An Education Bubble: Is College Worth It?

Student loan debt exceeds a trillion dollars. A recent Pew study reports that fifty-seven percent of the general public believes that higher education fails to provide students with good value for their money. Some commentators warn of an impending education bubble similar to the recent housing meltdown with crashing prices as people realize they have over-invested in an asset that will not appreciate in value forever and does not guarantee success. And unlike your house, if your education is “under water,” it is almost impossible to walk away from your student loan. One entrepreneur is even paying people to drop out of school and start businesses. After all, Bill Gates and Mark Zuckerberg dropped out of college and became millionaires: Maybe you should too.

For the vast majority of students, dropping out would be stupid. Let’s do a cost-benefit analysis. Out-of-pocket costs for a UNLV undergraduate degree is about the same as a mid-sized car. A 2012 Ford Taurus has an MSRP of about $25,000, so does a Chevy Impala, a Dodge Charger and four years tuition, fees, and books at UNLV. While you are in school you forgo some income you could be earning while you’re attending class. We need to account for these opportunity costs too as well as the incremental expense for food and housing–the part above what you would have to pay to pursue your next best alternative. If you are taking out student loans to pay for college, those interest payments have to be factored in too.

The costs of college are easy to identify as you pay tuition bills, live in that cramped apartment and eat lots of macaroni and cheese. The benefits are harder to see because they vary and are realized in the future. In the simplest terms, the average American with an undergraduate degree earned about $20,000 more in 2010 than a person with a high school diploma. That means the payback period for the $25,000 out-of-pocket expenses for a UNLV degree is less than the income gain generated by two typical post-graduation years’ earnings. More generally, Professor Nasser Daneshvary of our Economics Department has calculated that the average Nevadan with an undergraduate degree will earn $1 million more over their working life than the average Nevadan with just a high school diploma. A Nevadan with a graduate degree will earn $1.77 million more than their fellow citizen with a high school diploma. When Nasser accounts for the costs of college, he finds that the average annual return on investment for an undergraduate degree is 9.3% and for a graduate degree 10%. Other people who have done similar work for different locations and time periods get similar results.

Understand that there is a great deal of variance around these average outcomes. For example, students with majors that develop strong computational skills (e.g., engineering, computing, accounting, finance) do much better than college grads with majors that do not promote these skills (e.g., education, liberal arts). Personal motivation, economic conditions, the school you attended and chance matter too. Some people will make nothing more as a result of going to college. A few will make a fortune. Still a 10% average annual return on investment is a good deal. It is about the same as the average annual return from the U.S. stock market over the last 50 years. And while you can certainly get rich from starting a company, with or without a college degree, the number of new business start-ups has plummeted during the recession and estimates suggest that only about 40% of small businesses turn a profit over their lifetime.

The research I cite is based on historical data. Some critics believe that the future will be different, that past relationships no longer hold. I seriously doubt that. The best predictor of future performance remains past performance. The cognitive complexity and knowledge required to obtain the highest paying jobs in our economy is increasing, not decreasing. And while a poor economy leads people with frustrated dreams to question the promises of their society’s institutions, we have experienced hard times before and the results for higher education have proven to be robust: Over the span of a person’s working life a college education is a very good bet.

If you don’t believe me, ask college graduates. That same Pew study that reported concern among the American public about the value of higher education notes that a whopping eighty-six percent of college graduates say their degree was a good investment for them. Or ask a college drop-out. The Bill and Melinda Gates Foundation donates millions of dollars to higher education each year. The Gates believe in higher education too.

So, stay in school. Get your degree. Realize that college gives you valuable tools that can give you an edge, but it doesn’t guarantee success. Nothing does. It is a competition and you are going to have to train hard, develop skills and leave it all on the field every day. That’s how it works. It is how it has always worked. Sorry if I’m bursting your bubble.

Area 51

I just finished Annie Jacobsen’s book Area 51: An Uncensored History of America’s Top Secret Military Base.   It tells the story of the shadowy instillation from its origins, through its connection with Roswell, nuclear tests, spy planes and the Pueblo Incident.   Jacobsen also examines the conspiracies associated with Area 51 including whether the moon landing was faked there.   Are there alien new product developers at Area 51?  She addresses this issue too.  The ending will shock you.  Is it true?  Decide for yourself.

Area 51 was (and still may be) arguablyAmerica’s greatest skunkworks. Insulated from politics and bureaucrats, physically isolated, and conducting business on a “need to know” basis, it was able to experiment and innovate outside the rules. Some experiments were scary.  Failures were common.  But the successes were remarkable:  the U-2, stealth technology, and sophisticated drones were all brought to reality there.   Area 51 helped America maintain its technological edge during the Cold War.

Today, it is American higher education that needs a skunkworks.  I say this not because I believe that the system is broke. On the contrary, as with Area 51 and the Cold War, a higher education skunkworks is necessary to help us maintain our lead in an area critical to our national interest.

Make no mistake: A graduate degree from an American University is coveted by students from around the world.  Frankly no other country’s higher education system comes even close. But educational sputniks abound: Our leadership in undergraduate education is eroding.  Students across the globe are reading American-authored textbooks while attending classes in their home countries taught by faculty educated at American universities and employing American pedagogy.  Add in funding cuts to U.S. higher education that have produced much larger undergraduate class sizes and the deskilling and de-professionalization of the faculty through the use of part-time instructors (not because they are better, but because they are cheaper) and it becomes clear that some new thinking is in order: ideas that go beyond selling the convenience of asynchronous learning done in your pajamas in front of a computer or ipad.

So it is time to get a group of free-thinking faculty together from a variety of disciplines and give them a free hand at radical innovation.  The boys at Area 51 (they were all boys) had a blank check, but I would settle for $15 million per year to employ faculty to work with one thousand students.  Before the students ever show up, I want these innovators to debate the sacred cows of higher education and look for disruptive ideas about the business of educating students.  Some questions I would ask the group to wrestle with:  What if we had universities without lectures?  What if students didn’t have majors, but instead we exposed people interested in science, engineering and business to the same curriculum?  What if instead of paying faculty entirely based on their time, we offered them incentives based on the post-graduation success of their students, revenues from their inventions, or the number of students who want to get into their courses? I could more questions, but you get the idea.

Will all of these queries bear fruit?  Nope.  Some will go nowhere. Others will be tried and fail miserably.  A skunkworks for higher education won’t need unlimited resources to succeed, but it will require the people in charge to have the same patience, tolerance for risk, and willingness to promote success in the face of bureaucratic opposition as those who led Area 51.

Harvard or Caltech won’t do this.  They are at the top of the heap and have few incentives to engage in such speculative endeavors.  It will take an institution like UNLV–one looking to develop a distinctive student experience and use it to improve its national visibility and reputation.  Something about the high dessert attracts free-spirits wanting to change the rules: the strip, test range, Area 51 — let’s focus on higher education next.  Is anyone out there listening?  If there are alien product developers north of town, they aren’t going to do this for us.

Half a Degree

Two years ago the LBS faculty was debating changes to the business core curriculum.  This is the set of courses all students take as part of their BSBA degree.  The curriculum hadn’t been revised in years and while most people agreed the core had to be changed, there were differences of opinion among the faculty about how to move forward. One morning I was in the BEH courtyard discussing this issue with Professor Wimmer when he said: “I tell undergraduate students that if they can do physics and write well that they will do fine.”  I share his view.

No I don’t want you to change your major.  This blog post has nothing to do with your major.  Being a good economist, Professor Wimmer was emphasizing the importance of general skills.   As our world has become more complex, these skills have become more important.  Those math geeks you mocked in high school are taking over the universe, especially Wall Street and Madison Avenue. Do you want to earn your fortune there someday? And it is inspiration creatively presented and communicated that goes viral on YouTube.  Fame rarely comes to the inarticulate.

 Mastering these skills isn’t just important for those seeking fame and fortune. Employers never tell me that the only thing that stands between students and a good job is an internet gaming course or expert knowledge of the economics of sports and entertainment.  They tell me that ineffective job candidates don’t write well, can’t think on their feet, aren’t data driven decision-makers, don’t work well in teams, or present themselves poorly.  And, while it is common for students to think of themselves as “analytic” or “people-oriented,”  the skill sets associated with these descriptions aren’t substitutes for each other.  An “analytic-type” who cannot communicate their brilliant solutions is just as unemployable as a “people person” who expertly communicates half-baked ideas.  Conversely, if you can identify new opportunities, use data to creatively solve problems, work well in team settings and communicate your ideas effectively to others (preferably in multiple languages), you are golden in any profession:  $$$$$.

 This is why LBS won’t allow you to advance into business courses without a record of success in lower division courses: If you cannot prove to us that you have the math, statistics, communication and critical thinking skills to do well in the general education curriculum, there really is no point in us trying to teach you specific business knowledge.   

 So why am I telling you this now?  Registration for spring semester classes begins today.  Half the credits you earn at UNLV will come from outside LBS. Work with your advisor to take serious stock of your strengths and weaknesses.  Choose general education courses that will help you improve these skills.  There is no such thing as too much math or statistics.  Embrace courses that give you the opportunity to write and present your ideas to others.  While you are at it, take some courses that are very different from your major.  Exposure to different perspectives will help you gain perspective and develop your innovative potential. If it seems like a lot of work, it is.  The best students will take up this challenge. I have written this before: Whether you like it or not, you are in a competition to realize your dreams.  Don’t enter it with only half a degree.