Expert Interview: William Mann & Education Financing

May 10, 2018
Student loans

Education Finance

I recently spoke with William Mann, a finance professor at UCLA doing research on how corporations find capital to run their businesses. He has recently taken an interest in student loans as it draws a natural analogy with how households find money to make purchases (such as a college education). In the following conversation, William gives profound insight into his research and the higher education market as a whole.

I also had a conversation with William’s co-author, Mahyar Kargar

Tell me about yourself

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?


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

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!


I would also add that student loans also have a different characteristic, in that there really is no collateral.

Yes, that’s a great point! This gets at another unique feature of the student loan market, which is the nature of the “purchasers.” Traditionally, access to credit requires observables like a good financial track record or assets that can serve as collateral. That is true for both corporations and households, and for good reason. But the people trying to fund an education by definition can’t qualify on those metrics, because they’re students! So you can see why the government naturally plays a big role in this market, which creates great challenges in designing and implementing financial aid programs effectively.

The more I think through these issues and become aware of the work that people are doing in this area, the more I’m convinced that this a very important area for further study.


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

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. One 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.

Now, when it comes to policy analysis, this is a very important number to know. If it turns out that the cost of enrolling students is close to the cost of tuition, that will tell you that the competition between colleges is high, which will keep prices relatively low – relative to cost, that is.  And if there is a significant gap between the cost of enrolling students and tuition, it means that there is a lot less competition.

Now, most people will probably guess that the cost of enrolling a marginal student in a college is usually pretty low, that stands to reason in a number of ways. But, there hasn’t been any clear evidence of that so far. In fact, the only existing estimates that we have found in prior research suggest the opposite, that the cost of enrolling a student is so high that colleges aren’t ultimately making much of a profit off each marginal enrollee. But in general, prior research wasn’t specifically focused on these estimates, and as a result, I’d say it’s an open question.

So the deeper level on which our paper operates is that we study an event that serves, for us, as an experiment that helps us trace out the difference between the price charged and the cost of enrolling a student. To be more specific, in 2010, the Department of Education changed some rules in such a way that a large number of students unexpectedly lost access to the PLUS program. This spilled over to be a very big shock to many colleges where a large chunk of the student body had relied on the program to fund their tuition payments. We trace out the effects of that shock on the colleges.

It’s really important to see this from two levels. You can see this as capturing directly the impact of a change in this particular program: When the funds become unavailable for many students, students leave college or don’t enroll in the first place, so they lose access to education, but at the same time colleges ultimately charge less. On a deeper level, we can then do some accounting, because this is a shock that happens out of the blue, we can use this to help us trace out what happens to college revenue and expenditures when enrollment falls by a certain amount. That tells us about the prices the colleges were charging and also about the costs they were paying. By comparing those two numbers, we’re able to confirm what I think many people would suspect – indeed, the price that most students are paying to attend colleges is far above what it costs the colleges.

One natural reaction to this finding is that colleges are somehow predatory. I think that a lot of people go with this, and that could certainly be part of the story in some segments of this market. You don’t necessarily have to think about it that way, though. Many industries feature high prices relative to marginal costs – it’s something you expect whenever fixed costs are very high. In this case, it could be that it’s really expensive to open a college in the first place. They’ve sunk a lot of money into facilities, marketing, and potentially other expenses, and now they have to charge higher tuition over time to cover their costs – it doesn’t mean they’re making a killing, and in fact they may feel that they are on the edge of financial survival, which many colleges are. By the same token, these costs associated with opening a new college could be what prevents new colleges from springing up and competing with the incumbents.

But either interpretation has the same implication from a policy perspective. 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.


As a follow up to that, have you thought about policies that could be implemented?

Of course, for any paper as complex as this, we don’t try to come up with any easy answers. But it does point you in a direction. The existing approach to financial aid sends dollars to existing schools in proportion to the number of students they can enroll. Perhaps what you want to do instead is to foster a conversation about helping new entrants to compete with those existing schools. Anything you can do to get more schools out there providing education and competing with each other can be a good thing. An easy example of this is something the government does all the time – opening public schools.

There are profound questions about just how big public education can be, and we’re not trying to give an incredibly detailed answer, but just to offer a general principle. The way you would want to subsidize college attendance in the world like the one we described in this paper is – focus more on creating colleges that can provide education and be competitive with the private schools rather than just continuing to contribute money towards the schools that already exist.

Does that make sense?

Absolutely! So very simply put, what you’re saying is that instead of providing loans for students to attend existing colleges, one could use some of that money to open or subsidize new colleges that will compete with the current schools.

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.

That seems like it would take a while to implement things like opening a new school

Yes and no. These are very big picture goals. So this is not necessarily an actionable plan right now, but more of an idea about what direction we should be pointing for future plans. With that being said, there are a ton of public schools already in existence. It’s not like it’s a radical change to think about expanding them or opening new branches. It is not something that is too far out of reach. We’re not giving an exact prescription; our real focus is more of painting this picture of what the market structure looks like and when you know that, that points you in the direction of policies that look more like the ones that I’ve described.

So public colleges are an easy example, but you really want anything that makes it easier for competition to happen between schools, so that could also be somehow subsidizing schools not on a per-student basis but a per school basis. While this might be a little more abstract, right now, the number of students you enroll determines the number of federal subsidies you get. You can imagine trying to unlink those two things and provide something that looks more like a lump-sum subsidy to schools and that is going to have similar effects because there is no feature of scaling with enrollment if that makes sense.

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

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 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 for people 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 be positive, which is the goal of helping people access to credit markets to invest in themselves.


About the Author

Joel Soo

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