UV Letter - Volume 1, #13
As we arrive at the end of a challenging 2011, it comes as no surprise that the Oxford English Dictionary has chosen squeezed middle as word of the year. This phrase originated in the UK to describe the economic circumstances of ordinary people caught between stagnant wages, rising prices and a reduction in public services. But it’s equally applicable to the United States where a new report from the Federal Reserve Bank of New York demonstrates that jobs for the middle class are disappearing faster than generally recognized.
So-called “middle-skill jobs” are relatively well-paying occupations that do not require much in the way of higher education. These are not only blue collar manufacturing jobs, but also sales, office and administrative roles. In 1980, three quarters of all U.S. workers were employed in such positions. By 2009, the number was 65% -- a 10% decline. So while it’s no surprise that machine operators fell from 10% to 4% of the workforce over this period, administrative jobs in offices fell from 18% to 14%.
The antidote, of course, is more higher education, which would allow these displaced workers to enter high-skill jobs. Unfortunately, squeezed middle also describes the typical college student in 2011. While baby boomers may recall how they worked through college in order to pay tuition, it is noteworthy that this is simply no longer possible for the average student as a result of runaway tuition hikes. Working at the minimum wage in the late 1970s, a typical student at a four-year college could pay her entire tuition by working 23 hours a week, 50 weeks per year. In 2011, the same student at the same college at the present-day minimum wage would have to work 58 hours per week, a 150% increase in time per week. We can think of no better illustration of “squeezed” than this student who attends classes – almost certainly part-time – while working 58 hours per week.
The result, of course, is that very few students attempt this and instead resort to loans. In this regard, 2011 will be known as the year that outstanding student debt in the U.S. exceeded $1 trillion. It will also be known for the birth of the Occupy movement and the concomitant student anger at state universities for increasingly unaffordable tuition. (Occupy, by the way, was the runner up word of the year, according to the OED.)
In response, 2011 also will be known for a dramatic policy shift by the Obama Administration. Up until fall 2011, the Administration’s two priorities were increasing access and increasing regulation of for- profit colleges. In short order these priorities have been superseded by the twin issues of affordability and loan repayment.
First, in November the President announced a number of quick fixes to student loan programs (expanded income-based repayment plans and a new debt-consolidation program) that will reduce repayment burdens for a small minority. Then in late November, Education Secretary Duncan spoke publicly about how universities need to “think more creatively – and with much greater urgency – about how to contain the spiraling costs of college and reduce the burden of student debt on our nation’s students.” Following Secretary Duncan’s speech, as either a coincidence or a notable instance of bipartisan coordination, Rep. Virginia Foxx (R. North Carolina) held a hearing of the Committee on Education and the Workforce’s higher education subcommittee to focus on the affordability question. Topping it off, on December 5, President Obama called nine university presidents to Washington to meet with him. Reports indicate the government is planning a set of college affordability initiatives for early 2012.
The Administration is rightly trying to respond to the anger of the Occupy protests, but it also recognizes that when interest rates rise, as they surely will in the next few years, we may see the housing crisis recapitulated in the student loan market. Unfortunately for students, these loans are not dischargeable in bankruptcy. Equally unfortunate is that, despite media reports, the major risk here is not the 10% of the market represented by for-profit institutions, but the other 90%.
What can the administration realistically do? Making a substantial difference would require a fundamental restructuring of financial aid. For example, the UK government is introducing student loans on a widespread basis in 2012 to support new market-level annual tuition levels of £7,500-9,000 for undergraduate programs. But officials are doing so in the context of strict price and student number controls -- i.e., no university can charge more than £9,000 for a bachelor’s degree, and each university is assigned a quota of students it can admit.
A similar system in this country would certainly control costs, but it’s hard to conceive anything politically less feasible in this country. The alternative would be something like the Gainful Employment rules that the Administration is now applying to for-profit institutions. New rules could ensure that only programs that guarantee high-skill employment could be priced at a high level; all other programs would have to be priced much lower in order to qualify for Title IV loans. But as every Congressman in Washington has a postsecondary institution in his or her district, such a rule is equally inconceivable.
So in the spirit of predictions for the New Year, we believe the Administration will opt for one of two paths when they announce these new initiatives.
First, the government could make a number of small, but meaningful changes to Title IV loans. (To date, we have only seen small but meaningless changes. Recall that the last federal efforts to address affordability featured the publication of a “wall of shame” of colleges with the highest tuition and highest annual increases and requiring a net price calculator for each student.) The Administration, for example, could change the rules on how much students can borrow for living expenses. Today, students attending schools where tuition is low are eligible to borrow $10,000 or more to cover living expenses. This incentivizes colleges to charge more for room, board and other fees. Also, because Pell Grants do not cover remedial courses, the most at-risk students are being forced to borrow to pay for non-credit but essential courses. The funding structure for remedial courses should move away from loans and towards a mandate or grant program. Finally, the government needs to work with states so that annual cutbacks in funding within state university and community college systems cannot be met with increased tuition, but rather only by increasing student numbers paying the same level of tuition: address cutbacks by expanding access and enrollment, not increasing tuition. Arizona State University has had the foresight to do exactly this without a mandate and now enrolls 70,000 students – an increase of 30% since 2002.
Of course, even these small steps will encounter resistance from traditional higher education. So the alternative – and more likely scenario in 2012 – is that we treat the symptom, not the disease. The symptom is loan repayment. And the Administration has already tipped its hand that it believes income-based repayment is the right direction. But while a major new initiative to move Title IV in the direction of income-based repayment will satisfy the students currently occupying quads around the country, it will do nothing to address the underlying issue of skyrocketing tuition. Such an initiative would effectively transfer the liability from students to the federal government, but tuition increases could remain uncontrolled. Then, as a sop to the affordability crowd, we could envision a demonstration project or small “Race to the Top” type competition where the Administration would award grants interesting projects like those the Secretary has publicly praised (although hopefully not resulting in increased spending at the winning institutions).
We hope for a better holiday gift than this, to be sure. But in the year of the squeezed middle, we know not to hope for too much.
Happy holidays to you and your families from all of us at University Ventures.
University Ventures (UV) is the only investment firm focused exclusively on the global higher
education sector. UV pursues a differentiated strategy centered on partnering with (rather than
competing against) traditional institutions. As the future of higher education will be shaped by
innovative partnerships between the private sector and traditional institutions, UV is excited to
help lead the development of the next generation of colleges and universities on a global scale.