The Impact of Crushing Student Debt on American Society: Causes, Consequences, and Solutions
Episode description
It is well known that public perception of post-secondary education is at an all-time low, as politics, rising tuition, and higher student debt is saddling students and graduates with more stress. And, despite reports showing that people with student debt can negatively affect society, the Supreme Court recently ruled that the $1.7 trillion in student debt cannot be forgiven despite what the HEA clearly states in the statutes.
Research shows that students who must incur debt to attend college have lower GPAs, more health issues both before and after graduation, are less likely to buy a house, will get married and have children later in life, are less likely to start a business, and are less entrepreneurial. The problems are real and are affecting society as we know it.
In his latest podcast episode, Dr. Drumm McNaughton speaks with economist and investment manager David Linton about his findings from his upcoming book, Crushed: How Student Debt Has Impaired a Generation and What to Do About It. David shares how much the cost of education has risen from 1969 to 2020, why most college and university managers plan to budget, why this doesn’t help address the problem, and what higher ed can do to improve this.
Podcast Highlights
§ The cost of higher ed in terms of percentage of household income has risen dramatically in the past 50 years. In 1969, the cost of public college education was $1,545 per year, 19% of the median household income. In 2020, it was just under $29,000, or 42% of the median household income. That's about two and a half times more expensive as a function of household income. On an inflation-adjusted metric from 1969 to 2020, it’s between 3 ½ - 4 times as expensive. In other words, the cost of four years in 1969 was the same as that of one year in 2020.
§ A driving force behind this rise in tuition is that some administrators and presidents prioritize rankings and performing well vis-à a-vie their competitors. They know what colleges the other students are applying to and want to ensure their students have a similar or better college experience, including more physical and mental health services, nicer campus facilities, larger research departments, more public services for the community, and other ancillary services. There are also more administrators per student than before.
§ Another theory as to why tuition is so high is because state support has dropped from 50-70% of the tuition a student pays to around 12%. However, in 2017, Professor Douglas Webber of Temple University roughly found that for every $1,000 in state budget cuts, students pay an extra $300 – $315 more per year in tuition and fees. This addresses only 30% of the problem.
§ Adding to the rising tuition costs, most administrators discuss expanding departments or hiring new faculty versus cost-cutting and reducing tuition—many plan to construct a new building once a year or every other year. Very few or no administrators say that one of their top five priorities is to adopt the Six Sigma approach, which involves constantly getting incrementally better over a very long period. This can include delivering the same quality education or same quality experience but with 2% fewer resources every single year. Higher ed leaders respond, “No, we have a budgeting process, and each department has to fit within their budget.” John Katzman, who founded Princeton Review, says up to a third of overall university expenses could eventually be cut without damaging the education experience.
§ One solution to rising tuition costs would be that a large consortium of schools, e.g., PAC-12 schools or all Midwest liberal arts schools that happen to compete with one another, should announce they are not going to raise tuition by more than inflation each year for the next ten years. These savings could go back to the school departments to figure out how to do more with less every year.
§ Higher ed presidents need to know the average debt per student upon graduation and the degree to which they've been able to pay it off in five or ten years. If they don’t, the first step is to figure out what that is. Boards need to establish the objective. If boards discover that 30%, 40%, or 50% of students ten years out cannot repay their debt, one objective can be for the president to improve that somehow.
§ Campuses must identify if certain types of students cannot pay, specific academic thresholds that make it unlikely for students to graduate, or more likely to take on more debt if they don’t cross them. Also, if there are certain areas of study where students are more or less successful when repaying their debts or not having debt. Then, institutions must establish a clear objective. For example, possible goals could include that within five years, graduates’ student debt delinquency rate will drop from 20% to 10%, the graduation rate will increase from 70% to 80%, or the debt upon graduation will decrease from $30k to $20k.
§ Cust-cutting must be included in prioritization. Most schools have an annual or semi-annual process whereby they look at objectives, whether it's new facilities for staff or a department, and then rank them in order. But cost-cutting is rarely ranked in the top five. Reducing tuition and cost-cutting doesn't have to be dramatic. It can be to freeze, maintain, or have budgets increase at inflation, minus 1%, every year and then force the department heads to figure out a way to work within that framework.
§ Bring in a consultant or have faculty figure out ways to increase revenue without raising tuition. Identify where the campus is getting other resources if they are selling their services to other areas, utilizing their facilities and research more efficiently, or partnering with other businesses.
About Our Podcast Guest
David E. Linton is an author and economist. A former adjunct professor at the University of Southern California’s Marshall School of Business, he taught Investment Analysis and Portfolio Management. His first book, Foundations of Investment Management, has become a mainstay among aspiring professionals who want to bridge the gap between an academic understanding and the practical application of investment management strategies.
Mr. Linton’s second book, Crushed, was researched and written after his tenure as a professor at USC. While wondering about the beautiful campuses of USC, University of Chicago, UT Austin, and several others, Mr. Linton couldn’t help but wonder: why are college campuses so nice? Why is college so expensive? How can I possibly afford to send my three kids to college? Is a college degree even worth it? And how can I balance what’s in the best interest of my kids without mortgaging their (and my) future?
If you want to know the answers to these questions – don’t do what Mr. Linton did, which is spend the next two years and ~2,000 hours researching the topic. Just read the book. It’s a better return on time.
Mr. Linton works at a multinational technology firm managing corporate and customer cash when he's not teaching or researching. He is a seasoned economist and asset manager, previously working as the Director of Portfolio Construction and Manager Research at Pacific Life and a Vice President and Portfolio Manager at PIMCO. Mr. Linton is a CFA® charter holder, has a BS in Business Administration from the University of Southern California, graduating magna cum laude, and an MBA from the University of Chicago Booth School of Business, graduating with honors. He enjoys reading with his oldest child, playing chess with his middle child, and wrestling with his youngest child. He thinks they enjoy those activities, too.
About the Host
Dr. Drumm McNaughton, the host of Changing Higher Ed®, is a consultant to higher ed institutions in governance, accreditation, strategy and change, and mergers. To learn more about his services and other thought leadership pieces, visit his firm’s website, https://changinghighered.com/.
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