majoring in mismanagement

I glanced at a recent issue of the Stanford alumni magazine the other day. It featured an interview with former school president Gerhard Casper and an excerpt from his book on “addressing the challenges of higher education.” The piece was underwhelming, to put it mildly. There was the usual pabulum about school rankings, measuring outcomes, and fostering diversity. But there wasn’t a single word about the biggest problem facing higher education today:

It costs too damn much!

Our nation’s universities, public and private, have crushed an entire generation with debt. All told, young adults owe more than a trillion dollars in student loans. That’s a huge drag on our economic growth. And where is all that borrowed money going (besides the Wall Street banks that underwrite many of the loans)? It’s propping up one of the most backwards and wasteful industries in the world: academia.

Let’s be frank. There are too many professors in this country. Given the speed and potential reach of online education, how many people do we really need to stand in front of blackboards and teach basic calculus or Lit 101? Probably a small fraction of the number we have today. And yet every year our universities churn out another huge batch of PhD’s–most of whom owe many thousands of dollars in loans themselves–to draw salaries and eventually achieve tenure, making them virtually impossible to fire.

But the problem of too many professors is dwarfed by an even bigger, more costly problem: too many administrators. More and more, it seems like colleges aren’t about educating students but hiring people to provide them with dubious “services.” This kind of bureaucratic bloat and inefficiency would have killed off any normal business a long time ago. But, of course, academia is not treated like a normal business–yet.

One of my favorite companies is Grand Canyon University (ticker: LOPE). Unfortunately, its stock hasn’t done much for my fund this year. It’s been stuck around 43 bucks since New Year’s Day. But I’m not going to sell my shares. I still think Grand Canyon has a chance to grow into a gigantic corporation because it’s not trying to compete with for-profit diploma mills like Bridgepoint or the recently shuttered Corinthian. Its taking on traditional nonprofit institutions.

For roughly the same tuition as your average state school, Grand Canyon offers students quality training in high-employment fields like education and nursing–and it earns a 25 percent operating profit margin in the process. It doesn’t grant tenure to its instructors. It mixes online and on-the-ground instruction. And its management invests its resources prudently. The school has a basketball team because it’s relatively cheap and it’s great marketing, but it doesn’t bother with a football team because that would be a major expense for very little return.

These choices show that Grand Canyon’s leaders understand something administrators at traditional schools refuse to acknowledge, or at least admit: for all their academic pretenses, colleges are nothing more than consumer brands.

I was on a plane a while back with a fellow whose son had graduated from Princeton and whose daughter had graduated from UC Irvine. I asked him if there was any real difference in the quality of his kids’ educations. He immediately said no. They both had great experiences, and came out about the same in terms of instruction. Of course, his son’s resume looks a lot more impressive with a degree from Princeton on it, because it’s the academic equivalent of sporting a Rolex on your wrist. Actually, having the word Princeton on your CV is worth way more than showing off a Rolex, or carrying a Louis Vuitton bag or driving a Mercedes. The same is true for all of our top schools. In reality, Harvard and Princeton and Stanford are probably the sexiest, most sought after brands in the world.

Think about all the new millionaires being created every day around the Pacific Rim. How much would those folks be willing to pay for the privilege of bragging to their friends at cocktail parties that their son or daughter was attending Harvard? The answer is: they’d pay anything for that. Don’t believe me? A guy in the Bay Area is charging people (many of them from the Far East) hundreds of thousands of dollars a pop to train their kids to get into prestigious American schools–and his business is booming.

Here’s an idea: why don’t our top universities capitalize on their unrivaled brand images by employing the basic business principle of yield management? Like airlines, why don’t they charge different consumers different prices depending on demand?

If Harvard suddenly made tuition a million dollars a year for students who could afford it, it would still be flooded with applicants. The school could use the added revenues to slash or even eliminate tuition for poor and middle-class students. It could also double or triple (or more) its current enrollment and vastly increase the amount it spends on research. And there’s no reason it shouldn’t build more campuses in other locations, increasing enrollment even more. If its product is so great, why not scale it out?  That’s the kind of disruptive change higher education needs. But it will never happen because people who go into academia don’t do disruption. It’s a shame. It’s also ironic that a field founded on creativity and fostering new ideas is so averse to applying those principles to its own industry.

5 thoughts on “majoring in mismanagement

  1. Pingback: Stuff I Wish I Wrote ~ September 26, 2014

  2. Sebastian

    I agree completely with your appraisal of the college bubble. Thanks to upward pressure from EM tiger parents, however, it won’t pop for a while.

    Unless, of course, there is a major disruption in the student loan market, higher than normal delinquency rates, and it becomes politically unfeasible to bail out the banks (and government loan agencies) that have extended credit to innumerable aspiring underwater basket weaving specialists. At $1T+ outstanding debt, student loan debt rivals the MBS liabilities of 2008-9. And worse — these securities are not collateralized.

    Hopefully most of these loans are fixed rate, otherwise the Fed will have even less reason to raise rates (eventually) and attenuate the ongoing insanity in the capital markets.

    Online education, e.g., Coursera/EdX/Udacity, is undoubtedly more efficient. The problem remains the strength of college branding and the psychological inertia invested in physical classroom learning. People think they learn better in classrooms, and that the discussion-based format is working. There are a multitude of reasons (including personally tailored cognitive neuroscience advances) why the brick-and-mortar, 19th century Prussian Universitat system is worse.

    Fortunately, surveys indicate employers increasingly value MOOC certifications. This is most evident in computer science.

    Having recently passed through gears of an elite liberal arts college (admittedly it was a fantastic experience — although I could have had an even better time with that $60k a year), I can strongly affirm that academics and otherwise radical thinkers can’t fathom a sea change in the academy. Fortunately people like Sebastian Thrun exist.

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  4. Pingback: grand canyon education is still a growth stock | the confessions of a contrarian investor

  5. Paul Perkal

    The “scaling out” is a possible frontier for someone like Bezos. But you get credit for the idea, which is saying something.


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