We are less than one week away from the official launch of my new book, Making College Pay, and I couldn’t be more excited. This project has been in the works for a long time. So long, in fact, that I almost can’t remember exactly when the effort began.
What started out an an ambition to write an academic book reframing the policy challenges around higher education finance evolved into a how-to book for aspiring students and their families. In retrospect, this is the book I really wanted to write all along, but I was scared to leave the comfort of writing for other wonks to take on the challenge of speaking to a broader audience. I’m grateful that my book director at the Manhattan Institute, Bernadette Serton, encouraged me to take this path and that Talia Krohn, Executive Editor at Penguin Random House, believed I could do it.
In the end, Making College Pay became the book that I wish I could have read when I was 18 years old. It’s not a field guide telling you exactly what to do, where to go and how to pay. Instead, it teaches you, using insights from economics, how you can best make these decisions yourself in a way that will satisfy your individual goals, values and circumstances. In the text you’ll see plenty of reflections on my past as I seek to illustrate principles and provide guidance and answers to a new generation of students and their families.
I had planned to write a typical newsletter this week but found myself unable to think about much else besides the upcoming launch. So I decided that I’d share a bit of my excitement with you all and provide a sneak peek at the book. I really hope you enjoy it and invite you to share with others who you think might as well.
Thanks for reading and please do let me know what you think!
I bought my first home, with my husband, in 2017. Despite having professional expertise in policy, economics, and finance, I still could barely believe how many speed bumps exist in the process of buying a house: practices, policies, and procedures designed to ensure the purchase is a wise one. We hired a real estate agent to lend expertise to our search and an inspector to give the house a thorough check-up once we had found one that we loved. Then the mortgage company put us through our paces to prove we could afford it. They wanted to ensure—rightfully so— that we were taking out a home loan we'd be able to repay. And then there was the pile of documents we signed on closing day to seal the deal – insurance forms, deeds, inspection certificates, and so on— many of which served to protect our investment, should it turn out that we had unwittingly purchased a lemon of a home.
The process was riddled with caution. The sellers were suspicious of our commitment and ability to buy. We were suspicious of the value and condition of the house. And the mortgage company was suspicious of our ability to repay the loan. The result was a complex process that included a myriad of signatures, confirmations and due diligences. And while I can't say we particularly enjoyed it, we recognized that the seriousness of the process matched the seriousness of the investment that we were making in our house and that the bank was making in us. For us, as for many or even most Americans, the purchase of that home will be one of the largest expenditures of our lifetimes.
For many, college tuition will also fall into this category. Yet the process by which most of us approach that investment is far less rigorous. Unlike the road to home ownership, which is paved with policy constraints and warnings of “buyer beware,” the road to college is lined with cheerleaders telling aspiring students that a college degree will be a golden ticket to success. The result is student loans handed out with very little due diligence as to whether the student will be able to pay back – and how quickly – and students throwing buckets of cash at an institution that do precious little to safeguard their investment.
Colleges and universities, with the help of their powerful lobby, have succeeded in getting most Americans— and not just aspiring students— to believe that they are, largely, benevolent institutions. Most colleges and universities, despite their sometimes massive revenues and stock piles of cash, aren’t on the hook with the IRS. Their designation as nonprofit entities exempts them from having to pay federal taxes that would otherwise be due. Their position as institutions above scrutiny has even been formalized in the courts, where plaintiffs, like those suing for tuition refunds during the Covid-19 closures, will often be thwarted by a legal precedent called the argument of “academic deference," which discourages federal courts from meddling in matters of academia. Every facet of society seems to be sending the signal that colleges and universities are beyond reproach.
Though companies such as Google, Apple, and Facebook are often grilled by the media and public officials about their use of our personal data, we apply nowhere near the same level of scrutiny to the institutions of higher education that stash mind-boggling sums of money in their endowments will still charging a price that exceeds the annual household income for more than half of American families. For example, the richest college in America, Harvard University, manages an endowment of nearly $40 billion and has a current all-in sticker price of nearly $70,000. That's a cash flow and balance sheet situation that we hardly let a company in any other industry get away with without ample suspicion and antagonism. But in our culture, Harvard and other Elite schools, are untouchable; they are held up as the gold standard.
I fear that our collective worship at the altars of higher education has led a generation or more of young people to enroll in college without realizing what, exactly, they are signing up for. That's not to say that colleges and universities are necessarily nefarious actors. But our lack of attention to the details of their practices and the financial transactions in which we're engaging has left the door open for nefarious or even neglectful behaviors. We've made a practice and a culture of giving colleges the benefit of the doubt. And the result is that people of all ages are making decisions about college blindly, despite the potentially grave financial consequences.
Many years ago, I partnered with a few colleges on an experiment to test whether we can improve students’ notoriously low level of financial literacy, especially regarding their loans, by sending them informational material via mail and email. It was inspired by a program at Indiana University that claims to have lowered their students' levels of debt by simply sending them letters about how much they had borrowed while they were enrolled.
In setting up the experiment, I had the opportunity to sit with many financial aid professionals. When I described the goal of our research— to help student borrowers acquire a deeper understanding about the debt they were accumulating— at one of our initial meetings, one financial aid officer interrupted my rehearsed spiel about the project we were proposing to inform me that my goal was completely out of touch. She suggested that if I were to approach a random student on their campus and ask them how much they had borrowed, or even how much they were paying for school in the first place, they wouldn't have any idea. The nuance I was trying to impart on them, she explained, would be lost; they didn't even have a grasp on the basics.
As an economist and a generally persnickety consumer, I was astounded. How could so many young people be making such consequential decisions without this most basic of information about the financial trade-offs they were making? How could they determine whether they were receiving an education worthy of its price tag if they didn't even know how much their education was costing?
It turned out, as it always does, that the practitioners knew far more about their students than we did, the researchers with a lofty (some might say out-of-touch) plan to make things better. The experiment revealed that the information we delivered to students did absolutely nothing to improve their understanding of their debt levels and the consequences for their future budgets. But in the process we were able to confirm what the financial aid professionals already knew to be true: for the most part, students were shockingly unaware of how much they were borrowing or paying for college, and some didn't even realize they were borrowing at all. Just over half the participants in our experiment (52 percent) were able to correctly identify (within a $5,000 range) what they paid for their first year of college. The remaining students underestimated (25 percent), overestimated (17 percent), or said they didn't know (7 percent).
We later confirmed that this was not a phenomenon specific to the one college we had partnered with. When we replicated the exercise using nationally representative data, we found that about half of all first-year students in the United States seriously underestimate how much student debt they have and less than one-third provide an accurate estimate within a reasonable margin of error. And we found that among students with federal loans, 14 percent believed they didn't have any student debt at all. Imagine their surprise four years later when the first bill came in the mail.
In subsequent conversations with financial aid professionals, we got an inkling of why this might be the case. When we brought up the idea of sending student borrowers periodic financial statements informing them how much they were accruing in debt throughout their enrollment, some balked at even this most basic level of transparency. Much to my surprise, they expressed concern that reminding students how much they were paying or borrowing would make them want to drop out. I know that these people had the best interest of their students at heart. They weren't trying to dupe anyone. They simply believed, as we did, that the best way for students to succeed financially was to finish their degree. And they felt that shielding those students from the unpleasantness of knowing how much it was costing them was necessary to make that happen.
What is clear from this and much subsequent research is that the implicit cost benefit analysis we do automatically for each of the economic transactions we make every day— everything from the big decisions, like purchasing a home, to how much we spend on groceries— is too often absent from the process of shopping for college. This reality might help explain why so many students graduate from college each year feeling victimized by their debt rather than feeling grateful for the opportunities that it facilitated. And it may also help explain another common cause of disappointment among students: inadvertently enrolling in a lemon college— that is, one that doesn't deliver the financial return on your investment of time and money that you were expecting.
Despite this gloomy prognosis, there is actually good news on this front. For today's aspiring students seeking an economic return on their investment, making an informed evidenced-based decision is easier than ever before.
(Please excuse any typos; I gave my editor a reprieve from working on this edition of the newsletter. She’s already dealt with enough of my pre-launch, anxious energy this week. Thanks Olivia!)