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Colleges at a Crossroad
The future of higher education is a vital concern

By Michael H. Moskow

In recent years, much discussion has taken place in the educational community about whether institutions of higher education have been unable to maintain the implicit "social compact" that once defined the relationship between universities and the public. This compact was based on a belief that education was largely a public good and, as such, government support was warranted. This notion has eroded over time.

Today, many argue that higher education is a private good whose benefits primarily accrue to the student who is able to use his or her higher education to achieve a more satisfying quality of life and often significantly higher wages. This more market-driven notion suggests that higher education is an investment in an individual's human capital that has limited public spillovers. Therefore, it should be primarily financed by the individual.

For universities to flourish, they need to revisit this "social compact" and make a clearer case for the public good content of education. In order to do this, universities will need to be more transparent in their operations so that the public can have a better sense of what the value of the institution is to society.

Universities need to more tightly define their mission and be more explicit about how funding is used to meet the multiple missions of a university, including education, research and public outreach. Polls indicate that the public primarily values universities as places of formal education and often does not understand the return to society generated from the use of public funds for university research. In sum, universities need to become better educators of the general public and marketers of their product if they hope to attract greater tax support.

Another aspect of transparency is allowing for an easier understanding of the finances of higher education. Higher education is far from a homogenous economic sector. The financial structure and missions of schools vary significantly. The public flagship university and the local community college serve differing student populations and objectives. Private colleges and universities are significantly different than local state colleges.

The advent of the private for-profit university is yet another change to our system of higher education. How does the business model of these for-profit institutions differ from the traditional university business model, and are these institutions better meeting the needs of certain populations of students?

This variety is a source of strength in that it can cater to the differing needs of students, but it is also a source of confusion for people attempting to make higher education policy. For example, I asked a researcher on my staff to evaluate whether trends in tuition are making college less accessible. This seems like a pretty straightforward question. However, his answer was something less than crystal clear. As he put it, college has never been more accessible than it is today—and it's also never been less accessible.

It is now more accessible if one considers record enrollment and that the costs of attending community college can be completely covered if a student is eligible for a full Pell grant. In fact, one study found that 30 percent of community colleges actually charge negative tuition if financial aid is taken into consideration. But figures from the College Board show that, while the sticker price of the average four-year public college or university represents only five to six percent of family income for a well-off family, the cost of the same education consumes a staggering 71 percent of family income for a low-income family.

Are students from low-income backgrounds being priced out of education? You can only answer this question by knowing exactly how much aid is provided to low-income students and whether a particular school has the resources to fully fund need-based aid. Depending on the answer to this question, college may or may not be affordable and accessible.

In addition, the return-on-investment of a college degree must be considered. If higher education is truly an investment in human capital, shouldn't students view this as an investment at least as important as buying a car or a first house? Taking on debt for a benefit that will span over an individual's life doesn't seem to be a bad strategy. If someone is willing to borrow $20,000 to buy a car, should it be unrealistic to encourage them to borrow at least as much to finance an education? Given that the most recent statistics suggest that college graduates earn in excess of $1 million more over their lifetimes than high school graduates, student debt should not necessarily be alarming.

Finally, if colleges and universities are going to redefine the social compact to restore public support, they will have to address graduation rates. There are many reasons why students don't complete their degrees, so it would be unrealistic to expect 100 percent graduation rates. Nationwide graduation rates, however, stand at 50 percent, and it is not unheard of to find schools with graduation rates of 20 percent. Particularly for the nontraditional student population, universities need to devise strategies that will ensure that these students get degrees. Public confidence in universities will be higher if graduation rates rise.

Clearly the area of higher education policy is not meant for the timid. The historic and increasing importance of higher education to our economic wellbeing makes this a policy area where we must succeed. Right now, the U.S. has a university system that is the envy of the world, but the world is catching up. I hope that we can begin a dialog that will help us all better understand the challenges facing universities and what strategies will help us maintain the vitality of this key sector.

Michael H. Moskow is president and CEO of the Federal Reserve Bank of Chicago. This article is excerpted from remarks made by Moskow at a recent conference on the future of higher education.


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National CrossTalk Winter 2006



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