Goldman Sachs looks at higher education, very darkly

Goldman Sachs logoGoldman Sachs shared their analysis of higher education for investors a few weeks ago, and it’s an important document for people in higher education to consider.  Goldman is enormously influential in the finance world, and also in government, two realms with a lot of clout in academic institutions.

The report is short but crammed with detail, so let me identify key elements and their implications.  Note: I’m not writing to endorse the report.

Goldman zeroes in on rising college costs, unsurprisingly, and offers some recent data: “Since 2009, college fees have risen by 10.6% in real terms, versus a 0.9% and -0.1% change in high school and college graduates’ wages.”

One key conclusion is that student choice of major matters hugely when it comes to financial return.  Some majors aren’t worth the price:

[U]sing SAT scores as a proxy, the gap in alumni earnings between colleges in the 99th percentile of scores and the 99.9th is as big as the gap between the 1st percentile and the 20th. If future wages for an individual joining college today were 30% below the average wages expected for college graduates, they wouldn’t break even until they were over 50. Graduates studying lower paying majors such as Arts, Education and Psychology face the highest risk of a negative return. For them, college may not increasingly be worth it.

Speaking of majors, Goldman links them to jobs, and sees important gaps.  “[S]till high levels of skilled vacancies shown in Exhibit 10 despite record numbers of undergraduates points to a demand and supply mismatch”

Goldman Sachs unmet demand for job sectors 2015

Let’s see how many campus administrations emphasize or reemphasize some of these when they create, expand, contract, or close programs.  Did you think politicians complaining about art history and anthropology were bad before?

Also at the institutional level are gaps between different campuses.  The report emphasizes this in economic terms, of course, but condemns one fourth of all American campuses for being less valuable than high schools.  Listen closely:

median annual earnings of MIT graduates ten years post college is $91,600 (almost twice the national median earnings). At the other end of the scale graduates from the bottom 25% colleges earn less, on average, than high school graduates. Another way to think about the changing shape of the labor market is that graduates of colleges with a 90th percentile SAT score entrance requirement make $11,700 more per year than those from universities in the 10th percentile. [emphases added]

spiral_Owen ByrneDid you catch that?  25% of American colleges and universities are worth less than just going to high school.  Attending and graduating from them pushes learners backwards, economically.  People would be better off not taking classes from them.

If that’s correct, how do you think state lawmakers will react?  How about would-be students?  Put another way, have accreditors missed this?  If 1/4th of American higher ed is financially destructive, will we allow those institutions to continue, or will be choose to reform and/or extinguish them?  In the immortal words of Slate, to let the death spiral whirl?

Speeding up that rotation might be increased competition from the business world.  The Goldman report is struck by the mismatch between degrees and jobs, while also worried about the threat of automation.  Implicitly they don’t see academia responding efficiently to these challenges; explicitly they expect business to start opening more of its own campuses, with “companies creating their own de facto degrees.”

Alongside this the report thinks that undergraduate degrees are worth less than before, diluted by education’s progress, ironically: “More people graduating has blunted the signaling power of an undergraduate degree…”  Therefore Goldman thinks we should watch

for a broader new system of signaling and talent identification… [L]ook again to the tech sector; an increasing numbers of companies are using GitHub (a software development tool used for writing, storing and collaborating on code) to view coders’ portfolios of work as a better talent indicator than their academic resume. Consulting firms EY and PWC have both said they will use their own testing systems for recruitment rather than relying on academic grades.

Again, academia can face new, external competition.  Note that the 2015 Horizon Report anticipated this.

Things are grim on still another front.  Overall, Goldman sees the college investment as declining in value over time, in terms of payout:

The average return on going to college is falling. For the typical student the number of years to break even on the cost of college has grown from 8 years in 2010 to 9 years today. If current cost and wage growth trends persist then students starting college in 2030/2050 will have to wait 11/15 years post college to break even. 18 year olds starting college in 2030 with no scholarship or grants will only start making a positive return when they turn 37.

If that’s correct, traditional-age learners will experience a more than usually economically stressed post-graduation decade or two.  That’s a bad problem for them, personally.  It could also further dampen the national economy as they put off buying cars and homes.  Demographically they will likely put off having children as well.

Little in this report is new.  Every bit echoes discussions currently in the air.  But for one of the world’s leading financial firms to reiterate them is important.  This can shape investors, who in turn shape charitable giving and endowments, along with support for public funds.  Investors have the power to influence political decisions, which impact all of higher education, especially public institutions.  University and college leaders are deeply immersed in these discussions.  Their decisions in 2016 might be more legible in light of this report.

(link via Mark Rush @ Liberal Ed Crisis; spiral photo by Owen Byrne)

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21 Responses to Goldman Sachs looks at higher education, very darkly

  1. Joe Murphy says:

    I’d love to know more about that bottom 25% of colleges which (putatively) destroy value. Which ones are really just pumping people through (and, yes, why haven’t accrediting agencies kicked in?) and which ones have extenuating details like a focus on social service careers, students requiring a lot of remedial work, or weak local economies for their graduates?

    Or how much of it is the effect of wealth begetting wealth? “[U]sing SAT scores as a proxy, the gap in alumni earnings between colleges in the 99th percentile of scores and the 99.9th is as big as the gap between the 1st percentile and the 20th.”… and as we know, SAT scores are predictive of nothing so much as parental SES. We need to answer my questions above, but I worry that a focus on the bottom rungs may inhibit any discussion about the middle, elite, and super-elite.

    Also, pardon the snark, but it takes a lot of gall for a business which made so much money on collateralized subprime mortgages to sound the warning bell about a 15-year wait for a payoff.

  2. What’s tragic (and self-serving in documents such as the Goldman Sachs report) is that states, prodded by finance capitalists, have been funding public higher ed less and less for decades, forcing these institutions to re-shape themselves as foundation grant seekers, real estate development businesses (with a side mission of education), and deploying more and more adjunct and contingent faculty labor, leaving these institutions ever more focused on administrative priorities and employees rather than instructional priorities and employees.

    The costs of higher ed have risen exponentially over the last few decades. The causes of that rise aren’t questioned at all. UC Berkeley in the 1980s cost $650 a semester. UT-Austin now costs about $5,000 a semester. No wonder the rate of return or the VFM (value for money) for students is decreasing.

    Essentially, the neoliberal state has abandoned the idea of public education, forcing these institutions to turn themselves upside-down to mimic business efficiencies (i.e., corporatization in higher ed), and then to be found wanting for not purely running like very successful businesses; and forcing students and families to bear more and more of the costs while instructional quality declines through the over-use of professionally less supported part-time instructors, and then declaring that now might be the time for businesses proper to step in and do the job of training (educating?) workers (students?) properly.

    We have almost completely lost the point of what higher education is and what it is for. If it is just job training, then I’m sure it will be found wanting in terms of such vocational VFM, especially in liberal arts fields which will survive, oddly enough, in only elite institutions. Now why is that?

    • Van, that’s a powerful critique.
      I don’t think Goldman was complaining about the state of affairs.

      • Thank you for the gracious compliment Bryan. As you know, I’m repeating much of what other people have said and said better on this subject. Maybe my mourning for what we’ve lost and for our blind plunging into gross Gradgrindianism will connect with some people.

        I enjoy your blog and learned much from your extensive analysis here. Thanks for taking the time to do it. And I agree that Goldman has little to no interest in questioning the status quo. That’s what us gadflies are for, right?

  3. There are all kinds of problems with this, but let’s take just one logical error – the fact that the average graduate of a bottom-25% college earns less that the average high school graduate absolutely does not imply that those students are reducing their employment value by attending college. To draw such a conclusion you would need to match populations by demographics, innate ability, and geography. The average student attending a college in the bottom group could well be improving his or her earnings capability – there’s no way to tell from this data. (Bryan, just going by your summary – I haven’t yet read the actual report.)

    Looking simply at the demand side for higher education – the big story in California is wide-spread frustration at how hard it is to get into nearly all highly-regarded public universities. If you operate a four-year private college with a reasonable reputation in California, you can be very bullish. I realize it’s different in other parts of the country.

    • Emily says:

      There are also a lot of fields that are abysmally paid (teaching comes to mind) that legitimately require a college degree. If a factory job pays more than a teaching job, does that mean we should shut down all the teaching colleges?

      • Great question, Emily.

        On the one hand, many schools answer “yes”, since they’ve been closing or shrinking various education programs. That’s driven more by declining K-12 demographics.

        On the other hand, this is strictly a financial assessment, not taking into account non-monetary benefits. I can introduce myself as an example: a literature PhD, which seems expressly designed to *not* generate financial gain!
        The question is, does our society still value those non-Goldman goals?

    • Michael, the report argues that going to those bottom 25% reduces, not improves, the average student’s earning capability. They might start low, but then get dragged down.
      Obviously things are more complex. They depend on majors, individual life choices (staying at home to care for family members is simply a cost in this model, as is being disabled), geography, etc. I would like to see a more powerful analysis following this through, but haven’t found one yet.

      Demand side for higher ed: Michael, nationwide enrollment has *fallen* for the past three years, overall. Yes, demand is high for the most highly ranked universities and colleges; that doesn’t change this picture.

      As you say, there are geographical variations, but not for the elite. Demographics are collapsing in the northeast and midwest, but Harvard and Oberlin aren’t faring poorly.

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  5. I can’t find a source for Goldman Sach’s claims about 25% of colleges. I do see studies that look at this percentile for college graduates — an important distinction — and find that the bottom quarter do earn less than high school graduates. http://libertystreeteconomics.newyorkfed.org/2014/09/college-may-not-pay-off-for-everyone.html

    Quoting:
    …when we look at wages for the 25th percentile of college graduates, the picture is not quite so rosy. In fact, there is almost no difference in the wages for this percentile ranking of college graduates and the median wage for high school graduates throughout the entire period. This means that the wages for a sizable share of college graduates below the 25th percentile are actually less than the wages earned by a typical worker with a high school diploma. While we can’t be sure that the wages of this group wouldn’t have been lower if they had never gone to college, this pattern strongly suggests that the economic benefit of a college education is relatively small for at least a quarter of those graduating with a bachelor’s degree.

    When we look at men and women separately, the same basic wage pattern holds, although a wider gap opens up among men. The 25th percentile for male college graduates has been about $4,000 to $5,000 more than the median male high school graduate in recent years, whereas among women, the gap has recently been around $2,000. This difference between genders suggests that some people may be choosing lower paying jobs because of occupational preferences or family considerations.

    • Excellent catch, Audrey. I remember that study playing a role in the majors discussion…. which is focused on personal choices (what should I study to get ahead?) and very quietly about program strategy (which departments should we cut and add?).

      I suspect the Goldman team relied on this Economist ranking: http://www.economist.com/blogs/graphicdetail/2015/10/value-university

      • The Economist study is one of the more interesting ones out there (insert caveats about value-add methodologies, but still), but you’re not saying it compares high school students to college graduates, right? My reading of those numbers were they were under/overs for the population as a whole given the predictors, and since one of the predictors was SAT scores, high school is largely filtered out, right?

  6. Paul Schantz says:

    It’s a Horizon Report for investors. For those who didn’t read it, their higher education analysis is all of two pages, and only one of several themes in their “Emerging Theme Radar” report.

    I find it oddly comforting that the investment world has the same cottage industry of megatrend peddlers as IT and higher education.

    • Do you find the analysis flawed, Paul, or just too brief?

      • Paul Schantz says:

        Neither, actually…

        I read the report from the perspective of the people for whom it was written. It provides bite-sized, superficial overviews of big ideas within an investment context.

        My initial gut reaction mirrors those of the other commenters here, but then I looked at the other topics in the report. One of them is “What if I Told You…Lithium is the New Gasoline?” Another is “What if I Told You…the Blockchain Could Disrupt…Everything?” Are employees of the petroleum and banking industries aware of the risks electric cars and digital currencies hold for them? Certainly. Are they thoughtfully commenting about Goldman Sachs’ report in message boards like we are here? Maybe. Would those comments ever register as a blip on the radar of investors this report is targeted at? Absolutely not.

        Investors reading this report could give two shits about the nuance behind any of its topics. What they do care about is how they can use this information to protect and grow their assets in a world increasingly described as “disruptive.” As such, this analysis suits their narrative perfectly.

        I think my cynicism is showing.

      • I’m not sure that counts as cynicism, Paul, so much as a cutting to the quick. Indeed, Goldman’s primary audience is investors, of course.
        I don’t know how sensitive they are to public opinion. At times they like to shape discourse; other time, to defy it.

        I suspect, though, that the iceberg principle is at work here. In the Horizon Report a short document appears, but I know well the many, many discussions and large amount of research that lurks beneath the waterline. It’s possible that similar work dwarfs and informs the Goldman document.

  7. VanessaVaile says:

    reading this while live tweeting MLA16 and particularly the MLA Subconference is a surreal juxtaposition, either harbinger of cognitive dissonance or antidote

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