Although I don't have the hard data, I'd wager the word "prestige" is the most-used non-article word in threads and posts on this site. Prestige of firms, groups, universities, etc. has been discussed ad nauseam on WallStreetOasis -- but could prestige be less than the boon and blessing that we believe it to be?

Are universities, in an attempt to bolster their prestige through rankings and league tables, in part to blame for the ballooning cost of education and subsequent student loan numbers in the US?

Despite so many fat years, universities have done little until recently to improve the courses they offer. University spending is driven by the need to compete in university league tables that tend to rank almost everything about a university except the (hard-to-measure) quality of the graduates it produces. Roger Geiger and Donald Heller of Pennsylvania State University say that since 1990, in both public and private colleges, expenditures on instruction have risen more slowly than in any other category of spending, even as student numbers have risen. Universities are, however, spending plenty more on administration and support services (see chart 2).

From The Economist

What's most jarring to me about this entire higher education debacle is that, according to this article, only 57% of people who enroll in a four-year college or university graduate within six (not four) years! The next logical question is -- who authorizes these loans? Understandably the federal government has taken over providing most loans for higher education to students, but back in the golden days of private lending, how are these loans renewed on a yearly basis if a student is in jeopardy of not finishing his/her degree? And it's not just a few students here and there -- it's 43% of the people who go to college!

And those who do graduate, at an overwhelming majority of schools in the US, are no more prepared to join the workforce than they were after receiving a shiny high-school diploma. One of my neighbors told me the other day that she's about to get an A in her statistics course, and after talking to her about it for a few minutes, I realized that she didn't know what standard deviation was...

I understand that we want to make higher education accessible to everyone, but problems begin when people start receiving loans without a real plan to pay them back. See the housing crisis for a good example. Should people with good grades in STEM majors be rewarded with lower interest rates than someone who is more "risky", say pursuing an English degree? There's no denying that the former student will be more likely to pay off his/her loan than the latter, assuming everything else holds constant.

I guess there's always this thing that is still in limbo and (hopefully) won't pass...

But really, where is all the money going? Expensive administrative costs, rising bureaucratic costs, and a preoccupation with rankings (and our old friend prestige) that do not focus on producing higher-caliber graduates. The degree means less than it once did, but costs more than ever -- what gives?

What's to be done about this, all? How do we incentivize people do pick majors that create value AND give them the ability to pay off loans? Have students become too comfortable with receiving loans? I've recently talked to friends in law school who made it seem like taking out $240K isn't a big deal at all -- this would keep me up at night for the rest of my life if I were in their shoes!

Comments (8)


I've read in a few articles that since major college rankings (i.e. U.S. News) don't take tuition and costs into account, but reward schools that spend money on buildings and the like, that this creates an incentive for schools to spend and charge more. I wonder, if U.S. News started weighing tuition and other costs highly as one of their weighting factors, how much would that change things?

Just a thought.

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."


I think a lot of the answer is based on supply and demand. A college degree is not what it once was. For the average person 50 years ago, a college degree was a way to gain an advantage over your peers graduating high school. It often didn't matter what you studied or how well you did, just having an undergraduate degree made you "educated" and worthy of having a job. That is no longer the case - an undergraduate degree is REQUIRED now for just about every job. By obtaining a degree you're no longer gaining an advantage, you're simply making it an equal playing ground. As a result of that, and natural population growth, demand for higher education has skyrocketed while supply stays relatively flat.

As for the loans part of the question, in the past private lenders such as Sallie Mae would originate and service loans through a federal program called the Federal Family Education Loan Program (FFELP Loans). You've probably heard of these loans (Stafford Loan, Parent Plus, Student Plus, etc.). The private lenders would issue the loans under the terms stipulated by the federal government (low interest rate / delayed interest, etc) in exchange for the loans being federally guaranteed by various departments such as the Department of Education.

In 2010 President Obama signed into law an act that got rid of the FFELP program, so that the federal government could lend directly to students. The federal government cannot provide enough funding to all of the students though, so private lenders have absorbed the excess demand for student loans. So a typical scenario looks something like this: student needs loan for $30,000. Federal government lends $18,000, so excess loan demand is $12,000. Student goes to private lending sources like Sallie Mae for that $12,000 loan. They need the loan, and they need their parents to cosign for it. The ease of obtaining these loans leads to, in my opinon, a relatively inelastic demand. As a result, universities can increase tuition rates knowing that the demand will be there regardless.

Since the importance of having a college degree isn't decreasing, and the demand isn't going to decrease, I see no reason to believe this trend won't continue.


Simply put, a degree simply means that you have the discipline to do x amount of work in y amount of time. Its fairly evident that a 4 year degree is now the defacto standard for entry level positions. To MFFLs point, private lenders were given incentives to mitigate their risk. So why not lend (even for 6 years) if you are heavily subsidized? To my knowledge, you cannot erase student loans through a bankruptcy. Additionally, I believe that we no longer think its weird to not finish in 4 years. Especially, If you have to work and go to school. Times are a changing...

PE is the new black.


The flipside, is the European system where education is mostly free or subsidized through taxpayer dollars but there are limited spots for each major, in essence limiting the number of people based on perceived professional need. The downside to this is that students have to be very sure of what they want to do prior to picking a major, and that it is government run which makes it less efficient. I cannot imagine us in the U.S. allowing limitations on majors based on practicality, seems to go against freedom to choose...


I wonder, at what point do rankings stop actually mattering? I'd imagine at the very top -- maybe top 25 -- schools are preoccupied with moving up a spot or two, but most of these schools are going to produce quality grads. In the top 10 I'd imagine that the overwhelming majority of people graduate within 4 years (and certainly within 6). Are the schools with low graduation rates and high league table-based spending ranked in the hundreds or something? Does it even matter for them if they move up spots?

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This article is spot on - the rise in bureacratic costs are to blame. Think about all the "diversity" departments, student reach-out, conselours, administrators, community affairs, etc. your school employs. I read somewhere that these positions outnumber professors at most universities. That is rediculous, and the government student loan system is to blame. Think about how these loans are calculated for the school - it is based on the difference between what a student can pay and how much the school charges. It only makes sense the schools have increased the price so dramatically - they get more federal money that way.


There's a book called "Harvard Envy: Why Too Many Colleges Overshoot" by Andrew Rosen that discusses this. You can get it for free on Amazon. Yes, prestige is a big part of it.


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