The Dollars and Sense of a College Education

If you peruse this website you’ll see I think deeply about many subjects. Two subjects that are dear to my heart are medicine and higher education. Why? The first is obvious: I’m married to a doctor and have a nice perch from which I can view the industry’s operation and development. The second is not so obvious. Although I am a college graduate I have no particular love for my alma mater. In fact when I visited it a few years ago I was surprised by how little a connection I felt on campus. It had changed as I had, but there was something else. I felt that I had been processed, just one of thousands that graduated from the university that by-gone year. It was a very mechanical operation. I paid my money, got my card punched for the required classes I needed, and received a certificate and a handshake at a forgettable ceremony at the end.

Yet I still think about and worry about higher education. I recognize its importance in a free society, which is why I rail against its takeover by leftists and fret over its cost. I also I have a child who will soon be college age, and so I’m mindful about the choices and opportunities higher education offers him.

Medicine and higher education also share one thing in common. Their prices are completely opaque. I recently lost my health insurance as a direct result of  Obamacare, and as I get older I worry more about how long my body can last without seriously breaking down. Take for example a hernia repair. I had one done in 1999 and was similarly under-insured at the time. The price back then was $3,000 and was split 50-50 between my insurer and me. As I begin to prepare the farm for Spring (funny to think about considering I’m waiting to be walloped by a deadly winter storm as I write) I’m moving heavy things around. Every once in a while I get a twang in my lower gut on the opposite side of the repaired hernia and it scares me.

How much would a hernia operation cost me today?

I have absolutely no clue. I can go online and find the price of nearly any car. I can search real estate sites and learn the prices of houses in any neighborhood in North America. I can even find out how much companies charge to clean out my septic tank, but I cannot tell you how much the local hospitals are charging for hernia repair. All I know is that it’s probably going to cost me more than $1,500. Probably a lot more.

Why is this?

Similarly I can look up the cost of tuition at any college or university in North America. In many cases such numbers aren’t easily found, and when they are they really don’t mean much. For one thing the costs don’t include many mandatory fees that one has to pay. They also often don’t provide the cost of living one has to pay to attend. And finally, the tuition figure is a lot like “manufacturer’s suggested retail price.” Hardly anyone pays that number except for wealthy foreign students who tend not to be price sensitive thanks to their parents being members of some kleptocracy in the Third World. In most cases the cost of tuition will be lowered by need-based grants or scholarships.

Other costs are never mentioned. For example opportunity costs. For arguments sake let’s imagine that my son will attend college and graduate in four years. Not only will I have to account for the direct cost of his education such as tuition, fees and books, but I’ll have to include indirect costs like room and board, transportation, food, entertainment, clothing etc. On top of that there’s the cost of lost wages. During those four years he could have worked full time and earned say, $20,000 a year. That’s $80,000 in earnings he’s forfeited and that he will have to make up through better earning power of his degree. If he graduates and earns just $20k a year, then he’s wasted his time and I’ve wasted my money.

But by far the largest unmentioned cost is compound interest. As Einstein once said compound interest is the most powerful force in the Universe, and anyone who’s ever paid back a student loan knows he was right. Every month I cut a check to pay back the Wife’s medical school loans and the balance barely budges, and the reason it doesn’t is compound interest. Students may not understand that when they borrow $10,000 at 5% interest to attend school, they aren’t paying back $10,500 after they graduate. While they are in school that loan is capitalizing, and the interest is compounding so that by the time they pay back that $10,000 loan ten years after graduation they will have paid back $20,000 on top of the $10,000 they borrowed.

So how much does a year of college really cost?

Again, it’s difficult to say. The best I can do is estimate it.

I’ll start with my alma mater, University of California – San Diego which is to education what factory farming is to the poultry business. UCSD off-campus cost including tuition, estimated room, board, transportation is roughly $30,000 for the 2014-15 school year. I’ll assume my kid gets some grants, knocking the cost down to $25,000.

Say I throw in $15,00o leaving him to come up with $10,000. Since he’s a typical teenager, he won’t understand compound interest, so he’ll borrow his $10k and pay it off after he graduates. Because it will take time for him to pay it off, that original $10,000 will become $30,000 by the time he authorizes the last debit to his account for his student loan creditor. Adding in my original $15k means his year at my alma mater will really cost us both $45,000.

To reiterate, that’s the cost for one year at a public school in California based on the following assumptions:

  1. He graduates in 4 years. This is a big if these days. Many kids are taking 6 years or longer. The longer they take, the worse the compound interest on their student loans as the interest on the deferred loans compounds while they are in school.

  2. He gets $5,000 or roughly 17% in need based grants or scholarships. UCSD provides need-based aid to 70% of undergraduates, and some of that includes loans according to an admissions officer at the university I spoke to.

  3. I provide $15,000. That’s more than my entire stay at UCSD cost back in the 1980’s by the way…

  4. He borrows $10,000 and takes 10-15 years to repay it.

One of the dirtiest yet most effective ways to manage one’s time I’ve learned as a per-hour professional contractor is to determine the cost of whatever I’m doing or not doing in terms of a dollars per hour figure. What would it really cost my son to attend an hour long class at UCSD?

UCSD requires 180 units to graduate. So based on our assumptions that’s 45 units per school year of 30 weeks. Dividing the cost of the school year $45,000 by 30 weeks gets us $1,500 per week. In order to maintain our assumptions and finish in 4 years, our student will need to take 15 units per quarter, which translates into 15 classroom hours a week. Dividing the cost per week ($1,500) by classroom hours per week (15) provides us the cost of a classroom hour: $100.

We’ve all heard about dumb classes kids take.  Rutgers University is offering “Polticizing Beyonce” ostensibly to explore race, gender and sexual politics. Assuming Rutgers charges the same as UCSD, I wonder how popular the class would be if students had to peel off a Benjamin each time they entered the classroom. Would they be as willing to explore race, gender, and sexual politics in a classroom for the same price they could explore race, gender, and sexual politics with a moderately priced hooker in private? Granted one doesn’t have to worry about catching an STD by attending class; then again with some of the types I’ve seen on university campuses these days, I’m not so sure about that.

People alter their spending habits when they know what the price of something is and can estimate its value, and the fact that both are hidden from us whenever we consider medicine or higher education should make us stop and ponder “Why?” The free market is a ruthlessly efficient thing. If students had to pay for each class they took when they took it, one could bet that higher education spending would be revolutionized.

Universities would focus on providing better teachers that students would be willing to pay for. They would be forced to cut costs, cutting back on the administrative bloat that inflates the cost of tuition. After all, a typical undergraduate core subject class at UCSD might have as many as 150 students in it. Multiply that number by a $100, and it’s quite likely the adjunct professor teaching the class and the dozen graduate students TA’ing the course see a pittance of that $15,000, the TA’s working for free and the adjunct prof earning about $25/hour. Where did that $14,975 go?

It went several places. To pay down the loan on the new student rec center. To pay off the new training equipment for the track and field team. And on administrators, hordes of administrators, a veritable plague of administrators. As this article shows, a new study finds the number non-academic administrative employees at US colleges and universities has doubled at the same time the number of part-time faculty has grown from a third in 1987 to half of all teachers today. University presidents contend they are doing everything to cut costs, but Richard Vedder, an economist and director at The Center for College Affordability, calls them liars.

“I wouldn’t buy a used car from a university president,” said Vedder. “They’ll say, ‘We’re making moves to cut costs,’ and mention something about energy-efficient lightbulbs, and ignore the new assistant to the assistant to the associate vice provost they just hired.”

Some of my friends have commented that my arguments attack the liberal arts and that I focus too much on STEM courses that provide good job opportunities after graduation. I don’t have a grudge against the liberal arts per se. In fact one of the most useful courses in terms of my career as a systems analyst I ever took was a philosophy course on logic. Some of the English courses were excellent too in terms of value.  Being able to communicate to a broad audience is critical in business these days, yet so many students lack the basic ability of crafting a memo let alone being able to articulate complex subjects to non-technical audiences. If I could go back in time, I would happily peel off a Benjamin to pay for an hour of that logic course. It was worth it to me, and would likely be worth it to others. I’m advocating a system of price transparency and reform that will likely save such classes because the administrators who are waking up to the threat posed by parents like me are scrambling to cut costs by cutting teachers and courses instead of cutting their own jobs. Maybe Politicizing Beyonce is a great course well worth the cost, but the market, those paying for the class, should be given the opportunity to decide its true value.

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8 Comments

  1. Pj:

    Scott – You are not accounting for the fact that education should be considered an industry like any other. It is surely as much an industry in the United States as entertainment, sports, or energy.

  2. Scott Kirwin:

    Pj
    How am I not accounting for that? I’m advocating for price transparency, and the industries you mention are all more transparent than education and medicine.

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  6. Ymarsakar:

    It’s like a big mafia esque scheme.

  7. Ymarsakar:

    One of the funny things on colleges is the so called “student fee” for student activities like bar b ques, parties, and various other things. Supposedly this is determined by a student council or representative, which then decides how best to utilize the cash.

    The reality is that most people are either working, sleeping, or studying to pass tests at college. They don’t have the interest or time to join some bureaucracy to overseer student fees and how they are best utilized. Which means, guess who actually joins such committees? The pseudo Leftists in training that like to redistribute other people’s money.

    They get trained well in those years, and then they graduate and everything from Hussein’s Leftist mouth makes perfect sense.

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