Steven Smith: From APM, American Public Media, this is the "American RadioWorks" podcast. I am Steven Smith.
The cost of college keeps going up, but family earnings are staying the same. This is leading to an unsustainable situation both for colleges and would-be students. Now, after graduation, college educated workers general earn more than those without a degree.
A research group called the Institute for College Access and Success reported that the average college student racks up nearly $28,000 in debt to get a B.A. If you have to go into debt in order to get the education, is it worth it?
My guest this week recently tackled this question at a meeting of The College Board, a group that helps prepare students for higher education. Chris Farrell is American Public Media's Economics Editor and he joins me in the studio. Welcome, Chris.
Chris Farrell: Thanks for having me, Steven.
Steven Smith: Has college always been expensive relative to what people make?
Chris Farrell: College has always been expensive because it's labor intensive. That's a jargon term for you have a professor and he's talking to students; efficiency is a lecture hall because you're talking to a lot of people. But a lot of colleges and universities have them built around the seminar, the individual teaching, and the smaller class size. So college has always been somewhat expensive.
But here's the thing, college paid for itself fairly quickly. You got a college degree, you got yourself a decent job, it had health care benefits, had a retirement plan, and it paid for itself fairly quickly. What's been happening is that college keeps getting more and more expensive.
But the key, what really makes a difference here, Steven, is that family incomes have not grown. So 1994, you take your non-elderly household, and elder is 65 and older. The household income is about $57,000. In 2012, the household income, $57,000.
Steven Smith: Wow!
Chris Farrell: Meanwhile, from 1978 to 2012, the cost of college went up 1,120%. The cost of health care during the same period of time went up 600%. The Consumer Price Index up 200%. Now, I'm tossing out a lot numbers here, but the bottom line is, college keeps getting more expensive.
There are some good reasons why it gets more expensive as we become a wealthier society and the value of an education continues to grow. But family incomes are stagnant, they are not growing. My point is I do not see on the horizon any reason to believe that household incomes are going to grow.
Steven Smith: We'll get to that more in a moment, but let's talk about why college has become so much more expensive, out of proportion to other things in the economy. There are a lot of different theories about it, what's yours?
Chris Farrell: My theory, to a large extent, is that college is not that expensive relative to the kind of labor. If you compare colleges and universities to financial services, the jargon term is, their productivity level is not that different.
Now, if you compare it to Walmart, or you compare it to a factory in the United States, factories do more with less. That has been the story of the past, at least, more than 30 years. Let's just say, for the past 30 years with factories that has been the story. Walmart squeezes out every inefficiency in that system.
But with colleges and universities there is something of a limit to how much you can squeeze out. You need this highly skilled labor. It takes a long time to get a PhD. It takes a long time to become a professor. They have to stay up on the leading edge of their research and they have a lot of information technology demands. So that’s the fundamental core.
I'm not that upset about the inefficiencies in college. I don’t like what went on, the sort of arms race about what we all had to have: these beautiful dorms and we all had to have a climbing wall. There are a lot of legitimate questions about these magnificent buildings that have been built over the past couple of years, but I actually think that’s kind of declining.
Steven Smith: Has that really been the real driver here? Or has it mainly been labor and technology, where the technology isn’t actually making the labor more productive?
Chris Farrell: Exactly. That is the more important factor. You can toss in a lot of other stuff, but that’s what I would emphasize.
Steven Smith: Is there a financial crisis happening on college campuses?
Chris Farrell: There is absolutely a financial crisis. It's an erosion. It's not a crisis like in 2008 when the stock market crashed, it went down 57% before it bottomed in 2009, the global capital markets froze up, we were talking about the great recession, and the unemployment rate is over 10%. It's not that kind of crisis.
This is an erosion; you have a business model where your costs keeps going up, what you are charging keeps going up, and the gap is being filled with debt by borrowing.
So, what's now happening is that this side of the equation, the family income is stagnant. I just don’t see, in this economy that we are in, even if the economy continues to improve, the unemployment rate comes down, when you do you think that people are actually going to be taking home inflation adjusted wage increases?
Steven Smith: So, are there some people who just shouldn’t go to college because it's out of their affordability zone?
Chris Farrell: I think you're seeing something of a shift already where people who might have gone to a local, four-year, public university are first going to a community college, then they may transfer to a public university or a private university later on. But in order to lower the cost, they go to community college.
Part of this big gap that we have between the cost of going to college and what's happening to family incomes, enter scene left: the MOOCs.
Steven Smith: The Massively Open Online Courses.
Chris Farrell: Right. Now, I think part of what everyone likes about the MOOCs is that it is this wonderful acronym that you get to toss out there and say the MOOCs, but it's Harvard, it's Stamford, and it's a lot of really big names. That gap is what they're walking right into. That’s why they're not going to disappear.
So, we're going to go through a painful period of experimentation because the MOOCs are not going to destroy the brick and mortar university, they are not. But for the brick and mortar university, it is not business as usual.
I gave a talk in Cheyenne and it's before private, independent colleges, mostly in the admissions office and financial aid. A number of them came up afterwards and said: "Can I have your slides. I want to show them to my president because my president is saying: 'We have to raise our tuition by 2.5%.' And I'm saying you can't keep doing that. Look at what the family is at, coming to our college and university. You can't do that."
The problem is not going to disappear. It's not a bunch of faculty members that are sitting around, not working, and spouting Karl Marx, unwilling to work harder. That's not what's going on here. What's going on here is we have a business model that is based on family incomes increasing and those family incomes are not increasing.
Steven Smith: So, who's going to get left behind? I presume the people at the bottom end of the ladder. I what ways will they get left behind and what will be the implications for the economy?
Chris Farrell: This is really a story of the price of rising income inequality. Since 1980, income inequality has been increasing in this country. More and more the gains of our economy are not being shared. Those gains are going to a relatively small segment of people.
I'll give you one example. If we had the same level of productivity growth and sharing of the economic wealth that we had from 1948 to 1973, if we had that till now, without making any changes in the law, the minimum wage would be $18 an hour.
Steven Smith: And the minimum wage is now … ?
Chris Farrell: Twenty-seven states have raised the minimum wage to about $9 something right now. So, it's far from $18 an hour. This is the price of inequality. The people who are going to be left behind are minorities and low income families. The gap is getting greater.
You have very qualified students from low income families who are not going to college. Part of the reason they are not going to college, is these are not families that have traditionally borrowed. These are families that are afraid of borrowing. Even small sums of money are a strain on the family purse. This is the great disgrace that’s going on in our country right now. The median income household and below is being badly squeezed.
Steven Smith: How do people in that sector decide how much debt to take on? What it's worth? Is college worth it to those workers?
Chris Farrell: College is absolutely worth it to those workers. One of the things that really troubles me about this whole conversation, you’ve seen this, the story starts out the student graduates and they have $200,000 worth of debt or $100,000 worth of debt. The thing is, if you look at the debt levels, at most, its 3% have over $100,000. That’s a very small segment of the population.
But you hear these horror stories: people are borrowing and they're not getting jobs. Now, you're from a low income family and you're thinking: "Well, if I borrow all this money, I'm going to have to borrow $100,000 and I'm not going to get a job at the end of it."
the reality is, if you're from a low income family, you're going to get grants from the federal government like Pell Grants. You're going to get grants from the state. Yes, you're going to borrow a little bit.
My message would be, get that degree as fast as possible in order to start paying back your debt. But that degree will pay off for you and it will pay off for your children.
Steven Smith: In lifetime earnings.
Chris Farrell: Lifetime earnings. So, you want to get it fast and you don’t want to be intimidated. There's almost an indulgence going on right now about these horror stories with debt. One of the side effects of that is discouraging a group of people who really do need to go to college, who truly benefit from college. They would have careers that would develop very differently by going to college than by not going to college.
Steven Smith: The rule of thumb is that an individual student shouldn’t accumulate more debt from college than what would be the typical salary in that profession in the first year out of college.
Chris Farrell: That’s right. That’s a really good rule. Another rule is you don’t want to be paying back more than 8% of the income that you're going to be earning when you graduate from college. Now, I'm very empathetic. What undergraduate really knows what they're going to be earning? What the job market is going to be like. But still, these are the kinds of rules of thumbs you want to have in mind.
Frankly, you want to think very seriously about community colleges. You want to think very seriously about getting every grant that you can, every scholarship that you can, and you want to be incredibly aggressive about applying because here's the other side of the college and university crisis: they're starting to get hungry. They are getting really hungry for students, they need bodies. So, take advantage of their hunger.
Steven Smith: Because there's a demographic shift going on in this country. There are going to be fewer students in the future.
Chris Farrell: Fewer students and fewer qualified students. if you're from a low income family and you're a student, apply. My guess is, you're going to get in and you're going to get a lot of help.
Steven Smith: Final question. As you go around the country talking to groups of educators and professionals in the higher education sector, do you see much serious effort underway to try and rein in cost or try and somehow fix this business model which you say is outdated?
Chris Farrell: I see a lot of very sincere efforts trying experiments with turning, instead of the four-year experience you make it a three-year experience. There are discussions about cutting back on certain departments. There are a lot of meetings about what are we going to do.
But the reality is it's very difficult for successful institutions to change even when they recognize that the world is changing on them. The American college and university is one of the most successful institutions in the history of this country. In fact, among global institutions in the past several hundred years, it's really a crown jewel of the American education system.
The world is changing on them, they recognize it, and there are experiments going on. But for big changes, that’s going to take looking at bankruptcy, looking at: we're really going to have to change our mission, we're really going to have to make these difficult choices, and some wealthy funder is not going to come in and bail us out.
Part of what makes this discussion so difficult, is that the Stamfords, the Harvards, or the Princetons, they're not going to worry about any of this. They just don’t.
Steven Smith: Because they have enough name recognition and a big enough endowment they're always going to be in the business.
Chris Farrell: They are always going to have more people pounding on their door to get in. But then you go through the colleges and universities throughout this country, a lot of them are facing genuine financial trouble and know that the world is changing on them. they are trying, but it's unclear what they are going to do.
Steven Smith: Chris Farrell, thank you so much.
Chris Farrell: Thanks a lot.
Steven Smith: Chris Farrell is APM's Economics Editor. You can find more podcast about college affordability and a range of issues on K12 and higher education at our website www.americanradioworks.org. While you're there, browse the archive of more than a hundred documentary projects and let us know what you think of our coverage. That's www.americanradioworks.org. We're on Facebook at American.RadioWorks and on Twitter @AMRadioWorks.
Support for "American RadioWorks" comes from Lumina Foundation, the William and Flora Hewlett Foundation, and The Spencer Foundation.
I'm Steven Smith. Thanks for listening. This is APM, American Public Media.There may be small errors in this transcript.