Jul 242013
 

Sallie Mae, the too-big-to-fail, government-backed lender, recently put out study on how Americans pay for their college educations.  Since the cost of an undergraduate education continues to increase, how students continue to pay for it is important to understand.  Here is a link to the short writeup, and here is a link to the full report.

How Americans Pay for College 2013

How Americans Pay for College 2013. Taken from the short article "How America Pays for College 2013: A national study by Sallie Mae and Ipsos" on the Sallie Mae, Inc. website. Used for educational purposes.

Above is a nice pie chart from the article breaking down the percentages of where the average college student's funding originates.  I find fault with this chart in one area though:  Grants and scholarships do NOT pay for college.  Grants and scholarships are not a funding source.  In my work with my College Price Comparison Tool and as university professor, grants and scholarships are simply fancy words for the discount a college or university gives a student off of their advertised sticker tuition price for the first year.  This discount is primarily based on that student's (and that student's parent's) ability to pay through savings, income, and borrowing.  The sticker tuition price has no more to do with how much people actually pay for college than the sticker price on a vehicle at a used car lot.  And claiming the amount one can talk a smarmy car dealer down as "funding" for a vehicle is simply wrong.  Therefore, a more accurate set of percentages can be found by not considering the dubious category of "grants and scholarships."

With that in mind, here is a chart showing more accurate percentages of where the average college student's funding originates:

Funding sources for the average American student's college education.

Funding sources for the average American student's college education.

Looks a bit different, right?  The big thing I notice is that, in the average case, parents, friends, and relatives will put themselves on the hook for about 60% of the average student's education.  But for the rest, the student is on their own.

As always, find the total price of a four-year college education for every college on your list, before even visiting or applying, by visiting Birdseye College Price Comparison.

Jun 182013
 

I recently finished reading Clayton Christensen's book The Innovator's Dilemma (TID), which talks about technological innovation and how companies can effectively manage it.  TID was originally written in 1997, and I read a (slightly) updated version published in 2011.  I found this book fascinating, especially the way that Christensen broke down innovation into two distinct categories: sustaining innovation and disruptive innovation.  Each of these categories requires different strategies to manage productively, which are supported by historic studies of innovation in many different industries such as hard drives, excavators, steel, computers, motorcycles, and more.

Sustaining innovation is technology and process updates that give a company's existing customers more of what they want.  This is in contrast to disruptive innovation, which initially has no known customers, unknown applications, and capabilities that existing customers do not value.  But once the market for the disruptive innovation is found and grows, it will eventually take over the company's existing customers, often driving the company out of business.  TID points out that it is very odd that companies so often have problems managing disruptive innovation: sustaining innovation can be incredibly complex and expensive, but leading companies will almost always spend the resources necessary to see it through and bring the sought-after innovation to market.  Disruptive innovation is the opposite--it is often cheap and quite simple compared to what an industry-leading company already produce, but it is usually of "inferior" quality to existing customers.  Since existing customers do not want the disruptive technology, the market must be found for it before money can be made.  Large, successful companies historically do not perform this search--Christensen believes that is because established companies see the search for an unknown market as risky when they have existing customers they can continue to please through their established processes.

I found the ideas presented in TID particularly fascinating in terms of the higher education industry because of my work with the Birdseye College Cost Comparison site and because of the time I spent down in the trenches as a university professor.  The university business looks, to me, very similar to the large, established firms discussed in TID that, over and over again, got driven from their markets by smaller upstarts peddling disruptive technology.  The similarities in brief:  universities are established, they offer exceptionally complicated products in terms of accredited degree programs in many disciplines, and they are completely reliant on high-end customers feeding them fat margins.  Almost all of their development caters to these high-end customers.  To illustrate reliance on high margins, consider that many private, non-profit universities derive a large portion of their net budget, often a majority, from room and board charged to students for ever-more palatial "dorms."  Really, these dorms are more similar to luxury apartments than the two-to-a-tiny-room block houses of old.  Universities are essentially getting a significant portion of revenue from an expensive, high-margin add-on to their main product, at a time when news services regularly report that cost is a great concern.

After reading TID, I do not know what disruptive innovation will rise.  In fact, TID makes the point that this cannot be known.  But I can speculate based on what I know of the market and what cheap, readily-available technology currently exists.  Video courses might be one option:  with the expansion of low-cost fast Internet connections and the affordability of streaming and receiving video, entire video lecture series and accompanying material can be created and distributed.  The rise of Wikipedia offers another option:  a vast quantity of small, discrete, digital, educational elements (videos, interactive programs, web pages, homework assignments, etc.) created by a diverse number of experts that can be mixed and matched to create educational packages tailored to meet knowledge or skill goals for individual customers.  Or it could be something else entirely.  Whatever product arises, it will initially be something that existing customers (students going to university right now) neither want nor need.  These products will also not have many features the current higher-education market demands.  Perhaps no one in the new market is concerned about homework, tests, football games, lectures, grades, personalized feedback, dorms, accreditation, degrees, certification, etc.  The lack of some or all of these features will make the new product look "inferior" when compared to the established market, but the new product will have features that appeal to a different, initially unknowable set of people--the new market.

I have no idea what this low-cost, higher-education market is or what products to serve it will look like.  TID makes a compelling case that markets for disruptive innovation cannot be known before they arrive.  That said, I do not think that companies currently providing free college courses over the Internet such as Corsera or Udacity have figured out who the customers in this new market are or what they want.  At least not yet.  Both companies seem too locked into the current university model, expending a great deal of effort trying to emulate features of the university system, trying to become equivalent to a university.  I am not sure this is serving them well.

But whatever the new higher-education market turns out to be, it will be largely ignored by existing universities when it arrives because its margins are too low and the products too simple.  Years later, seemingly overnight, the new market's products will be sufficient for most then-current university students, and there will be a massive shift away from the current university model to the new model.

We live in interesting times.  Wherever this evolution eventually takes us, it is an exciting time for higher education.  I cannot wait to see what develops!

Feb 042013
 

Birdseye College Price Comparison is the site that I have spent the past few months creating.  The purpose of the site is to provide students first looking at prospective colleges an estimate of what a four-year education at each college they are interested in will cost them personally.  The site provides an estimate of the full cost for four years of tuition, fees, supplies, room, and board.  After just one visit to this site, with as little typing as possible, a student will have a list of the colleges they are interested in ranked by how much a four-year education will cost at each one. Odds of being accepted to each college are provided as well.

Estimating what a student will ultimately be charged by a specific college is challenging.  In the United States, public and private colleges practice widespread price manipulation.  Colleges have a sticker price, the posted tuition amount, but they offer discounts to most students they accept.  The discount offered is often called a scholarship or a grant in the student's acceptance letter, and the discount amount differs from student to student.  For example, students from poor families often get significantly larger discounts than students from rich families.  The discounts can be huge--some students may pay just 10% of the sticker price.  The discounted price, including room, board, fees, and supplies, is often referred to as the "net price."

Over the years colleges have become very good at offering students a net price in their admissions letter that is just under what the student (or their parents) are willing to pay.  Unfortunately, there is no easy way to figure out what a college will charge a particular student without applying to that college, which involves filling out forms, writing essays, and paying application fees.  Birdseye College Price Comparison helps by creating an estimate for each individual student based on what students like them have been charged in the past.

Since the 1992/93 school year, the net price charged to a new student to attend one year at a public four-year college rose an average of 5.9% per year.  Over the same time period, the net price charged to a new student to attend one year at a private non-profit four-year college rose an average of 3.6% per year.  (Source: College Board's Trends in College Pricing 2012 report).  And these are increases just for the cost of the first year of schooling.

After their first year, students currently attending a college end up paying more because colleges raise tuition and fees from year-to-year.  The discount that the college gives a student in their first year does not increase to cover the extra amount being charged, so the amount that tuition and fees are increased must be paid by the student.  Tuition and fee increases are a way for a college to extract more revenue out of its existing student body.  At private non-profit four-year colleges, the sticker price rose an average of 6.1% per year since 1992/93.   And those increases are passed directly to students who are currently attending college.

To create a complete price estimate for a four-year education, initial net price offers as well as tuition increases must be factored in.  Birdseye College Price Comparison takes care of all of that for students, first by estimating net price based on what similar students have been charged in the past, and then extrapolating out expected tuition increases for the years necessary to get a degree.  It does all the arithmetic for students, giving them a list of each college they are interested in with an expected price for a complete degree.  That way, a student can decide if a degree from one college is really worth an extra $100,000 over a degree from another.

Don't waste your time applying to colleges that cost too much.  Give Birdseye College Price Comparison a try, and start narrowing your college search today!