Overinvesting in Higher Ed

Richard Vedder

Editor's note: By way of introducing our readers to the articles of our Board of Directors member Richard Vedder, we are cross-posting some of his top articles. This piece was originally published by Forbes.com on August 30, 2010.

When Amanda Magnus started college at New York University she knew she'd struggle to pay the school's $31,360-a-year tuition. "I was taking a risk going to an expensive school," she says. "I didn't go to schools that offered me money because I thought that in the end a big-name university would help me get a job."

But when she got her bachelor's degree in journalism and cinema studies in May 2009, no job offers followed. The closest she is getting to her chosen profession is five hours a week at Sirius Satellite Radio as a fill-in employee and an internship at a public radio station paying her $10 a day.

Magnus acknowledges that she dug her own hole. But she is still bitter about the $50,000 of student debt she amassed at an institution she says turned out to be more of a fancy name to put on a résumé than an education. Loan payments of $350 a month have forced her to pick up part-time jobs as a lifeguard, waitress and grocery store clerk. "I was poor in college, too, but I thought it was very temporary," she says. "I thought there was a foreseeable end. As it stands now, I just don't see any way out. I'm completely stuck."

A recession and an education industry all but oblivious to price competition have combined to make students think something radical: Gee, maybe we're getting rooked. All too often, college graduates incur crippling debt and don't improve their job prospects.

It is still gospel among politicians that college education makes people better off. The federal government showers grants and tax subsidies on higher education; President Obama has set a goal to increase the percentage of Americans with two- or four-year college degrees from 40% now to 60% in 2020. The job market, though, is telling us that this is wasted effort.

Vocational training, such as in medicine and law, probably pays off. But do liberal arts degrees make people more productive? That's not clear. The widely advertised difference in incomes between grads and nongrads (over a lifetime, about $500,000) doesn't really prove anything. It could be that the difference is entirely attributable to traits like intelligence or perseverance that kids have before they matriculate. Bill Gates (pictured right) is a dropout.

Notwithstanding the sketchy evidence for the value of what they do, colleges are cavalier about their price tags. In the last decade tuition and fees (before financial aid) have risen an average of 4.9% a year beyond general inflation, according to the College Board. The country is now spending an estimated $453 billion a year on higher education (including professional and graduate schools), of which $84 billion is paid with debt on the shoulders of students and their parents.

What does the nation buy with this investment in human capital? Sometimes, nothing tangible. Two in five students who start don't get a bachelor's degree within six years, according to the U.S. Department of Education. The ones who finish confront the same weak job market that everyone does. There are now 2.3 million holders of bachelor's degrees looking for work. The average starting salary offer to 2010 graduates was $48,700, down 1.3% from the year before, according to the National Association of Colleges & Employers.

The problem: Most new jobs simply don't require college graduates. Of the 30 occupations with the highest expected growth from 2008 to 2018, only 8 require a bachelor's degree or higher. The fastest-growing occupation in the country, registered nurse, requires only an associate's degree. Most of the top ten (including home health aides, customer service representatives, retail salespersons and office clerks) require only short-term on-the-job training.

The consequence of this mismatch between supply and demand is predictable: tree-trimmers with a master's degree in history, furnace repairmen with math degrees. Why should society subsidize people to go to college for five or six years in order to take jobs requiring at most a high school education and some on-the-job training?

Credential inflation is at work. When 90% of the applicants for a job have diplomas, the 10% who don't look like losers, even if they are qualified. It is said that college education functions as a signal to employers of who is the best and the brightest. It's an expensive signal. Moreover, it no longer signals hard work. The typical college student spends less than 30 hours a week on academics, according to the Bureau of Labor Statistics Annual American Time Use Survey. A lot of colleges compete not by making academic demands on their customers but by offering golf courses, climbing walls and fancy dorms.

The pell-mell investment in sheepskins is beginning to look an awful lot like something our economy has seen in real estate: a debt-fueled asset bubble. It might end just as badly.

We're sensitive to this issue in our rankings of colleges. The FORBES scorecard of higher education, which begins on page 70, is very different from what you see in other publications. We measure outputs (like career success later in life) rather than inputs (like sat scores), and we put a lot of emphasis on the economics of the transaction. Our advice to high school seniors: Shop wisely. Outside of a house, this is probably the biggest investment you will make.

Richard Vedder is a distinguished professor of economics at Ohio University and director of the Center for College Affordability & Productivity.

Additional reporting by Hana Alberts and Laura Keen.

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