Given what they have become, good riddance to most. But the ongoing problem of
granting these loans and then writing them off has to be stopped. They need to
stop this program, which in govt never happens. One more nail in our financial
coffin
American Colleges and Universities Are Doomed@media all and ( _filtered_a )“I'd
rather entrust the government of the United States to the first 400 people
listed in the Boston telephone directory than to the faculty of Harvard
University.” – William F. Buckley, Jr. It pains me to write this piece. In so
many ways, the American post-secondary education system is the envy of the
world. The best and brightest from all over the globe compete to be a part of
it. The graduate school system in particular produces wave after wave of newly
minted scientists, doctors, engineers, artists and thought leaders who make
truly substantial contributions to societal progress.
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American Colleges and Universities Are Doomed
| | Doomberg
| Sep 16 | | | |
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“I'd rather entrust the government of the United States to the first 400 people
listed in the Boston telephone directory than to the faculty of Harvard
University.” – William F. Buckley, Jr.It pains me to write this piece. In so
many ways, the American post-secondary education system is the envy of the
world. The best and brightest from all over the globe compete to be a part of
it. The graduate school system in particular produces wave after wave of newly
minted scientists, doctors, engineers, artists and thought leaders who make
truly substantial contributions to societal progress.
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Alas, these positive attributes aren’t nearly enough to outweigh the rot
growing from within these institutions. Nor will they shield them against the
relentless assault of market forces. The American post-secondary education
system as it currently exists is doomed to collapse – probably sooner than you
think.For a few years of my career, I was mainly focused on mergers and
acquisitions (M&A). I scouted for targets, evaluated opportunities, integrated
acquisitions, and so on. It was fascinating work. Over time, I developed a
simple process for evaluating target companies that involved four basic
questions. One could usually complete this exercise quickly, allowing for
deeper valuation dives on only the best candidates. These four questions were:
- How much value is created for customers?
- What drives customer purchasing decisions?
- What is the company’s current and future cost structure?
- What is the competitive landscape?
The first of these questions is far and away the most important and it is
worded very carefully. When I analyze a company, I’m not actually all that
interested in current profitability. It is nice to see, to be sure, but current
profitability is an equation that includes pricing strategies, procurement
effectiveness, prior capital allocation decisions, and so on. A business begins
and ends with how much value it creates for its customers – almost everything
else is management discretion which can be optimized in the hands of the right
buyer.Can you pay expensive consultants to create hundreds of slides that give
the appearance of deep analysis and certainty when presenting M&A opportunities
to board members? Sure. Will it result in better decisions than spending a day
thinking about these four questions instead? Not in my experience. Let’s
analyze a typical American university through the lens of these questions. As
you can probably predict by the title of this piece, the analysis is a sobering
one. We’ll consider each question in order.Question 1 – How much value is
created for customers?For most students, obtaining post-secondary education at
an American college or university destroys economic value. Notice I did not say
completing post-secondary education, because a substantial portion of students
who enroll do not complete a degree. The numbers are quite staggering – see the
data from educationdata.org below – making dropouts a substantial driver of
revenue for these institutions. Approximately 56% of students who enroll in
4-year colleges don’t make it to graduation. This is the dirty little secret
our current education power structure would rather you didn’t know.
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These churn rates are even more incredible when you consider the binary nature
of the benefits students are seeking. A huge number of jobs in our society
require a college degree to even apply. For the students who don’t complete
their degree, partial college credit is essentially worthless (there is some
small option value because they can more rapidly complete a degree in the
future, but this is modest in aggregate since most don’t).Even for those
students who do complete a degree, many would have been far better off pursuing
an alternative education strategy. The research on this point is a little
scattered and often biased, since it is usually written by educators with an
agenda, but I would say with high confidence that the fully loaded net present
value of a traditional college degree for the median student that graduates is
negative. There are some degrees at some schools that are incredibly lucrative,
but most graduates would have been better off obtaining alternative and
job-specific educational training at much lower cost. The opportunity cost of
4-6 years of lost wages is not inconsequential.Question 2 – What drives
customer purchasing decisions?Two things: artificially induced societal
pressure and easy access to financing. The first driver is cultural and a full
treatment of how it occurs and why it should change is beyond the scope of this
piece. I’m more interested in the second, since it is a force that is coming to
a head soon. Simply put, the customer financing model is unsustainable.Most
students who show up on campus wouldn’t be there without easy access to
financing. The student loan industry is among the more nefarious and cynical in
our society. For example, the lenders have lobbied to make it incredibly
difficult to discharge student loans during personal bankruptcy proceedings
while simultaneously working to make it easier for students to borrow. The
calls by progressive politicians for massive student loan forgiveness are, in
many ways, understandable.
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There’s only one problem – the need to forgive these loans is proof they never
should have been drawn in the first place. Mass loan forgiveness would also
lead to a rapid (and likely complete) nationalization of the entire
post-secondary education system. If the federal government is going to pay the
bills of past customers, don’t you think they’ll also be forced by these same
political forces to pay for future customers as well? Of course. Time and time
again, one-time government injections morph into permanent
entitlements.Question 3 – What are the current and future cost structures?Here,
the picture is once again bleak. The ratio of administrators to educators
continues to grow at most institutions, as does their mission creep. Despite
skyrocketing tuition prices – which have been increasing at roughly twice the
overall rate of inflation – most colleges and universities are in serious
financial distress. As a rule, if revenue is growing rapidly but not finding
its way to the bottom line, costs must be out of control. At most colleges and
universities, they are.This is bad enough, but it gets worse when you consider
structural aspects – especially the tenure system. When I was working in M&A,
we had one firm rule: thou shalt not buy a company with substantial operations
in France. Nothing against the French per se, but France has some of the most
stringent labor laws in the world, leaving almost no degrees of freedom for
management to implement cost control measures with agility. The tenure system
is a relic that dooms these colleges and universities to endless salary,
benefit and pension costs regardless of the quality or usefulness of the
professor.
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Question 4 – What is the competitive landscape?Finally, the competitive
landscape for colleges and universities is ominous. With technology, the cost
of high-quality instruction outside of the campus setting is rapidly
approaching zero. Entire university course curriculums are freely available to
be accessed by the motivated student online. YouTube has millions of hours of
enormously insightful instructional videos on every topic imaginable. Tech
company powerhouses are racing to disrupt the industry, recognizing the need to
create a better trained and more adaptable workforce at lower cost. Major
corporations, fed up with having to retrain new graduates unprepared for the
work they are hired to do, are creating their own internal curriculums and
tying the completion of specific course modules to internal career progression.
These trends are only accelerating with the advent of remote work. As people
become comfortable working from home, the leap to skipping the campus
experience altogether is a small one.***What will become of American colleges
and universities? I don’t know. But one can’t destroy value indefinitely,
especially with so many compelling alternatives. The ivory tower is headed for
a painful restructuring. That which cannot go on forever usually doesn’t.If you
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