Rethinking Higher Education

The coronavirus pandemic has taken a toll on college enrollments. Overall,  undergraduate enrollments have declined by 9.4 percent, or about 1.4 million students. The most obvious reasons for the decline are the disruptions caused by the virus. However, some experts feel that increasing numbers of high school graduates are concluding that college is just too expensive, which is not surprising considering the costs of college have more than doubled over the last 20 years. All of which suggests it might be an appropriate time to begin to rethink American higher education and examine alternatives to it.   

The debate over student loan forgiveness as much as anything else highlights the problem of college costs.  About 70 percent of college freshmen take out federal student loans with an average debt at graduation of around $32,000. The loans come due six months after a student leaves school, keeping in mind that only 40 percent of students will graduate after four years. Eleven percent of borrowers will default in the first year, while 25 percent will default within the first five years.   To make matters worse, student loans are also tied to increasing college costs. The Federal Reserve Bank of New York found that for every dollar increase in student loans, college tuition increased by 60 cents.  

Parents can also take out what are known as Plus Loans.  These loans allow parents to borrow up to the full cost of attendance for their child minus any financial aid already received. Unlike student loans, parental loans are not subsidized and come due soon after they are taken out. 

In 2022, the average Plus Loan debt was $28,788.  Ten percent of parent borrowers will either be behind in their payments or default within two years, which is tied to the fact that 6 out of 10 borrowers are low-income.  

Why are students and their parents willing to take on such large debt? The answer is the deeply held belief that attending college will result in finding a good job, and paying off the loans will not be an issue. Indeed,  when college freshmen are asked why they are attending college 87 percent answer “to get a good job, ” a figure that has steadily risen since the 1970s.  College graduates do earn about $33, 000 more a year than high school graduates. That said, the situation appears to be more nuanced than it may appear. From 1979 to 2000 the pay gap steadily increased, but after that it slowed. In fact, the pay gap after 2000 could mostly be attributed to the large salary increases given to top executives, while the bottom 60 percent of four-year degree holders, after accounting for inflation, had lower wages in 2018 than they did in 2000. The pay gap is also strongly related to college majors. Put simply, some degrees are worth more than others. For instance, research conducted at Georgetown University found that STEM graduates (science, technology, engineering, and math) earn 50 percent more over a lifetime than humanities and social science graduates.

The lower incomes of liberal arts’ graduates brings up the issue of underemployment, which occurs when college graduates take jobs previously held by high school graduates.  Forty-one percent of recent college graduates are underemployed, while the rate for all college graduates is approximately one-third. Hence, many of the wage gains of college graduates occur at the expense of high school graduates who are forced to accept even lower-paying jobs. Why has this occurred? Employers assume that degree holders are more capable, and, if available, it only makes sense to hire them.  On the other hand, recent graduates need an income to achieve some level of independence and begin to pay off their student loans. A recent study conducted at the Harvard Business School reinforced many of these assumptions. The study found that companies often hire college graduates for jobs that don’t require a degree, or what is known as degree inflation. Companies typically pay college graduates 11 to 30 percent more than they would pay a non-degree holder. The system is inefficient, since companies are paying more than needed, while non-degree holders are being excluded from an opportunity to earn higher wages.  

By 2026, another issue will emerge, which has been labeled the “demographic cliff.” In that year, there will be a 15 percent decline of traditional college-aged students over the next five years, which can be traced to the Great Recession of 2008 when birth rates declined. The dearth of 18-year-olds combined with the ever-rising costs of colleges that scares off potential customers could result in severe labor shortages.  How will organizations deal with the lack of graduates?  One obvious way would be to implement their own training programs, and companies like IBM are doing just that for entry-level positions. The company reports that with the right training these “new collar workers,” as they are referred to, performed at a level that was as good, and in some cases better than those with college degrees.  The trainees are not saddled with debt and companies can train individuals exactly as needed. The downside is that training can be expensive and is the reason why many firms avoid it. Nonetheless, if labor shortages persist there may be no other short-term alternatives.

Perhaps what is needed is a more robust program of apprenticeships.  According to the U.S. Department of Labor, apprenticeships are becoming more popular.  In fiscal year 2020, there were more than 600,000 apprentices in roughly 26,000 registered programs -- a figure that has increased every year since 2011.  Along with on-the job-training, apprentices often take courses at a  community college as needed for a particular job.  Apprenticeships typically last three or four years and successful completion usually results in a job offer. Apprenticeships are efficient compared to traditional college education since organizations only take on the number of apprentices required to meet their needs, hence underemployment should not be an issue.  Although apprenticeships are more common to blue-collar jobs, between 2017 and 2020 the number of white-collar apprenticeships rose by over 700 in areas like information technology and healthcare. Interestingly, both the Obama and Trump administrations pushed for more white-collar programs, and the reason for doing so is obvious.  Apprentices are paid and do not incur any large debt. It is important to note that state and federal subsidies are often needed to ensure that companies will sponsor apprenticeships. In this regard, there is a large disparity in government spending on higher education, which would have to change for an increase in apprenticeships. Consider that in 2017 the federal government earmarked $162 billion for college education, while only $1.1 billion went to technical and career education.

Other than apprenticeships, the certification model could be another alternative where the key element is getting a passing grade on a certification exam, a system that the accounting profession has used for years. Substantial savings could result, since a college degree would not be required. A certification model makes sense in skill-based areas like accounting or computer programing, but would be more difficult to implement in areas where specific skills are not so apparent. Unlike apprenticeships, the groundwork for such a system would have to be developed.  A key issue is how would individuals acquire the knowledge to pass a certification exam other than by being self-taught?  Specialized courses could be offered by various educational venues both on-line or on-ground. Others could attend college and, then at some point, take an exam when they felt ready to do so.

An alternative path to the labor market other than college could financially help many students but particularly those from lower-income families. Twenty-five percent of low-income first-generation college students drop out during their freshman year, while 89 percent will leave college within six years without a degree.  Not only have they wasted time and effort but their student loans will soon come due. They typically find a low-paying service job in an attempt to make ends meet but never earn a degree.  When one considers the dismal numbers involved, it’s hard to believe that apprenticeships or a certification system would not be more effective.

All this is not to say that high school graduates should forgo college. Certainly, those students majoring in STEM areas along with certain business and medical disciplines where securing a well-paying job is likely will continue to enroll, along with students who have a clear focus on attending graduate school in disciplines with a high potential for successful employment.  On the other hand, for many students likely to be underemployed or unlikely to earn a degree, making alternatives available only makes sense. The current system of higher education with its overemphasis on college is too inefficient and costly to students, parents, and ultimately taxpayers.  Alternatives need to be explored. If not, taxpayer bailouts due to excessive costs of college will continue. 

Image: Stockvault

This article has been updated to clarify that the average debt of $32,000 is counted as of graduation, not as of entry into college.

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