The Trouble with the University Financial Model

I recently listened to a “Bloomberg on the Economy” podcast with special guest Gary Shilling, which talked about the current state of student loans, the financial models used by universities, and the effect on the economy.

I found the interview had a few very interesting topics including: university education not providing the skills needed for available jobs, how student loans drive tuition prices up, the myth that university makes you smart, and a case where a university lowered tuition and saw better results.

Click here to listen to the Bloomberg on the Economy podcast.

The beginning of the interview talks about increasing corn prices and the droughts that are happening throughout the US at the moment, all of which has nothing to do with the title of the podcast.  You’ll find the meat of the conversation a couple minutes in.

The discussion begins with talk about how students are graduating from university with very large amounts of debt and are unable to find good quality jobs to pay off this debt.  This is nothing new.  We have seen in the past five or so years this topic being debated.  We have seen the protests in Montreal and other cities fighting against the increased cost of education.

Shilling discusses how there is a stigma that you have to go to university.  It is common belief that the road to a quality job is through higher education.  The model has been to go to university, get smart, get a good job, pay off debt, and live happily ever after.  And if you wanted a higher income you would continue on to more school.  Until recently this has proven true and the data is there to back it up too.  Statistically speaking, the higher your education the higher your pay.  But, Shilling brings up a great point that should always be remembered when looking at statistics; you must discern whether there is correlation or causation.  Shilling uses the analogy of guaranteeing that if you go out and bang a drum, that the sun will set.  Or the old joke of, “Hey, why are you clapping your hands?  It’s to keep the lions away.  But there are no lions here.  Exactly, it’s working!”

Part of the problem could be that today more and more people are attending university than when our parents did.  This naturally increases competition (demand) and therefore would naturally reduce job opportunities (supply).  What’s more is that many students are graduating with degrees that aren’t sought after by industry.

One topic discussed that I have been thinking about for a couple years now is that people feel university is the only option to have a good career.  There is this belief that anything less than university means that you are not “smart enough”.  Our parents wanted so badly for all of us to become doctors, engineers, chemists, bankers, and so on.  But, the reality is that not everyone can be an engineer.  Not everyone can be a doctor.  These are positions that truly do require very high intellect and extreme amounts of dedication and focus.  Some people just don’t fit this description.   And there’s nothing wrong with that.  So maybe we should stop forcing it.

There are other great careers that pay great wages and can be learned through community college or by apprenticing.  Electricians, plumbers, home builders, crane operators, forestry equipment operators, roofers, medical equipment technicians; these are all careers that pay good wages and don’t require four years of university.  And, some of these jobs are even in demand.  Think if some of our bright young minds became home builders or electricians.  Isn’t it nice to think that the house we live in was built by a great mind?  Think of Mike Holmes.  He became a great leader in the trades industry and changed how people look at contracting in Canada.  He definitely could have been a great engineer or doctor, but he didn’t, and society benefited from that.

There has to be some sort of balance between technical and vocational education.  Many industry jobs need technical training at the moment.  Automation is high and programming and computer skills are needed.  Does it mean that everyone needs to have a master’s degree in computer science and be able to build and develop this equipment?  No.  We need people to run the equipment and fix the equipment as well.  One topic that I found great in the podcast was industry teaming up with education to develop programs to train students in fields that are needed.  This is a great system!  The school provides students with the skills that industry desires; people get jobs.

The other part of the podcast describes the university financial model.  The problem with the financial model of universities is complex, but simply put, it looks something like this.  Universities are able to charge high tuition fees because: a) there are some people out there who can afford to pay $50,000+ to put their child through university, they are not necessarily the smartest people, but they can pay the fee. b) To get the student body that the school desires (high IQ), the school has scholarships and bursaries supported by alumni, endowments, and government subsidies, and 3) the government gives students access to loans to pay for a university education.  Can you see why universities are able to charge higher and higher tuition fees?  The problem is that universities have a customer that can always pay the price of tuition no matter how high it is raised (within reason).  You could say that tuition fees are close to being perfectly inelastic in demand.  All this available money makes it easy for universities to keep pushing up their fees, which have grown five times faster than regular inflation.

The first group may or may not have the high IQ, but they do have the money, so they are able to pay for tuition and go to school.  The second group has high IQ but no money, however, they can get scholarships and bursaries to pay for education, and so they pay tuition and go to school.  The third group doesn’t have the above average IQ or the money, but they can easily get a loan without any assets or income, so they pay for tuition and go to school.  The university always gets paid.

The big winners are the universities.   Next are the high IQ and wealthy because they might be able to squeak by university with relatively small amounts of debt.  The ones that bear the most risk are the poor/average wealth and average IQ students, which make up the majority of the population.  This group is usually left with large amounts of debt, and in a high unemployment economy like we are facing now, are not able to get a job to start paying off that debt.

Now, I’m not saying that scholarships and government loans are bad.  They provide people with the resources necessary to attend a school they would otherwise never be able to attend.  I myself would not have been able to go to school without government aid and bursaries.  But, there has to be a point where universities cannot just charge higher fees because they have access to this money.  Government aid should be in line with industry needs.  You sacrifice the student and the economy by giving them $50,000 in debt towards an education that is not desired.

A cool little case Shilling talks about near the end of the podcast involves the University of the South.  They lowered their tuition by 10% and froze it there for 4 years.  They are still considered a reputable university, but they are now cheaper compared to the competition.  What implications did this have?  They found that the quality of their applicants increased and retention rates (people staying in school and not dropping out, a.k.a. paying for four years of university instead of just one) increased.  This has great effects on the future of the university: 1) With better quality students comes greater chances alumni will continue on to better jobs and demand for attending University of the South should go up, 2) With a stronger retention rate, you have a less variable revenue stream.  You have students who stay for the full four years and pay tuition each year, not just a large first year money stream.

So what would it take to make the system better?  I unfortunately do not have the answer, but our current system proves to definitely not be the solution either.  What I do think it requires is change from many of the parties involved.  Here is a simple list that I think might help:

  • Industry: Coordinate with Education and Government to provide guidance as to which jobs, skills, and training are in demand.   Work with Education to develop programs to provide employees with the qualities you seek.
  • Education: Less focus on the short term and more focus on the long.  Contemplate the consequences of increasing tuition far above inflation.  Concentrate on quality of applicants, not quantity.  Your business model should include high quality students, high quality staff, and high quality research; not simply maximizing profits for the short term.  Don’t forget you are a university, not Wal-Mart.
  • Government: Tie education funding (student loans) to industry need.  High demand industries should have more funds devoted to them.  Make it very visible to prospective students which industries are in demand.  Information for government financial aid should be side-by-side with industry needs and opportunities.
  • Parents & Students:  Be realistic.  Match your education with your ability.  Don’t look down on trade and technical schools; plumbers make more than most majors.  Research which jobs are in demand and expected to still be in demand in the next 5-10 years.  Go to university if it’s right for you.  Get it out of your head that University makes you smart; you make you smart.

So there’s my two cents on the topic.  What do you think?  Comment below if you agree, disagree, or have the solution to the topic of tuition, debt, and student unemployment.

Click here to listen to the Bloomberg on the Economy podcast.

Thanks for reading and good luck out there!

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2 comments

  1. Is there a renewed interest in career and technical education in Canada? (We call it CTE in our public schools here). Some new funding has come via the acronym of STEM-Science, Technology, Engineering and Math. Some education [and business] types have finally realized that it takes geometry to be a plumber; and that electrician jobs pay well, and won’t be outsourced. There is also another variant STEAM-with the addition of Art to STEM. STEM jobs are not just for university!

  2. Not sure if there has been a renewed interest here or not. Some college courses like police foundations are full and hard to get into. But there is still a huge demand for trade related jobs, especially in places like Alberta and Saskatchewan. There’s still a lingering mentality that University is where you need to go after high school. But saying that, I recently visited a few high schools and noticed that there was some real equality when marketing trade schools, colleges, and universities in the hallways (not sure what is said in the classroom). Hopefully this can help high school grads be more open to the possibility of alternative education streams. The STEM programs you are talking about sounds interesting. Is the purpose to teach the trades but give an even deeper understanding of the principles? Are the courses longer (or more expensive)?

    Thanks for commenting!

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