UCLA Professors Discuss the Cost of Higher Education

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May 10, 2018
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Student loans

Cost of Higher Education

The cost of a college education is becoming more and more expensive. A recent report by the College Board states that going to a private four-year institution costs $34,740 a year. In 1988, this number was $15,160 (adjusted for inflation).

As rising costs threaten college accessibility, the US government has implemented large-scale initiatives to help students pay for college. One such initiative is the PLUS loan program. There are approximately 4.5 million students with loans from the PLUS program. A key feature of the PLUS loan program is that it allows students to borrow as much as they need to attend the program of their choice. Colleges respond to the availability of student aid when they set their prices, so the PLUS program is arguably key to understanding the benefits students in these programs receive, and the factors that affect college prices.

Joel had the opportunity to speak with William Mann and Mahyar Kargar, researchers at UCLA’s Anderson School of Management. In their research, they study how the PLUS loan program has affected college prices, and they quantify the marginal costs associated with enrolling college students.

Below is the transcript of our interview. It has been edited for brevity and ease of reading.

Click here for the full interview with William

Click here for the full interview with Mahyar

 

Tell me about yourselves

William:

I teach Finance at UCLA, and I got my Ph.D. at Wharton in 2014. My research focuses mostly on financial issues and how they affect corporations. In particular, a big question that we are always concerned with is: Do corporations have access to sufficient financial capacity to fund valuable investments?  

Mahyar:

I am in my final year as a PhD candidate at UCLA in Finance. One of the research areas I am interested in is household finance. This project was based on a conversation I’ve had with William a couple of years ago. It became a paper and it is currently under revision at a finance journal for the possibility of being published.

Mahyar, I know you’ve come from a non-traditional background. How does someone go from electrical engineering to writing articles on financial markets?

Mahyar:

[Laughs] That is a good question! The journey from Electrical Engineering to Finance, I was working in the industry for a few years. And then I did an MBA here [UCLA] and got really interested in finance. I eventually decided to pursue an academic life and teach finance. To do that, I needed another Ph.D.

Yes, this sounds a little excessive and crazy but it’s been awesome!

A recent paper of yours is about student loans and education finance, is this related to your primary area of research?

William:

Yes – there is often a natural analogy between the questions we ask about a corporation, and similar questions from the perspective of the household or individual. In this case: Do people have access to the financing they need to invest in their futures, just as a corporation needs to raise capital to invest in its activities?

There has been a lot of research on how households use financial markets to help purchase expensive, important goods like homes and cars. What is really interesting about student loans is there is something potentially even much more critical about that “purchase.” Student loans are indeed helping you to invest in yourself – at least we hope so!

Forbes has recently published an article citing your work, can you talk about what it was?

William:

For the research we did, you can think about it on two different levels

On the surface level, there wasn’t much research on the PLUS loan program, which is I think what drew the attention of the Forbes article. There is a lot of research on Stafford loans and Pell grants. While the PLUS loan program is not used by as many students compared to the Stafford and Pell grants, the average amount borrowed is much higher, due to the lack of a limit on that borrowing. We thought it was essential to study the program and try to understand what we can about its real impact. In general, researchers and policymakers are concerned with the impact of loan availability on tuition costs and other important outcomes. To understand those questions, we think it makes sense to look at a program like this one. On the one hand it is not the most commonly used program, but on the other hand – when it is, it is kind of like an unlimited tap of funds. Therefore, if you do believe that colleges would try to take advantage of loan programs and increase their prices, I think this is probably the most likely place you would see happening.

So that’s one level of this study; the other level is a little more in-depth: There’s a lot of really great work at this point convincing us that, when you increase the availability of financial aid, it does raise the price of college, which is an important point to establish. There is also research showing that colleges, especially for-profit colleges, are very strategic and aggressive about generating revenue from the availability of increased government funding for student loans. Indeed, for many schools, tuition dollars funded by government programs constitute the bulk of their revenue stream and profits.

We were interested in a related but slightly different question: How does the price charged by a college relate to the cost that it must pay to enroll and educate a student? This takes the perspective of thinking about the school – at some level, as a company or an enterprise, and trying to understand the wedge between how much they can charge for their product, and how much does it cost them to provide.

Mahyar:

In a nutshell, what we we’re trying to do is to estimate the difference between price and marginal cost of educating a student. There was a policy change that gave us the opportunity to evaluate marginal costs for our sample schools. Now, this is an important parameter for many different reasons. There is a lot of interest currently in the importance of market power in industries and markets, and we currently don’t really know what the ramifications are. Increasingly, we can study and quantify it better than we used to before. We want to know how big that is for the education market.

Can you discuss your findings?

Mahyar:

We found that there were pretty significant mark-ups. Actually, the wedge is pretty significant between price and marginal costs in private colleges in the United States. The goal of this study was actually trying to estimate the wedge and how this can inform future decisions.

William:

So this matters for policy because what that means is that for every new dollar of loans that you give, most of that ultimately is going to incumbent schools. Which is not to say that they’re in any sense predatory or evil necessarily, many industries have this feature as well. Opening and maintaining a school is costly, and at the end of the day, you will have to make profits to pay that cost back.

What would you suggest as a policy change?

William:

For every new dollar of loans that you give, most of that ultimately is going to benefit incumbent schools. So when you’re thinking about policies that help people go to college, pumping government money to help people attend existing colleges is not necessarily the right way to do it. And if you can think of other policies around that, you could potentially see a higher return on your investment.

So instead of providing loans to attend existing colleges, use some of that money to instead fund newer or public schools?

Mahyar:

Yes! It helps to make the competitive environment a little more favorable for these schools to enter.

William:

Exactly, and to expand a little on that; What we know from our results is that a lot of that money is ultimately going to benefit the schools that are enrolling the students. Maybe take some of that money and re-channel it towards creating new schools, or even just expanding the size of existing public schools. That would have two benefits: First, the government may provide education closer to cost, given that it will have a less profit-focused motive. Second, this will create some competition which will effectively push prices down closer to costs even at privately-owned and for-profit schools.

At the moment, there are $1.5T in student loans outstanding. With implementations that you’ve proposed, how do you think this can help the broader economy?

 

Mahyar:

Here’s my opinion:

There is recent research that looks precisely at these issues which are the real effect of ballooning student debt in the past decade. This student debt is having an adverse impact on people starting families, buying homes, or even starting businesses. That has significant implications for the economy as a whole. If you’re making monthly payments for your student debt, that is money you would have used to buy a home otherwise. These events get postponed and have real implications in the economy. This problem also affects entrepreneurship- if you’re saddled with student debt, it’s harder to get credit to start a business. All of these things have significant effects.

What do you hope to see within the higher education space in the next five years?

William:

One thing that I think we could really use more of is consumer education. I think a lot of people don’t know too well the long-run career path of the programs they enroll. While that is not based on my research, this is based on what other people have been doing in the space. I think a lot of people enroll in programs that ultimately aren’t that beneficial to them. In my opinion, the best way to combat that is consumer education. So some of these proposals tying school funding to student outcomes, they are very interesting things, and I think are relatively easy things to try. Probably the best thing of all would be to educate people as much as possible about the costs and benefits of going to school so they can make the most informed decision possible. Socially, we’re in a moment where it has traditionally been a very exclusive thing to go to college, so the perception is that is always worthwhile, and perhaps people are not yet as discriminating as they should be about that decision.

So what I hope will happen is an increase in cultural awareness and just a broader conversation to have about what type of college is useful and when is it a good idea – so that people can try to protect themselves from some of the concerning patterns that we see developing out of something that should have been a positive, which is the goal of helping people access credit markets to invest in themselves.

About the Author

Joel Soo

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