, we wonder if their practicality and focused content can replace two- and four-year undergraduate programs in the decades ahead. If employers see them as valuable, some percentage of your customers are likely to take the shortest route to solid employment and lower debt.

And if employees can continue to improve skills with these kinds of short, focused career propulsion options, taken intermittently during the full span of their career, they just might find the affordable path to continued personal and professional growth.

Traditional undergraduate education is looking for a similar way to spread the costs over time. The latest innovation of pay as you earn is an interesting and promising path to balance individual and social needs for education. The student loan borrowers pays 10-15 % of their income as loan repayment for 20-25 years and the government is willing to take the risk of any unpaid balance.

These changes and innovations are being driven by the continued upward trend in education costs. If schools are unable to pare their expenses in a meaningful way and deliver education more cheaply, something else will come along to help the customers get where they want to go.

Topics: Insights