Goldman 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”
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]
Did 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.