The TL;DR of this essay might perhaps be:
- College degrees are more valuable than ever in post-industrial economies, so applicants to top-tier schools are up 240% over the last 25 years
- Meanwhile, available spots at top-tier colleges in America have increased just 2% over the last 25 years (Thanks to Tyler Cowen & others for complaining about this publicly)
- Microeconomics 101: Fixed Supply + Increased Demand = Increased Price
- That’s the obvious part
- The non-obvious part is that this is intentional...
- ...because the Charity-status ( 501(c)(3) ) of Colleges in America depends on more-than-half of their students being unable to afford the education (read: “receiving financial aid”)
- That Charity-status protects the Investment Returns of College Endowments from Uncle Sam & the IRS
- Investment Returns Compound over time, and there is no more powerful force on Earth — anyone not playing the game to maximize Compound-returns will lose to everyone who is
- Thus: if Colleges want to keep their Investment Returns tax-free, Tuition MUST remain unaffordable for at least 50% of undergrads
I wasn't aware of this at all. Do you have a source? Non-profits don't generally need to give away their money.
I tried to touch on this idea in the “Case for Charity: A Charity Case” section, but my approach is to view it idealistically / as things should or might be.
And in a hypothetical world where Colleges charge double-digit fractions of a family’s net worth, while generating as much investment profit as our best companies and hedge funds, but where 0% of students received any “aid”......
.....and the institution was still allowed to remain a non-profit and have returns tax-sheltered....
....I can’t imagine that such a state of affairs would be allowed to continue.
Which organizations are allowed to be considered 501(c)(3) and on what basis and what privileges that affords them is a matter that is hypothetically at the prerogative of Congress.
I know trust in Congress/the political process is pretty damn low these days.
But my point with the “best play it safe” comment was basically...if I were colleges, I wouldn’t roll the dice.
I doubt that's changed much. The "sticker price" for elite colleges has always been too high for most families to afford, but most students' families don't pay that price.
If you want to prove that maintaining charity status is a cause of tuition increases, you'll have to try harder.
Room and Board is a major driver of the increased cost of colleges.
Do you see a problem with universities increasing the quality of student housing, sports programs like football, and college administration, and that this desire to spend more to get more students to pay more tuition dollars is an undesirable feedback loop that perpetually increases tuition costs over time?
Can we all agree that this is an awful idea societally and for the individuals involved? If you couldn't get credit to go, it's because the market is sending a signal that it's a really bad idea to go. Yeah, it sucks if your dream is to do [insert unmarketable degree here] and there are few jobs for people who do that and the training costs just as much as an engineering degree. The idea that "society" should subsidize that is narcissistic at best.
This would still be true even if college cost 10x less than it does now. Very few 18-22 year old full time students can afford any level of tuition.
The undergraduate education is part of the university, but not the primary part. (At UChicago, grad students still outnumber undergrads!) If you want to see what the finances of an institution that primarily educates undergraduates looks like, go to one of the Liberal Arts colleges, or non R-1 state schools, like any of the Cal States in California, or non-flagship schools in other states.
You're definitely right that "educating undergrads" is not the "primary purpose" of these institutions. I definitely did not & do not believe that. If that came through in the essay, I apologize for being inaccurate. If anything, I expected the response to be that I was assuming the primary product of a research university was Investment Returns, which is at least closer to a point I tried to make.
Regarding Research: "Research" in the abstract is -- I believe -- considered a tax-deductible expense in America, and the IRS treats it pretty favorably and that's probably for the best.
However, engaging in "research" to some capacity does not -- to the very best of my knowledge -- allow you to claim a full tax-shield on the Investment Profits of $10 billion+ merely by virtue of the fact that you engage in "research" (compare: Big Pharma, which actually has to write off expenses in order to reduce taxes, or Google or Boston Dynamics).
That is VERY different from how Education works today. To be a University is to be a Charity operating in the Education space. Additional Revenues and Expenses in Research areas are not important for this designation. Once the designation is established, the returns on your Investment Profits (invested in both the open and closed markets) are tax-free, forever.
That's a pretty big deal in the finance world as it relates to your ability to accumulate capital and build Wealth.
Whatever the "primary purpose" of that Wealth might be, the fact remains that (at MIT) that Wealth has grown 1,500% over the last 25 years, while the operating budget has grown ~250%. I believe that is somewhat noteworthy, and I could not avoid noticing how critical the Education-Charity tax-shield was to this compound growth.
The question I tried to raise was: "if your Education was affordable, would we allow the service provider to be considered a Charity?"
Regarding finances & more data: every institution named in this essay has it's 2017-full-year financial report linked, which I spent some time going over to better understand revenue sources (i.e. to understand the truly minimal importance of Tuition) and expenses (to understand the nature of the costs involved).
Sadly that data doesn't appear to segment anything by "research intensity", but it usually pulls research out at least research in all forms. And you're right, that Research usually dominates both "Instruction" and "General & Administrative" in terms of spend. (Quick example here: https://web.mit.edu/facts/financial.html, the other institutions have their fully detailed reports linked in the bullets at the start of the essay )
> Whatever the "primary purpose" of that Wealth might be, the fact remains that (at MIT) that Wealth has grown 1,500% over the last 25 years, while the operating budget has grown ~250%. I believe that is somewhat noteworthy, and I could not avoid noticing how critical the Education-Charity tax-shield was to this compound growth.
This is noteworthy, but is it really out of line? You're comparing apples (Wealth) to Oragnes (Operational Expenses). From a strict financial perspective, the standard advice to ensure an endowment or lump sum lasts is a 4% withdrawal rate. At a 4% rate, a 1500% increase in wealth would result in a 60% increase monies available to spend operationally. 250% is much higher than that, although not all of the operational increase comes from the endowment.
Is there an accepted rate of expenditure that endowments should target? Is MIT meeting or exceeding that?
So it sounds like you'd be a fan of Trump's tax on university endowments? I was surprised it wasn't mentioned at all in your writeup. https://www.chronicle.com/article/A-Tax-on-Endowments-Became...
...and look at the instructor's salaries. PhD's from top universities who could easily make 300k+ in the private sector but instead take positions that pay 60k-70k. Even with tenure, that's a labor of love.
Blaming highly paid admins would be great, except that university presidents at teaching colleges are the highest paid (reminder: branch campuses and liberal arts colleges never have Div 1 sports programs) and still make $50k-100K less than a green phd out of a top 10 CS program (200k is good money for a president of a branch campus or liberal arts college -- and remember, that's typically a person with 30+ years experience and a uniquely positive track record).
I worry about what will happen to the American teaching college (public or private) over the next 50 years if the current war on college -- which this article typifies -- wins out in the public mind.
If you doubt a single word of this feel free to reply to this comment. I'm extremely familiar with both markets. When I say that (even tenure-track) CS teaching requires a 200k paycut, I really do know what I'm taking about.
When people talk about the cost of university administration, they're not always talking about the cost of the most highly-paid, but rather the aggregate cost:
"Since 1980, the number of administrators per student at colleges has about doubled; on most campuses their numbers now match the number of faculty,” the study reads. “Here are some of their titles: senior specialist of assessment; director for learning communities; assistant dean of students for substance education; director of knowledge access services."
from http://mediahub.unc.edu/administrator-salaries-drive-cost-pu...
Not to say academics don't take a pay cut compared to industry, but at least in CS $60k-$70k is very low for a tenure track position. Here's a good indication of where salaries are in CS: https://cra.org/wp-content/uploads/2018/05/2017-Taulbee-Surv...
$90k (9 month salary) is the bottom 10th percentile for a starting assistant professor in CS. $200k (9 month) is the 90th percentile for a full professor with 16+ years.
This obviously varies by school and region, but $60k-$70k is what you would expect for an instructor at a very low rank school, which is not a position PhDs from top universities would be applying for.
It's the set of ramps up the west side of Darrel K. Royal Memorial Stadium.
26 USC 501(c)(3) explicitly lists an organization operated exclusively for educational purposes as being tax exempt. Charitable organization is listed as a separate type.
Also worth considering is the example of Cooper Union: It charged no tuition and therefore offered no financial aid for most of its history. While one could argue that that is a form of aid so too would any other tuition reduction enabled by an endowment. This further suggests that universities do not set tuition in order to maintain tax exempt status.
He's not really saying that there is some "50%" magic number in tax law. What he is saying is that, imagine a situation where the price of admission was much more reasonable (i.e. hadn't gone up 300+% in the last generation) so that only, say, 10% of students needed aid. This means 90% of students would be paying full price. Well, if 90% are paying full price, he imagines the political pressure would come to say "Why the fuck are these absolutely gigantic, small country-sized endowments able to earn all this profit, and compound it, tax-free, and still 90% of students are paying full price!"
Thus, he argues that the large universities play this fuzzy-math shell game to consistently jack up the price of tuition so that the majority of students require aid. That way they can argue their endowment profits should remain tax-free because they are going to subsidize the students' education.
That's just my summary, but all-in-all I think the whole essay is powerfully argued. In my mind (and I say this as an Ivy league grad) I agree that getting an Ivy league degree 25 years ago is basically like buying real estate in SF 25 years ago. The overall supply has remained artificially constrained which has made prices go through the roof, with the social signalling and economic benefits accruing to those who graduated when admission rates were higher and tuition was lower.
I’m skeptical both that: Lower tuition would make taxing endowments more likely and that universities believe that that’s the case.
In a world with lower tuition, endowments grow somewhat more slowly and are easier to justify because they are the thing that enables low tuition.
For a more direct set of examples of how much inertia we have, consider the way wealthy individuals use foundations to avoid taxes. I haven’t heard people crying out to tax the Gates Foundation despite its endowment growing over time because it can’t keep up with its contributions. Nor is there a massive uproar about donor advised funds which (particularly in CA) can be 80%+ taxpayer funded while effectively lacking minimum disbursement requirements as part of a larger organization.
The comparison to artificially-constrained SF housing is very apt (as a current SF resident, I know it well).
Conrad if you wrote a book about this I would buy it. Super fascinating stuff. Colleges are clearly massive financial instruments that need to be analyzed further.
Building alternatives to universities that are driven by grass-roots movements are the perfect way forward here. Home schooling, MOOCs and startup businesses are some of the developments that have started diminishing the need of expensive degrees.
As long as there's a need for degrees as a signal for baseline competence/barrier to entry, it seems those needing it will be at the mercy of the systems that provide it.
Its crazy! Over time the tax advantage could make university endowments (as well as wealthy religious entities) the largest owners of capital in the world, along with sovereign wealth funds.
I'm not focused enough right now to put a book together -- although I agree that there is more to be said on and around this specific topic. Some good nuggets are in this comment section -- as is usually the case for HN.
The essay format allows me to spend a month writing an essay about the intersection of Game Theory, Anime, Military Strategy, AI, and Political Economy without stressing about any grander narrative, which I very much enjoy...
What will happen when this bubble bursts is that we will bail out the bad loans using US taxpayer money. This is another reason why universities can continue to raise tuition rates: they know there is significant political support to having the government "help students pay for college". The government tipped their hand regarding being open to outright forgiveness of debt by including a rule that they do full debt forgiveness if you go work for a non-profit right after school. This turns out to be a fantastic deal if you go to medical school. You can rack up hundreds of thousands of dollars in med school loans, go get a job at non-profit hospital for several years (and get paid market rates for your skills!), and then saddle the US taxpayer with your med school loans.
https://en.wikipedia.org/wiki/Student_loans_in_the_United_St...
I have heard it said that indebtedness in student loans is interfering with the ability of many to take out loans for cars or houses, in other words, getting too much debt from the government to get any from the private sector. I don't like banks all that much, but I think they are politically powerful, and if they perceive student loans as impinging on their ability to make money, I would think they would get something done to change the situation.
Who has more powerful lobbyists, universities or banks? Both way more powerful than I am, but I would not bet on universities.
Perhaps at some point an equilibrium is reached where these institutions extract exactly as much as the degree is worth, minus the little bit left that will incentivize people to take the deal. After all, the 'value' of these degrees has only gone up. Overproduced malthusian elitehood[0] has to be better than starving with the unnecessariat[1], maybe[2].
We are after all already at the near-apocalyptic scenario. Economically disenfranchised liberal arts graduates are roaming the earth and using the only skills they have to extract resources from the environment. In practice this amounts to a sort of Trust Me I'm Lying dystopia of manufacturing outrage with one hand and selling solutions on the other.
For calibration, many students in the UK have turned to literal prostitution[3].
[0]: https://nationalpost.com/news/world/jonathan-kay-on-the-tyra...
[1]: https://morecrows.wordpress.com/2016/05/10/unnecessariat/
[2]: https://berthamasonsattic.wordpress.com/2018/10/12/i-applied...
[3]: https://www.independent.co.uk/news/education/education-news/...
The only question is when it stops growing because it has run out of space.
A simple example is that if Caesar had invested one gram of gold after the conquest of Gaul at 3% compound interest today it would be worth 2.64e24 dollars. Or a trillion times larger than the world economy today.
In fact, I could pay even less and do the 2+3 program and go to an even cheaper school for the first two years and stay at home?
https://www.nerdwallet.com/blog/loans/student-loans/highest-...
On the other hand, I graduated from a no name state school in the mid 90s and within three years I was sitting by people who went to “prestigious” schools making just as much as they were making with no student loan debt. My entire four year tuition was less than they spent in one year.
(1) - https://www.paysa.com/blog/harvard-vs-mit-which-tech-grads-m... (2) - https://www.ajc.com/news/education/this-how-much-alumni-geor...
https://www.nerdwallet.com/blog/loans/student-loans/highest-...
Not that I’m disputing the 10 year salaries.
According to the article, 58% of MIT students received aid (averaging to 2/3 of tuition (?)).
I think right after the Catholic Church, universities and colleges collectively hold the massively large tracts of land as investments/REITs and as physical asset.
Some of them..like the 2 year community college in my town in Bay Area, CA...are selling it to real estate developers. Federal and bond money ...public money meant for education is going to a speculative activity like real estate
I’d wager that most of American education is funded by speculation. Ivy leagues have land in South America and invests outside the country. Even public schools are funded by property taxes(at least in California..)...which to me is a speculation. Considering the insane house prices in California, our burgeoning population and prop 13. Throw in unionized teaching staff, it’s no wonder that most of the best and brightest minds come from outside the country. We attract immigrants because they really can fill a gaping vacuum in the labour and skills market. And they can work for less aka demand less because they don’t have the burden of student loans.
I am not sure if any of the above is relevant but those were my first thoughts after reading the article.
Depending on their country of origin, they also are comfortable with lower standards of living. Which puts negative pressure on wages.
Local K-12 education is funded by property taxes, but I don't think this applies to the CSUs and UCs.
Also, I don't think it's appropriate to refer to this as speculation. Are property taxes in CA driven by high prices? Yes. Is the bottom likely to drop out? Given the "burgeoning population" that you note, probably not. Also, if property values crash, incomes and consumer spending will likely also crater as part of the same event. So if we chose to fund education through income or sales taxes, it would be similarly "speculative".
- You make an organization that just examines people in various subjects.
- You hire a bunch of professors in each field.
- You make sure everyone thinks the exam is hard.
- You make sure the exams are fair. Rent exam halls, get invigilators to pace up and down. Biometric scans. Passports. Etc.
- You make the syllabus and practice exams freely available.
- You make a secure website to show everyone who passed.
There must be something similar, somewhere. Perhaps the Chinese civil service exams. Or the CFA exams.
It's the same for a professor who got involved - everyone else in the field would assume they couldn't get a university position, or really needed the money. For the people who could give credibility to such a venture, there's only downside.
2. When the exam is cheap and the only source of credit, fraud is a much bigger risk than for normal university exams. Apart from anything else, outright bribery is now a risk at every level in the process, because a good exam result is worth far more in lifetime earnings than you can afford to pay anyone involved.
But you can see the questions yourself. If you did a degree you'd know if it was the sort of level that you'd expect from a university student. If someone can answer university level questions, why do they need to go to university?
As for the profs, you can hire them from the same universities. They're allowed to work on the side.
> 2. When the exam is cheap and the only source of credit, fraud is a much bigger risk than for normal university exams. Apart from anything else, outright bribery is now a risk at every level in the process, because a good exam result is worth far more in lifetime earnings than you can afford to pay anyone involved.
Sure, so rent a hall, make people walk through a metal detector, etc. Make sure the papers are seen by several randomized people.
It's a trust building exercise, that's true. But plenty of businesses depend on trust, and it's not like nobody has managed to build trust before.
I am working in Germany now (in a "good" university) and I often visit top tier US universities.
Due having money, US universities at a similar relative rank have vastly bigger faculties, vastly better supply of researchers and usually better admin. And it is not even close. Network effects among researchers are much, much stronger.
Combine this with the fact that the German system has unecessary deficiencies. The appointment system is f'ed beyond repair and it is virtually impossible to offer positions to good prospective researchers. The "Mittlebau" lacks any and all good career track and is made up of disillusioned and hopeless people on 2-year successive contracts (and nowadays, it is missing entirely). And of course, there is no real tenure track, which means a lot of Profs are really bad and would have never gotten tenure in a meriocratic process.
Since we have a couple of privately funded places that do the US system here in Germany, we can see that it just simply works much better.
On the other hand, in terms of long term stability and the average quality of education, I agree that the US system has issues. Relying on inflated undergrad fees, especially from international student, seems dangerous in the long term.
This seems to be the latest legal reference with regard to colleges and universities retaining 501c(3) status.
> Of total endowment distribution, 56 percent were made for scholarships, awards, grants and/or loans in the amount of $3 million. 29 percent of total endowment distributions were made for general university operations in the amount of $3 million.
Off-topic:
> Half of the systems reported that at least one of its five most highly paid employees received NCAA income.
Tuition-dependent colleges and universities tend to look very different from their large endowment counterparts.
The best way to think of MIT is not as a school but as a research lab with a small school attached.
I wonder how much of a difference the tax-exempt status is a factor in the growth of e.g. MIT's endowment.
Was this tax-exempt status ever in jeopardy? It's unclear from the article whether this status was part of the failed anti-trust suit, but the article does seem to suggest this is the underlying problem.
There's a pattern here in public policy-making that needs further attention. We have slogans and phrases that become untouchable. "Clean water" is one. Who isn't for clean water? I've never met anybody who wanted water to be dirty or poisonous. In the states we've had a very powerful movement called "Mothers Against Drunk Driving". Once again, who the hell would be in favor of allowing drunks to drive? These titles are self-evidently good things.
It goes on and on. I'm a fan of learning more about Universal Basic Income. We solve poverty by, well, giving people money. We do it anyway through social programs. Why not give it directly? (I don't know. Let's see what happens in various experiments)
"College" is yet another one of these magic phrases. Who isn't for college? Higher education? I just read another commenter on here that said we should stop this "war on colleges"
That's why I'm commenting.
The pattern is this: there's a phrase or slogan that nobody in their right mind would oppose. Lots of people and emotional energy is put into making sure we have this goodness for everybody. People who provide any sort of feedback at all aside from unanimous support are shunned. And they should be! After all, they're against $GOODNESS_X
Then we start spending money and making public policy around the phrase -- and the results can be quite mixed. Since the phrases themselves mean little, it's all about the tiny details, the implementation. Some groups do this thing very well. Some suck at it. Over time, however, in every one of these situations, architectural cruft accumulates and people figure out how to game the system to make it do things nobody ever intended.
Well then we're kind of stuck, aren't we? You can't provide any feedback aside from full support, otherwise we'll shun you. We established that when we started this movement. Colleges not working at the things the common person thinks they're supposed to be working at? Prices way up, graduates sometimes deep in debt with useless skills, use of the collegiate corporate structure as a proxy for a modern country club? You point that out and you're one of those anti-intellectuals fomenting a war on colleges.
The public discussions around dozens of policy initiatives suck. And they suck because the concepts have been so bowdlerized that we're all forced into false dichotomies. And technology, by continuing to promote the concepts that these huge, intricate, and detailed policy issues can be discussed at in terms of 140-character tweets or something similar? We've got a huge hand in making things as sucky as they have become. We're making a buck off of making people stupider than they would normally be and having them fighting over things they would normally mostly agree about. In my mind this is a terrible thing that my community is mostly responsible for.
