Literally investing in education
Taking a page out of the entrepreneur’s handbook to save higher education
Higher education is broken
In addition to the problems with the K-12 education in the US, its abysmal world ranking and the dire consequential impact on the future of our country, our higher education models are similarly struggling.
One of the largest problems with higher education is that prospective students don’t understand the expected benefit of the various types of available degrees, can’t properly assess value and end up overpaying for degrees or otherwise make misinformed decisions about which field to study.
With this fundamental problem, our current higher ed models leave much to be desired. Not surprisingly, for profit institutions tend to take advantage of the vulnerable students and traditional institutions tend to disregard the problem entirely. Because profiteering is more sinister than negligence, for-profits get a lot of flack but both models are causing significant damage to the lives of students and the economy as a whole.
A closer look at why this is happening
The silver lining for for-profits is that their shortcomings are a natural part of free markets. In new industries, it’s not uncommon for capitalism to favor businesses over consumers. Over time, as consumers become more informed, the poor-performing and/or pernicious institutions get weeded out, leaving surviving companies to duke it out over shrinking profit margins (a.k.a., more innovation comes at lower costs). Unfortunately it can take decades for an industry to mature to this level.
In the case of traditional higher education, solving the situation is much more complicated and, in my opinion, much more difficult. Its problems stem from a distorted market caused by government subsidies and monopoly-esque behavior:
- State government subsidies support an environment in which schools compete with each other based on the perception of the “highest quality” education, a.k.a., “most expensive” education. In other words, it becomes an arms race instead of allowing schools to differentiate in a free market fashion. Costs rise unnaturally making degrees elitist and overvalued.
- Research grants from the federal government also play a role in deforming the focus of traditional higher education. During the WW2 era, the federal government began taunting universities with very large research grants which fundamentally diverted the focus of universities away from mainstream education.
- Finally, in order to compete in this market (i.e., qualify for subsidies), new universities must play by the traditional model’s rules (accrediting agencies, external rankings, etc.) or not play at all. It’s a sort of deranged barrier to entry…which perpetuates monopoly-like behavior in which fewer goods are produced (market driven degrees) at greater prices.
After many decades of this dynamic, it’s no wonder that “there are … disturbing signs that many students who do earn degrees have not actually mastered the reading, writing, and thinking skills we expect of college graduates. Over the past decade, literacy among college graduates has actually declined”, according to the Spellings commission.
A crazy idea
Have you heard of Ycombinator? They are an organization with an interesting take on seed funding that focuses mostly on web startups. Traditionally, the scope of seed funds is limited to a simple exchange of cash for equity. Ycombinator (“YC”) takes it a step further by infusing elements of classic higher education into its investment offering.
- Instead of classrooms and libraries, YC provides tech startup office space / atmosphere.
- Instead of professors, YC provides mentors (already succesful tech entrepreneurs).
- Instead of career services departments, YC offers connections (partners, investors and press contacts).
- Instead of a degree, YC offers the notoriety that comes from having been through its program.
- Since YC accepts participants in groups, it even has “graduating classes” from each 3 month long program.
YC has become so successful that thousands of applications are submitted for 60 available spots (although this number is growing). Even more indicative of their success is that their current holdings are valued at over $140M after having invested approximately $6.5M.
All things considered, YC could be viewed as an extremely profitable higher education institution. Where traditional universities utilize a vendor/client model (i.e., a student pays a university for their product—often taking out a loan to do so), YC utilizes an investor/entrepreneur model (where both parties are on the same side of the table).
Could this model be broadly applied to traditional higher education?
Let’s look at an example
Assume that the annual tuition for a university is $5K and that there are 20,000 students enrolled at any given time. This yields an annual revenue of $100M. Compare that to a university with the same number of students that uses a more YC-like revenue model where instead of tuition, students agree to remit 5% of their income (which is on the low end of the typical percentage of income that should be set aside to pay off student debt) for the first 10 years immediately following graduation to the university (the average amount of time that it takes students to pay off their debt).
If alumni make an average of $70K / year over that period of time, annual revenue would be $175M*. Maybe this particular structure is too steep of a deal or maybe the alumni earning assumptions are off, but there is bound to be a sweet spot where the school makes more money and the deal is still more palatable to potential students because of the lack of risk (in fact, the university would still be making money if the average income was just over $40K / year or if the revenue share percentage were 2.6% instead of 5%).
Consider the benefits
Think about what happens when you’re very survival as a university is dependant on the financial success of your students. The pressure to innovate would be unprecedented.
Would we see a shift of professor incentives from tenure to something more like becoming a partner at a law firm? What about an increase in student propensity assessment to see where students are likely to have the most potential? New and personalized learning models? Rapid infusion of technology into the classroom?
Long term commitment
Sustained and fruitful alumni employment would be top priority for schools for years after graduation. Career services departments would exponentially increase in size and efficacy and would be constantly pushing graduates to be the best they can possibly be long after graduation. Maybe schools would act more like top tier recruiting firms: negotiate salaries, maintain employer connections, etc.
Feedback from employers
Think of the massive effort that would be undertaken to find out what skills employers are really looking for. The shifting of resources, adjusting of curricula and introduction of new degrees would occur quickly and frequently to the highest areas of demand.
All of the flawed regulations and minimum requirements, the slow bureaucracy and the evasiveness of those who are the object of the regulations would be unnecessary because the interests of the student and the school are perfectly aligned. Schools would be incentivized to implement extensive business data tracking and analysis to know how to improve. The side effect of this is that, finally, prospective students will have the data necessary to make the best choices.
Yes, revenues will immediately increase in the short term; but the uncapped opportunity for revenue will have an expansionary effect in the long term yielding greater output for the school, the student and the economy.
Criticisms of this model
Loss of well roundedness
Could hyper focus on salary maximization pigeonhole graduates? In other words, would schools start to cut time honored subjects like art history or philosophy? If so, how big a deal would this really be? It seems like the classic educational model allows students to take a deep dive in a particular field only after there has been a basic education across a breadth of subjects. It’s hard to say if cutting or limiting subjects that don’t seem to be as directly tied to financial success would put students at a disadvantage, but if it did, schools would be incentivized to quickly reintroduce these subjects.
Another side effect would be that great effort would be taken in the student selection process. It could be argued that a model like this favors the affluent because based on the data, this the demographic that tends to succeed the most financially. I believe it could also be argued that once schools’ assessment capabilities mature, higher education will be more inclined to the ambitious and hard working (regardless of class, race, background, etc.).
Certain market segments could be ignored
In pursuit of highest dollar, will schools ignore certain segments? It’s hard to say what the lowest hanging fruit for schools would be with this business model. Will it be with fields like law, medicine or engineering or in fields like security, logistics or healthcare support? Capitalism has a way of squeaking out every last dollar starting with the low cost / high revenue fields. It’s safe to say that schools will not address the high cost / low revenue fields, but maybe those fields shouldn’t be serviced anyway?
Considering that some fields will not be addressed by schools, will students be encouraged into fields that they don’t naturally love because there’s more money to be made elsewhere? Maybe. But if a student truly desires to pursue this type of path, I’m sure there will be a niche to fill by higher education institutions that have vendor / client revenue models.
Students won’t have any skin in the game
Because the university is assuming all of the risk, will students still take their education seriously? It’s a valid question. There have to be repercussions for dropping out after having received a portion of a degree. You can’t get something for free. Part of the agreement should be that if they drop out, they will be required to pay for services received (imagine that would do for graduation rates).
So, will the model actually work?
At the very least, it seems worth looking into. It would likely take an ambitious entrepreneur a la Paul Graham to give it the ol’ college try (couldn’t help myself).
* the total value of a graduate is $35K which can be normalized to $8,750 / student school year