Astronomical Costs: Higher Education

[ak666]

Probably any American who has gone to university or has contemplated going understands the astronomical costs of obtaining a higher education, especially at a prestigious university. Why are the prices so incredibly high?

Were the prices always so high? Nope.

Broken Market

Whenever we feel ripped off in the market whether it's healthcare or pharmaceutical drugs or education or anything else, the market is likely broken.

If there are no incentives for prices to be low, prices won't be low. If there are no incentives for quality to be high, quality won't be high. Low-priced, high-quality goods and services won't exist unless there are market forces that provide an incentive for them to exist. It's as simple as that.

For example, let's say I write you a blank check. I want you to perform a job for me. You can put in whatever amount you like. You won't be held accountable if you do a poor job or spend the money unwisely. It's fine. Do whatever you want.

How much are you going to charge me, how wisely are you going to spend the money, and how good of a job will you do? Unless you're some kind of charitable saint, chances are that you will charge me a fortune, spend the money very unwisely, and perform a mediocre job.

Of course I could try to monitor you, regulate you, oversee everything you're doing and constantly lean over your shoulder, but that's trying to force you to give me a good value when you still lack any incentive to do so. Chances are that doing this won't make things so much better. You'll likely still try to put as high an amount as possible on that blank check while doing the minimum necessary to keep me from getting too upset. The real problem is a lack of incentive.

Government Subsidization

The above scenario with the blank check is predominantly the reason behind the skyrocketing costs of tuition. The only difference is that I'm the government in this scenario subsidizing you, the university, either directly or indirectly through student grants and loans.

It also doesn't bother me if you put an astronomical price on this blank check since I'm not the one who really pays for it. I get to spend the revenue I receive out of taxpayers. So not only do you lack incentive to spend the money I give you wisely, I also lack incentive to spend money on you wisely because it's not my own money either.

As the amount of government subsidization increases, so too do the costs of tuition. As the costs of tuition rises, more government subsidization becomes necessary, making the costs of tuition rise even more. As the costs of tuition rise out of hand, citizens demand more government subsidization, which then makes the costs rise even more.

It's a never-ending vicious cycle which can only lead to higher and higher prices until the entire economy is bankrupt unless the government starts doing something different.

The solution? We have fix the broken market by reintroducing market forces which provide incentives for prices to become affordable. The safest bet is almost always less government in these scenarios.

College Textbooks

College textbooks deserve a notable mention since they're one of the rare cases where high costs are reasonably divorced from government intervention.

In this case, it's the professors assigning the textbooks who have no incentive to choose affordable textbooks for their students. They're spending the students' money indirectly through their choices, not their own money. It's still a case of reckless spending of someone else's money, but in this case it's the professors who are being reckless with their students' money.

A way to solve this problem is to make it so that textbooks are provided by the professors and come out of their own earnings. Voila, now the market forces are restored to provide incentives for shopping smart and for prices to drop. As a bonus, the prices become more transparent for taking a particular course since the cost of required textbooks is included in the fee. This eliminates any form of sticker shock after signing up for the course.

Low Quality

Of course there's the off-chance risk that the teacher might simply choose the cheapest textbook that provides the minimum educational value. To combat that using an economic mindset, these actions might help:

1) Independently subject students who take the course to a standardized test to measure their performance before and after taking the course. The specific details of the test should be hidden from the teachers so that they focus on teaching the subject instead of teaching the students to excel on the particular test. Publish the results and make them transparent to students, helping them to guide their choices towards quality teachers whose students improve the most.

2) Eliminate the idea of tenure. Poor-quality professors who are in the lowest demand should be eliminated. They need to have incentive to continue providing quality education to their students.

With these types of market forces at work, we should find prices dropping dramatically while the quality of teaching increases dramatically.

For those who distrust market forces for driving prices down and quality up, our only practical alternative is to just trust that humans generally aren't greedy and will do the best job possible lacking any monetary incentive to do so. Typically greed wins out with the exception of some saints here and there.

The beauty of having market forces in place is that it drives prices down and brings quality up in spite of humans being greedy.

No Painless Solution

The unfortunate part when governments create these types of problems is that there's typically no painless way to solve it. The temptation to exacerbate the problem grows stronger and stronger. It's similar to trying to combat high inflation levels or paying off the national debt. Either the people in the economy suffer a bit now or they suffer even more later the longer the problem is postponed.

The least painful solution I could see arising in this circumstance is for a new type of competing, affordable education system to arise in place of the former one. Such is what seems to be happening with the Free Market Medical Association for healthcare. If these alternatives start to become favored over the former system, then the former system will lose its business and be forced to start competing for affordability and quality or shut down.

[jp612612]

While there is no "painless" ways to fix the problem of skyrocketing education costs, there certainly is a way to slow it down. Right now, student loans are all exempt from bankruptcy protection such that no matter how much financial trouble you get in, repayment of your student loans cannot be dodged. This is important because if the loans were not guaranteed like this, no one would ever loan an 18-year-old money for college. However, if you put a cap on these loan amounts and then allow that amount to be adjusted yearly for inflation, you'll find that college tuitions will suspiciously hover right at that number. If you choose the right number, you'll both get college costs under control and give the university system time to adjust their cost structure to the new reality.

[ak666]

I like this idea, especially with the cap. How does the exemption from bankruptcy protection work if a student defaults on his/her loan?

There was this interesting debate I watched a long time ago. A university professor actually made the bold suggestion of providing student loans in a way such that the university will not be paid back unless the student is successful and can pay them back.

That was a very bold proposal and might send educators in a riot, but I liked it. It meant the university would have to invest in the student's future ability to secure an income through their education. That would provide a boatload of incentive for quality at the very least.

[ak666]

... basically the proposal was something like this IIRC: if the student is subsidized, the university doesn't receive a dime until the student starts making payments on his/her loan. They receive that delayed payment, giving them incentive to provide the highest quality education. It'd probably also provide incentives only to grant student loans to very promising students, especially with your proposal to reduce costs.

[jp612612]

Yeah, I don't see schools going for the whole deferred payment thing because there are so many students who are getting degrees in fields that have no economic future (like say, sociology). This benefits the university system because it allows sociology professors to get paid very well. If you linked funding to the economic success of the students, then you'd inevitably get this huge dichotomy between STEM and non-STEM. This is not what the university system wants as they want their English professors to get paid like their engineering professors.

[ak666]

That makes sense. Didn't think it through so much... though putting some of the sociology department out of work might not be the worst thing. :-D It also leads to bizarre incentives and side effects when you have some students paying upfront and some on a loan.

I like the basic cap idea.

[ak666]

by the way, is that news coverage from Stossel accurate? I went to university in the US in 1999, and it was nice but what he was showing looked like luxury hotels. Is it really getting like that nation-wide and not just in a few select schools?

[jp612612]

Yes, the new buildings that are being created look amazing! The same thing with hospitals here in the US. The new Children's hospital in Seattle looks like one of those CGI crystal palaces that you see in high fantasy movies. Whenever that happens, you know that there's a money issue that's eventually going to come to a head and we're going to see the results of that in the coming decades. With regards to education, I think that what we're going to see is a huge default on student loans where a bunch of borrowers simply refuse to pay. When the wage garnishments threaten to kick in, the base of defaulted borrowers is going to be so large that they'll push for some sort of bailout. I don't know what it's going to ultimately look like but the current path is not sustainable.

[ak666]

Ouch! Sounds really nice but also really expensive. I was hoping the news story was at least slightly exaggerated. I really don't understand Bernie Sanders -- how he could look at that and not think free this and that for everyone is not going to make things much worse unless he has some really savvy economical tricks up his sleeve.

[jp612612]

You know, that's the thing about it with our healthcare. Making it just "free" will cause costs to skyrocket because it'll then be a blank check. Healthcare is really a lot like higher education (and home prices) in that there's this system in place that makes costs moot. For healthcare, it's insurance. For education, it's student loans. For homes, it's mortgages. This manipulates the market and drives prices way up. If you look at Europe, you'll see that doctors and nurses get paid way less. Everyone wants to talk about the humanity of providing healthcare, but no one seems to look a nurse in the face and tell her that we want her to cut her salary in half.

[ak666]

There might be a way for the nurse and doctor to still earn quite a bit without skyrocketing costs. There is this one facility in Oklahoma called Surgery Center of Oklahoma.

https://surgerycenterok.com/pricing/

They're offering prices that aren't exactly cheap just yet, but are relatively often anywhere from half to a tenth of what traditional hospitals charge. The staff are unapologetic about making a profit, and yet charge a fraction of what "non-profit" hospitals charge. The key to their low prices according to them:

1) Transparent pricing. They don't hide the costs and give the customer sticker shock later.
2) The facility is owned and run by the doctors and nurses. They cut out all the bureaucrats and administrative overhead.
3) They reject most forms of insurance which would force them to adhere to regulations of a kind that would require them to put their hospital under bureaucratic control.

https://www.youtube.com/watch?v=fkXywMBYfLM

[ak666]

They're actually promoting their "for-profit" business model with transparent pricing to other medical professionals through an association they've founded called the Free Market Medical Association. They're also beginning to accept a new form of state and business-provided insurance which doesn't come with the red tape of traditional insurance.

https://www.youtube.com/watch?v=0uPdkhMVdMQ

I actually see it as the most hopeful development so far in American healthcare provided the model catches on nation-wide and more people could find a way to insure it without corrupting it.

[Jimrat86]

Universities are allowed to run themselves like businesses without assuming any of the risks. I recently debated a 62 year old who argued that in-state costs are cheaper, thus students can work part time to pay them off. Apparently he can't do math.
Congress put in uniform bankruptcy clause at the federal level that the states have all been allowed to just violate for some reason, so the lenders, colleges an gov't have all been making dollars on the backs of students. SImply put, yes the system is broken, and there is little to no incentive to getting a graduate degree let alone a BA or BS because the value has been diminished. Not sure why people argue that the value of a college degree would go down if ed were free in the US, since it already is all but worthless...