Our Irrational Higher Ed Economy

David Segal's New York Times article on the economics of law schools highlights many of the same factors that we presently see facing the University of California and other universities and colleges: while the price for higher education continues to escalate, the quality of instruction is being downsized. In the case of law schools, Segal reports that many schools are increasing their enrollments and raising their tuition because there is such a high demand from students, and even though many students with large loans can not find jobs when they graduate, schools are not reducing the supply: “Legal diplomas have such allure that law schools have been able to jack up tuition four times faster than the soaring cost of college. And many law schools have added students to their incoming classes — a step that, for them, means almost pure profits — even during the worst recession in the legal profession’s history.”

Segal hints that one reason why some law schools are increasing their price tag and their enrollments is that it helps them raise their standing in the all-important U.S. News & World Report rankings: “There are many reasons for this ever-climbing sticker price, but the most bizarre comes courtesy of the highly influential US News rankings. Part of the US News algorithm is a figure called expenditures per student, which is essentially the sum that a school spends on teacher salaries, libraries and other education expenses, divided by the number of students.” As I have pointed out before, this standard method of university accounting not only has no real relation to educational quality, but it pushes schools to increase their budgets by supporting unnecessary expenses like new administrative positions.

Just as the counter-productive U.S. News ranking system distorts the priorities of higher education institutions, an equally faulty bond rating system pushes schools to increase tuition and enrollments: “Like all stand-alone institutions, N.Y.L.S. is even more dependent on student tuition than those attached to universities, and Moody’s highlighted this fact in its 2006 appraisal of the school’s bonds. Under a section about potential “challenges” that could lead to a downgrade, Moody’s cited “significant and sustained deterioration of student market position.”” In other words, schools are told that if they do not increase their revenue generated from students, the schools’ will see their bond ratings go down and their interest rates go up.
Thus in the pursuit of higher rankings and lower interest rates, universities and colleges force more students to take on higher debt during a time when there are fewer jobs. The central decisions of our institutions of higher education are therefore being determined by faulty rating and ranking systems in which no one really believes and everyone uses. Welcome to the irrational economy and the death of the middle class.