Part II: AAEA Has Become The Important Source of Honest & Innovative Ideas in The US Higher Ed Sector

You may not be trained as an economist or a math whiz, so we are going to explain it real easy–bare with us.  If you have a chance to look at Figure I, presented also on the Home page, you will notice different lines intersect or cross to one another.  You can read the story behind it here.  For now, let us pay attention on rectangle T1 T2 D B, which indicates the total aids that Uncle Sam has poured-out in the higher ed industry.  This amount then will be used by the US colleges and universities to finance their (efficient and inefficient) operation.  In such a case, the Uncle Sam’s role is equivalent as the loan-guarantor.  What unfortunate implications this system can bring as the by product of this policy?  If the institutions operate based on profit motive or if morale, as suggested by the founding father of the capitalism idea/concept is not in the equation when strategic decisions are made, it creates a lot of loopholes that can be taken advantages by any entities.  For example, higher ed institutions may increase its tuition and fees constantly.

Data showed that the spirit of 1958, when the first Act was enacted was faded away over-time.  Higher ed institutions forgot the sole purpose of the National Defense Education Act (NDEA).  Which is to make the country to be more competitive.  In facts, the Act was created after the US was shocked, because another country has successfully launched its first-ever satellite, Sputnik.  However, over time, some “smarts” people have different ideas and they look at the NDEA as opportunities to satisfy their own ego, such as making profit or to increase their materialistic well-being from the society to their own pocket(s).

Let us analyze this whole situation academically and set aside the politics, using Figure 1 as the starting point. Though, this graph shows the analyses are in a static equilibrium notion, but it actually is a dynamic game with incomplete information (assume a two-period game for simplicity).  In period one, before the students graduated, the total amount of taken student loans are paid to the Universities and Colleges by Uncle Sam.  In such a case, from the borrowers point of view, signing the student loans contract can be seen as a binding promise to willingly share or partially giving up her or his future-income to the third parties such as school, private lenders, banks or any financial borrowing institutions.  Of course, this is the most profitable business, because in one side, they have the government as the regulator, and it has the power to garnish students’ future income if the loans got defaulted.  In the other side, the whole system has been set-up such that diploma, or any college degree is a signal of competency to the employers.  Unfortunately, these employers not only, are in fact, the financial institutions who partially own the companies (through NYSE, the stock market) or the lenders of other businesses in manufacturing, services and others.  Think about the practice to appoint the schools’ or colleges’ or universities’ Board of Directors?  How many of them have ties to financial institutions or companies as such?

So, in period one, taken student loans can be seen as the advanced transferred of future wealth or income from the small guys (students) to the big guys (higher ed institutions and lenders). Regulator works as the loan-guarantor, a middleman or the financial institution itself.  For its effort, it receives the interest income and other related loan origination fees and late fee penalties.

In period two, after student graduated, either the guarantor or other financial institutions and private lenders will start taking back their money, plus interest.  In such a case, higher ed and others involved in the whole process are the biggest winners, while the borrowers and their family or the general public, especially the working bees (class) are the real losers.  Did the readers see this dichotomy imitates something?

The student loan borrowers or the whole society need to start asking critical questions such as (1). Why they may need to borrow their own money and (2) Pay the interest; (3). Why as an alum, you should support your school?

AAEA Has Become The Important Source of Honest & Innovative Ideas in The US Higher Ed Sector: Part I

Exactly a month from today, AAEA will celebrate its fifth anniversary.  Starting with our humble motivation to help the average American families to get through college with minimal debts, the Association has become the source of inspirations and a place for researchers, grad students to get new research ideas, for companies to create new business and for other to innovate.

We are surprise that in the past, so little scholars have put their fine mind, talent and time to analyze such a huge problem facing the society.  It is AAEA, an independent non-profit, self-funded organization that started to utilized and applied widely available NCES public data to study this important, but neglected sector for so long.  From knowing a little, we know more how most higher ed institutions have been managed, and honestly, we are stunned.  Our research results show this sector, among others is one of the worse contribution of the financial nightmare to most family in the US in recent years.

None of the researchers has tried to measure the “Dead-weight Loss” cause by public policy and other players in the market.  This is our first attempt to put this mystery unveil, at least in the scientific way.  Starting in 1958, when the country tried to promote science and technical education which led to the creation of National Defense Education Act.  According to this Act, the loan dollars come directly from the Uncle Sam.  This noble plan worked fine at the beginning, where moral is the motivation to participate in the effort.  However, as time lapsed, group and self-interest and profit motive replace the moral, the bad dreams turn to nightmares.

Since the beginning of 2006, students loans has increase tremendously as shown in the following graph. During the same period of time, the average of college tuition and fees has also increased tremendously.  In spite of this phenomenal tuition increase,  demand for higher education also experience upticks due to technology change where higher institution offering online classes.  Continue to Part II.

College Enrollment Becomes An Inter-State Fierce Competition

There are many surveys, facts and figures which show college enrollment in many institutions have shown a downward trend.  One can find decreasing enrollment is more significant in one state, such as in the Midwest, than in any other regions.  Therefore, there is no surprise when one or two states in those states are trying hard to keep their students fleeing from the state and attending colleges and universities in others places.

If our observations are correct, this fact simply show that competition among colleges for student enrollment has changed from regional/state to the next level.  Students and their families finally realize that, they, as consumers have many choices, and that they do not need to attend institutions in their home state.  Humans are rational, so, after a certain time lapsed their finally learned.  As the cost of education gets more expensive, consumers can now make a comparison, and finally have shown who is the boss and who has the “buying power”.  In this sense the Invisible Hand of Adam Smith’s proved that it works.

Consumers’ react to the ignorance behavior of past higher ed institutions.  In other words, they are fed-up.  Their frustration has reached a point of no-return.   There is no reaction if there isn’t any actions.  This suggests, past higher ed actions have proved to be flatly wrong, and now “they are reaping what they have sown“.  Any policy directed for a short-run interests/goals will suffer greatly in the long-run.  Got it?

We often heard story that said, in the long-run we all will die.  Therefore, a college administrator’s philosophy will be more concerned toward maximizing short-term metrics.  Especially for a young-aged person who plan to hop to another and larger institution who offers a larger pie.  The older ones’ interest is to retire at the organization where she or he is currently working.  These types of person do not have the interest to change anything, but BAU.  His only interest is to keep everything as present and make sure to keep the board members happy, and monthly pay check is undisturbed.  In order to achieve her or his purpose, she or her always looks up and copies what others are doing, by attending various association’s annual meetings or through a net-work of US universities presidents.

Freshmen Students in WI: Beware of the Trap?

Recently we learned that a flag university in the state of WI has offered a free-tuition for all first-year students starting in the Fall 2018. The only condition applicants have to do is to apply financial aids through FAFSA.

Here are several points that prospect students and their family need to think about before taking the baits.

  1. While the whole higher ed budget in that state has been cut, even some of the faculty members were let go, will the offer too good to be true?
  2. Read the fine line carefully, the offer applies to all first year students.  The relevant question one might have would be what happens after the freshman year.  This has been a classic example of the bait-and-switch strategies that some of higher ed institutions have done in the past.
  3. Perhaps, this strategy is one of the many efforts for the school to increase first-year student enrollments. Therefore, the enrollment department will have a pretty good metrics, and the boss will look pretty successful, but with the expense of the continuing students.  Once students get trapped, there are no other easy and cheap ways to get out.  School transfers can be very costly.  Basically, once trapped, a student has to wait another 3 years to complete her or his program, and worse thing is without or less financial aids money.  There is almost impossible for an institution who has experienced a budget reduction will be able to subsidize the whole first year students.
  4. NCES data show the average tuition and fees charged by the institution in 2016-17 academic year is $25,230.00.  The average of freshmen year class is 3162 (Fall 2016).  The author mentioned 800 eligible students. Assuming no major change has occurred, it is easy to show the total annual subsidy amount equivalent to $80, 534,160.00 or $80.5 millions.  Which is about 40.15%  or 31.11% (see point #5 below) from the total institution’s core revenue  (2015-16 NCES’ reported figures) or 15.60% (use the author’s 800 student counts) will be used to subsidize the first year students.
  5. Note that the fall-to-fall overall retention rate is 55%.  Let us use this fact instead as a comparison. Then the total subsidy amount is $62.4 million., which is smaller for some 45% first-year students will not be able to make it, and they will not return in the following spring semester.
  6. Including in the core revenue are (1). Tuition and fees, (2). State appropriations, (3). Local appropriations, (4). Government grants and contracts, (5). Private gifts, grants, and contracts, (6). Investment return and (7). Other core revenues.  Yep, pretty much major cash-inlow sources are counted.

Based on the published NCES numbers above, it is up-to the readers to make their final conclusion.

PROSPER Act: Impacts on US Higher Ed Institutions?

No one can expect perfectly when and how policy may change over time.  Higher ed institutions only have a limited ability to affect future legislation, which usually are conducting through lobbyists.  What Harvard president said, echoed and perhaps  represent how the US Colleges and Universities, in general, feel how the new regulation will effect their own institution.  If one of the most stronger private universities in the US, such as Harvard has expressed it concerns, perhaps other smaller institutions may have more challenges to navigate the change.

As the Association have mentioned in the past, any reduction on the demand side of the equation will have negative impacts on the suppliers.  Therefore, the most efficient organizations will survive the industry restructuring process, while others will be wipe-out from the competition map.  We have shown which institutions have higher probability to take that route.  Among the group, institutions such as for-profit; private not-for-profit alike will first feel the pitch.  Then state-owned schools will have to work with a smaller budget.  Instead of cutting the cost or downsizing, some of these institutions plan to increase tuition.  This pricing strategies perfectly may nail the coffin.

But, why the law makers think the changes are necessary?  Well, we are not a fortune teller, but one may expect that there is no smoke without fire.

  1. Adam Smith’s Theory of Moral Sentiments does not work as it should.  Because moral may not be considered in the decision making process, especially when self-interest & money is involved.  Therefore, interventions by the policy makers are needed.  Or perhaps, the Theory only applies to the for-profit entities?
  2. Lack of control such as SEC in the stock market.  IPEDS reporting system may not a successful deterrence means to keep institutions in line.  This proves IPEDS reporting is ineffective, perhaps close to useless.  Gathering data, without a clear purpose, proved to be expensive, unnecessary and adding inefficiently in the whole system.
  3. Other means of college accountability needs to be developed, applied and enforced in-full, consistently and persistently.  But who is going to do it?  Not DOE, for over the years, and the past facts show that all of those supposed to be a watch dog, proved to be incompetent.
  4. Accreditation agencies which are expected to participate actively in the controlling process may have done sub-optimal work, and have become the problems instead of the problem solvers.
  5. Higher institution organization such as AACU, AAU or others have, indirectly set the general policy and trends in higher ed industry.  They resemble and therefore may act like the oligopolists.  That said, these players have the “market or policy” power, at some point, to direct or redirect the so-called business model in the whole industry.  One may be surprise to find out that higher ed institutions have worked in harmony in pricing policy.  Example, prior to 2015-16, college tuition and fees have increased harmoniously, across the board.  The numerous associations seem to work against the American public, unfortunately.  Students and their families are experiencing financial stresses and long-term suffering from the organizations’ reckless behavior (business model).

College Administrators Salary: How High Is Too High?

In economics theory, goods and services are priced by the market, i.e., supply and demand determine the outcome(s).  Let us use the Neoclassical economic theory to examine if this is the case in higher ed industry.  When the resources are abundant, there is no issue to pay whatever price asked by the service providers.  This sounds more like a non-market solution which may lead to inefficiency?  Are we correct?  But thing, is a bit different when most schools are experiencing budget cuts from the state, waning federal dollars, when donations are getting much smaller or even more challenging when total student enrollment drops.  Worse if these four elements occur at the same time.  How colleges and universities in the US are going to fund their activities and cover their expenses?

In the past weeks, there were several articles discussing college and university administrators salary.  For example, when NY governor planned to expand aids for in-state, it appears that the Bundy Aids, which supposed to help paying students’ tuition went somewhere else, such as to pay the administrators salary.  Another example comes from FL.  The lawmakers in that state have questioned Broward College president’s salary recently.  Similar kind of situation at MSU.  When she quits her post, the school pays pretty well chunk of money to president, according to some analysts.

The question that one might have is that, what appropriate methods or approaches to use, if any, to determine campus administrators salary?  Manufacturing industry follows the so-called product costing discussed in managerial or cost accounting college textbooks.  Basically, there are three elements that make up the total cost such as direct material, labor and overhead or indirect cost.  The product costing theory discusses further the issue of standard or full costing as the basis in product & pricing strategies.  A question that one might have is that, in service industry such as higher ed, what will be the appropriate way to price the administrators salary? They indirectly contribute to the students’ class room activities.  So, their salary can be classified as overhead cost. If there is no scientific method that can be applied/used to price their contribution, then their salary may have been determined, so far, using some sort of arbitrary methods or guidelines, which do not have any clear scientific justification.

Neoclassical economists such as Pareto hypothesized that the price paid to the last hired worker should not surpass his or her contributing productivity (example, if her or his contribution has a value of $10, then the max amount that they can be paid is $10).  The question will be, how can one measure an administrator (Example: a college president) productivity?

Plus the Neoclassical economic theory applies basically to for-profit organizations, which may not be appropriate for non-profit institutions such as colleges or universities?  Will then the non-market solution, such as bargaining is the best efficient solution? We invite the best brain in this country to think about this challenge.  If  this question can be answered, then what one needs is mathematical proofs to justify it.  Believe us, that this will be a significant contribution not only for this country, but also the academic world.

If there is a managerial accounting or a mathematical economist genius who happens to read this post, please share your opinion along with your logical (math) proofs.  Thanks!

US Colleges & Universities Are Broken: You Got To Be Kidding, Right?

Now that the big guys and respected Journals, News and Financial Rating agencies have finally voiced their opinion, concerns, and admitted that the US higher ed institutions are broken.  Thank you guys for finally confirming AAEA’s past research results & recent outlook published on January 1, 2018Historical data and the American public’s opinion never lie.  It reflects many facets of the same coin, even though the coin has only two sides.  When we first published our research results (reminder over, 1k pages pdf file) no one thinks seriously that they are important.  When AAEA introduced the new mindset (IRI Analytics) back in 2012 at North Carolina Community College Systems Conference and 2013 SAS Regional Meeting in Houston, TX on how to strategically anticipate, cope and minimize the negative effects, the decision makers not even look at it in one eye.  Which is not a surprise for us.

Now that we see the reality, what striking on all of this business is that only several, literally only a few organizations recognize and understand the implications for not doing so.  Institution such as Harvard has prepared and made necessary changes.  Others, still BAU.  Even the most respectful research institution denied that there is a serious problem with $1.4 trillion student loans and sky rocketed tuition which may lead to higher ed institutions owned-doom days.  But it is now in 2018, over 5 year later, after thorough & painstaking research efforts what we had concluded is happening and confirmed by other important players.

College Administrators’ Interests: Part II

Four years ago, on January 26, 2014 to be exact, the Association has written an article which discussed and tried to understand US College administrators’ management behaviors, motivations, goals, styles or purpose.  Upon examining college’s mission or statement of purpose, we found out the following words or a collection of words become a standard that can be found at every US college statement of purpose.  Below are a couple of many examples:

  • “…. combines high-tech educational facilities and state-of-the-art programs with a focus on teaching for student success”.
  • “… we offer exceptional student support services and staff that are eager to help you realize your dreams”.
  • “…fosters educational excellence and student success, prepares students for local and global citizenship….”.

The institutions always say, their main focus is the student success.  However, in the past ten years, the graduation rate is more likely to be flat/stagnant, while the tuition has increased faster than the country’s inflation rate; the student loans sky rocketed to about $1.4 trillion; but the administrators’ salary has never been decreased.  You can make a logical conclusion what do these observations and the data tell you.

Then what the State representative from FL has said is correct ” …..the change is necessary so that they (the colleges) are able to live up their mission. Therefore, the students can take the right courses, reduce their debts and graduate on time.

It is fascinating to learn that these college administrators even think that the effort to make improvements that will benefit the students are direct assaults to the students?  These people always use the students as a reason for any proposed changes that will affect their own interests (readers need to read the reactions/comments of this article).  The comments are the reflections of the public’s frustration with the whole and prolonged aren’t funny jokes with expensive price tag that higher ed institutions’ administrators have been showing the American public around for many years.  Wow

Let us present the data, so that our discussion can be fruitful.  We are all agree that we have a bigger and more important goal for this country, and not just focus on one’s owned interest.  Readers can examine the following research results (over 1K pdf file)and make up your own mind.  What are the college administrators’ true motivation?

Linking Students’ Future Income To Student Loans: Part II

Yesterday we has discussed if this idea is viable.  It seems great ideas, but actually not.  During the hearing, one of the professionals who testified presented a table that shows the break-down of cash inflow and outflow.  The Association has a chance to analyze his number.  As attached, we share to the American public our analyses side-by-side with what has been presented on the Senate floor.  Taking all his numbers as they are, here what we found:

  1. Unfortunately, the person has made a simple mistake when calculating the total cost of education.  We are all humans, and sure, humans make mistake.  However, with this simple table & calculation, and considering how important the testimony will be and how will it impact community college students in this country, the error seems to be significant.  We are wondering if any of his staff, anyone in the Senate floor, anybody at the American Association of Community Colleges or anyone at Senator Lamar’s office noticed such an unfortunate miscalculation before, during or after the Senate hearing? Wow…
  2. We hope the intention is not to understate the cost of education, but an honest calculation error.  Considering the table was prepared in some sort of spread sheet, making such a mistake will be very rare?
  3. One can infers that if mistakes were made in a simple calculation, what will happen to an institution that have to manage a bigger dollars?
  4. Partly, based on his study/table, he has suggested the Congress to increase the federal funding?
  5. It seems that part of the taken student loans have been used to cover the living expenses?  AAEA thinks this is more important issue to be solved?  Despite DOW has increased about 5000 points under the new administration, there are people experiencing difficulties to meet they basic needs?
  6. The Pell number surely has covered the total cost for education ($6,000.00 versus $5,211.00).
  7. We are wondering if the Fed Loans such as Pell should also cover students’ living expenses?
  8. It seems that his testimony is not consistent with the intend of the hearing related to simplifying the student aids process.  Rather, asking more aids?  So, it is really a different place for that and the timing may not exactly quite right as well.

Linking Student’s Future Income & Student Loans: Good Ideas?

This BLOG article tries to make it clear for the college students who are thinking or in the process of enrolling in the program as this article has described.  In another attempt, a lawmaker has proposed to link students’ future pay check with the loans repayment program.

The Association has described many times, that the student loans issue can be solved only if the root of the problem is addressed logically, honestly and methodologically.  US student loans explosion has been caused by expensive cost of education, period.  Our research results show administrative expenses make up about 40% of the whole cost.  The two loan repayment programs essentially do not address the root of the issues.  It seems okay, but really not.  Linking loan repayment with future income overlooks and ignores the whole reason behind the current $1.35 trillion student loans. It seems that the whole linking ideas are borrowed from the mortgage loans. While one may have the potential for a capital gain from the property that he or she buys–that never happens with student loans.  Potentially, if one’s earning increases, so does the repayment amount.  However, some States have realized that operational inefficiency from state-owned higher ed needs to be improved.