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Dealing with the Deficit
You’d think Pamela Gann was the president of a country, not of a college, with the deficits we’re running in 2012-2013. 10-12 million? Yikes! Unlike Bush and Obama, she cannot borrow from China to finance it.
With those deficits come some hard choices. Abhi has already written about the hiring and pay raise freezes, and the Inland Valley Daily Bulletin reported that CMC laid off eleven people right before we went on summer vacation, including the not-so-popular Ethan Andyshak, czar of CMC housing. Staff and now faculty have been encouraged to seek early retirement so that the college can keep its hefty $80 million dollar operating budget balanced, and George Posner reported that $600,000 will be cut from financial aid, despite promises from Gann not to cut it.
In the future, it seems likely that more employment cuts are forthcoming. As Gann noted in an email, for every $1 CMC pays an employee, between a quarter and thirty-five percent goes to fringe benefits. And so, the sacking of Andyshak, who didn’t really do anything that a computer system couldn’t do, was good news. (A future blog post will tackle how computers and auction markets can help make CMC more efficient.) Although it will be sad to lose members of the community, the cuts may open up more on-campus jobs for CMC students to pick up the slack. (Perhaps an adjustment on the prevailing CMC minimum wage would create even more.)
But employment cuts will likely not be enough and so, I think it’s a fair bet to say that the administration will ensure that incoming classes will be richer than the classes now graduating. Reportedly, that happened at Pitzer College, dependent as it is on tuition, this past year. Considering that nearly all the international students pay their own way and that Gann wants to make the campus more international, it seems likely that more international students will continue to grace our campus (and our college’s coffers) in greater numbers in future years. In short, the college will be looking for money, not potential. Before long, it’ll be clear that top-notch poor kids needs not apply.
According to at least one member of Board of Trustees who spoke with me earlier in the year, the school remains committed to producing the best education in the world for its students, regardless of their ability to pay. But with increasing cuts, how might they do that?
Here’s a suggestion that would garner the school international attention and make a bold statement about the quality of the education that CMC imparts to its alums — rich and poor alike.
Claremont McKenna should accept a promissory note or contract where students promise to pay a percentage of their future income for an agreed amount of time. In exchange, they get a free (or partly free) ride.
Sound far-fetched? According to Thomas Sowell, an economist at the Hoover Institution, it was done for years with professional boxing when boxers agree to being trained by their managers in exchange for a chunk of their future earnings. Here’s what Sowell suggests that the benefits would be:
Another option would be to allow students to sign enforceable contracts by which lenders would pay their college or university expenses in exchange for a given percentage of their future earnings.
That way, students would be issuing stocks to raise capital, the way corporations do, instead of being limited to borrowing money to be paid back in fixed amounts — the latter being equivalent to issuing corporate bonds.
Not only would this get the conscripted taxpayers out of the picture, it would also make it unnecessary for parents to go into hock to put their children through college.
Still, the financially poorest student in the land could get money to go to college, with a good academic record and a promising career from which to pay dividends on the lender’s investment.
If the college isn’t willing to sign off, perhaps the alumni community would front the money, for a return on their investment, of course. Such a policy would keep the alumni more engaged in the ongoings and quality of education on the campus. Career services would be more inclined to help students get the best paying job they can. And for the econometricians in the room, the school could even chart and track how well students do — using factors like IQ score, SATs, leadership ability, parental income, etc — and tweak its admissions to accept the best candidates for success. And there could be different contracts based upon what the student is likely to make in the future, given his major.
This simple idea has a chance to become truly revolutionary. Imagine the statement that it would make to prospective students: “The college believes in you — and our own standards of admission – so much that we’re willing to pay your costs.”
35 Comments
2009-05-29
14:41:08
Interesting idea, Charles.
The premise is a bit off the mark, though. President Gann has presented to the trustees, the faculty, and the alumni community regarding the extent and nature of the cuts. They are appropriate and sufficient. She's surprisingly open with the information, and would likely present students with the same information if they requested it. Here's the general idea, though:
CMC will balance the budget through...
1) Salary freezes
2) In terms of financial aid, becoming need-aware for transfer students only (need-blind admission, 100% need-meeting policy, and no-loan policy remains intact for freshmen admits)
3) 2-3% departmental budget cuts
4) Selective administrative hiring freeze
5) The involuntary layoffs already outlined
6) The study abroad tuition policy change
7) Increased revenue from sources such as a CMC summer session
Other ideas are in the discussion phase, but they will be long-term projects. The actions outlined above solve the current budget shortfall. Financial aid policy is not changing significantly, and the type of student CMC admits will not change.
2009-05-29
15:17:56
Well, CMC is need-blind for freshman applicants from the US, but not for international students. The admission office is need-aware for international freshmen because they rely on international students to pay the full price of tuition.
So, the number of international students in the Class of 2013 is jumping quite a bit higher than it has been in recent years.
I'm not sure why we aren't need blind for international students too.
2009-05-29
15:22:29
Not granting financial aid to international students is a logistical issue. Tax returns play a central role in calculation of financial need. Deciphering international returns (if they even exist) is virtually impossible.
There's also the issue of currency conversion, and how quickly it can change. If an international family qualified for aid, it is more than likely that the constant changes in exchange rates would cause serious fluctuations in their need, even over the course of one semester or year.
2009-05-29
15:32:07
if that were true, other schools would not offer financial aid to international students either. granted, most don't, including many of our competitors, but it's an issue of affordability, not practicality.
2009-05-29
15:42:50
Nope, sorry. This is what I do for a living, so -- not to sound like a dbag -- but I know what I'm talking about. Some schools are willing to ignore the difficulty or impossibility of fair calculation. It's usually a sign of a clueless office or a school desperate for international students. But it is legitimately the the tax and exchange issue that prevents international FA.
2009-05-29
16:15:24
Okay Brad, I'm not an expert, but I think we can compromise and say that it's both a logistical and budgetary constraint.
Harvard, Princeton, Williams, and a few other schools meet all need and are need-blind for international students. I'm sure it is not because they are desperate or clueless, but rather because they can afford to overlook the higher possibility of an inaccurate calculation.
2009-05-29
16:35:30
Yes, there are a few schools that don't fit neatly into the criteria I mentioned. But that's because they're in an enviable position that only about a half dozen schools have reached: they could fund their entire operating budget from the interest on their endowments. In other words, logistics don't constrain them, and they don't have to worry about ensuring the accuracy of their financial aid distribution. They could give every student full financial aid, and they'd still be fine.
At a place like CMC, we could fund international students the same way we fund domestic students, but it's logistically impossible to distribute dollars equitably between the two groups, because the windows we look through to assess their financial situations are wildly different. If CMC is anything like my current workplace, we would love to be able to distribute FA to international families. It would allow us to branch out to new markets.
2009-05-29
19:05:17
Right. Just so you know, I've heard that there are some international students who pay their full tuition for all four years at the beginning of their freshman year based upon how they think their country's currency is going to perform.
I don't think we need to be need blind for international students. At least we're not Pomona. Reportedly they give tuition breaks to illegal immigrants, but not to international students who are here legally.
2009-05-31
21:55:23
Im a bit lost how promisary notes would address our budget deficit. Floating tuition to students in times when we're in financial trouble is not going to erase the deficit, it will only create more of a cash crunch.
As to the idea of alumni/parents donating money for a return, it seems like a plausible solution. I contacted President Gann about the potential for CMC to issue psuedo-bonds, giving a small return to parents, alums and/or students who would lend the school money for a short time, but she responded that the school had no liquidity problems and it wouldn't be necesary.
It seems that budget cuts have been chosen, for better or worse, as the method of choice by the school, and they seem to be the effective and direct means of easing financial strain.
2009-05-29
14:47:53
Hey Alumnus,
I'm well aware of all of that, but it's also true that Gann reportedly said that financial aid will be cut more than $600,000. That was several months ago and that was only after a donation came in at the last minute. It would have been more. She also said something to the effect of if well off families are dissuaded by how little they'll get in fin. aid., they'll end up going to UCLA.
Follow the link to the George Posner post for more information.
Thanks,
2009-05-29
15:19:10
Keep in mind that $600,000 reflects roughly 3.5% of the FA budget. Modest adjustments, such as the transfer-student policy change, would lead to shifts in that range.
Additionally, even if there were noticeable modifications to the FA formulas that CMC employs, they are not likely to affect the type of student enrolled at CMC. Why? Because CMC's formulas were about as generous as they could be. Adjustments of the sort Posner hints at include: cost-of-living calculations, inclusion of home equity in need calculations, reporting of vehicle value, and other factors not directly related to cash flow. These matters are always discretionary, and it is rare to find agreement in an office -- let alone in higher education generally -- on how to employ them. The way that CMC has employed them in its recent history reflects its desire to err on the side of caution -- offering awards that many of our peer institutions would consider beyond the need of the family.
This type of policy has always been a luxury. Admitting students regardless of financial circumstances is central to the school's philosophy and purpose. Making it financially feasible for them to attend is a natural extension of that mission-centric policy. Going beyond that is not central to CMC's purposes, and is not likely to change the type of student we enroll. We will still be meeting need to an equal or greater degree compared to our peers.
Our now-departed period of financial stability afforded us the luxury of frequently exceeding a family's demonstrated need. We're not in a time of luxury, any longer. But we'll still be meeting full need.
2009-05-29
19:08:53
Correct, Brad, I'm glad you mentioned home equity in assessing financial aid.
Here I think it is really unfortunate how we structure financial aid.
Given that your financial aid for the coming year at based upon last year's tax returns (read: before the housing market collapsed) it's really putting a lot of families in a bind. Some of them were simply lucky to buy a house when they did and it may be their only asset. In some areas of the country, home values have fallen over 50%. CMC is really making a mistake when it assesses family contribution by the equity in your home.
What are those families supposed to do? Sell their home in a depressed market to finance their children's education? In some cases, after taxes, they would net less than they even paid for the house in the first place!
2009-05-29
14:47:58
Not a bad idea. But the devil is in the details. Under your plan, the college would have a huge financial incentive to direct these contracted students toward more money making majors. The school would likely push kids into majors like Econ and Computer Science and away from less marketable majors like PPE or Art History. But what if a student's talents were really meant for fluffy sophistry? The student might make more cash as a money grubbing Econ-CS dual, but they would have more of an impact on the world (and make more of a name for CMC) as a PPE major. By giving the school a financial stake in these students, the plan could easily have the perverse effect of focusing the school's attentions only on a student's earning potential - to the detriment of their other potentials.
2009-05-29
14:53:37
Hey Patrick,
Not a bad point, but the current system isn't much better. Right now, students still have a huge incentive not to take more fluffy courses, esp. if they are about to be in debt. (Hence the reason I'm not a French major.) I don't see who it would change matters much, except that my plan would put the cost of your education on you and your future salary rather than on your family now. I don't really have a problem with students taking more practical courses. (That was, after all, why George C. S. Benson and the initial donors founded the school.)
It might also encourage a lot of students to get serious and take classes that will give them real skills, unlike some of the sillier courses that are offered. The Living Sea anyone? Thanks for the comments.
2009-05-29
15:03:37
in response to patrick, let's not put down my beloved econ-cs or argue about which major is better for what (i think it's mostly irrelevant), but...
yes, it's true that earning potential isn't everything to everybody. to some people, future earnings are valued very highly. under charles' hypothetical plan, it would be the only thing valued in an education.
our goal (and, i believe, the college's goal for students, as a non-profit organization) is to become happy, not necessarily rich.
2009-05-29
15:08:38
Yes, let's not put down CS-Econ majors.
But my plan doesn't say future earnings need be the only thing valued, just that this system could and should be an option for those of us who don't have a trust fund or Mommy and Daddy bankrolling us.
The Horatio Alger story is a real one for many of us and the college should let us sign a contract, if we want.
Just so we're clear, I think this plan is very affordable even for people who major in things like Black Studies or Psychoceramics.
The college would just charge different percentages based upon the major and the likelihood that the individual would pay it back.
2009-05-29
15:16:07
Also, since when was it the college's goal (or even our own) to be happy? I thought it's -- and by proxy, our -- mission was education. Education comes from the greek to "draw out." And there's nothing that would make me happier than drawing out the talent in each and every one of us. Such a plan, like the ROTC plan that some of us embark upon, trades future comforts for the promise of an education. But such a trade is something students SHOULD be able to make. We let people trade years of their lives and maybe even their life itself to pay for a CMC education through the military, but why wouldn't we want to encourage people who want to sign contracts to go ahead and do it?
2009-05-29
15:22:25
I think it's generally accepted economic and philosophical theory that any rational individual's goal in life is to maximize his own utility-- happiness. As we learn in Econ 101, utility is not always in the form of cash money.
The school, as a non-profit organization, has an iffier goal than "utility" or "cash money." The school's goals are determined by the Board of Trustees (and students and faculty, to the extent that we are able to advise the Board of Trustees).
2009-05-29
19:18:36
Hey Josh,
Isn't that assuming a lot? That we're rational? And maybe graduating with no debt would give you an incentive to take a riskier (but likely have a higher payout) job? In theory, a student could always go bankrupt (unless, of course, they were an auto company) and reschedule the debt later.
--Charles
2009-05-29
15:20:59
Charles-
While students do have a financial incentive right now to earn enough to pay off there debts, that is not the same as the financial incentive the school would have under your plan to maximize the future earnings of each contracted student (by contracted student I mean students who get into CMC under your plan). But my worry is that this financial stake the school would have in its students would override the schools other legitimate interests in students' success. Perhaps an example would make this clear.
So lets take an average CMCer who's interested in American government. Let's say he's fairly smart but eloquent as hell. Now suppose he could be extremely successful if he goes into the public policy/law/politics arena. He might even be a presidential speechwriter. But he'd likely make more cash if he did econ or applied math and did one of the triad (consulting, ibanking, accounting) - became a "master of the mouse" as one of my great profs once said. He might be good and borderline special as a business whiz kid. But he'd have a much greater impact on the world as a high flying Politico than being another quant jock. He'd make enough to pay off his student loans in either scenario but would make much, much overall taking the quant jock path. I worry that the school under your plan would have such an incentive to maximize their students future earnings that they would push some of these types into quant jockery - subtly perhaps - to the detriment of those students and the school's reputation in the long run.
2009-05-29
15:27:29
The true banker/baller doesn't need to be a "master of the mouse" because he shall know all the shortcuts of the keyboard. Back to *MSFT EQUITY WACC * ...excuse me.
2009-05-29
19:16:06
Hey Patrick,
That's an interesting idea, but I find it entirely unpersuasive. For one, you could design the system so that no one knows but the students if they have made the contract or not. That way, the school would have no way of knowing which students to "subtly" push. Assuming, of course, that anyone hears the siren songs of Wall Street nowadays anyways.
Some students could also decide that they want to become entrepreneurs. Remember, it's a percentage of future income. The colleges could conceivably make a loss on the students. Say, somebody dies, but in the aggregate, I predict that they'll end up picking more winners than losers.
Second, I'm also unpersuaded that the colleges would do this. How good would they have to be to pressure someone into a field and whose to say, in the situation you mentioned before, that the student isn't better served being a quant? Tough questions, but I'm afraid I don't think it's a good idea that tough questions should eliminate an option that would help many students and their families afford college.
2009-05-29
20:48:41
I agree completely. I just think - and I think you agree - that you'd have to be very careful in designing the system to ameliorate the potential damage that this dramatic financial incentive would induce on the school.
2009-05-29
15:25:33
Ok before this gets out of hand, full disclosure: I make fun of all majors equally (except Psych where I'm serious), even my beloved PPE major. So all of that was in good fun Josh.
2009-05-29
15:29:56
haha yeah i know... and i think there are plenty of easier targets than psych
2009-05-29
15:38:58
but psych tries to take itself seriously, which to me is far more annoying
2009-05-30
09:01:07
We talked about this in a game theory class I took last year:
If students are able to decide whether or not they want normally structured financial aid or "future income percent financial aid," the program will probably face problems.
Why?
Let's say, coming into college, I know I'm going to become a lawyer or a doctor or a banker or some other high paying job. If I have the choice of which financial aid package, I will probably choose the fixed cost financial aid.
On the flip side, if I know I'm going to become a teacher or an artist or a writer, it's probably going to be an easy decision to take the future income package.
Essentially, if given the choice, students who believe they will be higher earners (and people are pretty good at estimating how much money they will make) won't use this option and students who believe they won't make as much money, will take the future income financial aid. Of course there will be exceptions, but likely the whole program would be dragged down by utility maximizing, low income earners while high income graduates happily repay their fixed costs.
...but hey, I'm a literature major... so what do I know.
2009-05-30
18:57:23
Carl,
I think you have point, here. Given the choice, the highest earning majors don't have much of an incentive to choose a plan based on a percentage of the future earnings. There is a way to solve this, though. You could put a cap on the amount a student can pay out. It could be adjusted for inflation and include some interest rate that is tied to federal student loan rates or some form of bond (I will defer to someone who knows more about these rates than I do to suggest the appropriate one).
That said, such a plan is by no means affordable to any college right now. While future earnings are important, I think CMC is concerned about next year's budget at this moment.
2009-05-31
08:59:46
Hey Carl,
Carl,
It's an interesting idea, but I don't think it would be entirely born out. As I mentioned earlier, with enough data points (enough students taking either option), it becomes possible to see which majors would be subject to such a deal. You'd know not to finance the art history majors with a percentage of their future income. Or if they did sign off on it, it would have to be a fairly high percentage.
Many students also change their majors throughout their college career, so that the person who thought that they were going to wind up being a corporate lawyer, ends up as something else.
Andrew,
I would absolutely be against a cap on the amount a student could pay out as it would put the burden of an education on the college rather than the students. We know from research done in Europe that when such caps are instituted that they almost always end up with students majoring in easier subjects, which can often end up harming GDP.
While it might stop academic inflation, it will cripple the educational opportunities of families who want to pay more for a better product. It's analogous to rent control, etc. and will only lead to harming educational outcomes.
2009-05-31
18:50:37
Limiting the number of art history majors doesn't fix the real problem. Any Econ/Accounting major worth her degree will choose the wealth-maximizing option of paying a fixed amount for their education to prevent mandatory tithes on their income. This is a huge flaw which I don't think can be easily fixed, but luckily there are other ideas for creative education financing.
The problem with caps is NOT that it creates a problem similar to rent control. I don't understand your logic there since students have the option of paying a fixed amount smaller than the cap of their repayment. CMC offers an education to anyone who is admitted, not anyone willing to pay more for a better educational product. The problem with caps is that the program would become similar to the program of educational loans we currently have in place only with fewer guarantees on complete repayment. I don't understand why a school or alum would subscribe to such a risky model with tithes and caps. It's like if a VC firm needed to operate without the big winners. Education is not venture capital; educational loans have some of the best conditions for willing investors and students don't need to tithe their earnings for capital.
Today, peer to peer lending programs exist where alumni and family members can front the money for educational loans and receive a safe and fair return on their investment. Educational loans are exempt from personal bankruptcy and loans for education recruit better borrowers. One company, People Capital, uses a student's major, college, GPA and test scores to determine the best investments. A system like this, administered by an agency independent of CMC seems to make more sense as a way to finance education.
I realize the point of this post was for CMC to deal with its deficit. Unfortunately, I don't think this program would generate enough income without the self-interested Econ majors who will choose smarter ways to finance their education.
2009-05-31
19:12:17
Hey Kim,
I'm just not convinced that the first point is entirely accurate, particularly if the student is self-financing, particularly if they don't expect to make serious money for at least a few years post graduation.
Caps create huge disincentives for colleges to invest in the quality of education. A tuition cap would adversely affect education at Claremont because we're so dependent on our endowment and on tuition revenue. By not allowing the school to keep up with rising costs at other colleges, we'll be unable to offer a better product and ultimately fall in the rankings and in educating students. The only people who don't feel hurt by caps are those who enter the college right after the plan is instituted. In the long, it's disastrous. You're right, a financial cap works more like social security and Medicaid-- an unfunded liability on future generations of students.
On the point about educational loans and personal bankruptcy, I'd love to know you're source. My understanding of the relevant statutes and court cases is that you can be excused from educational loans if you show absolutely no ability to pay it back.
I'd also really enjoy seeing any evidence that peer-to-peer or social lending actually scales. (What lending isn't social, I wonder...) There's a lot of criticism that such groups misstate their interest rates and that they operate in too much of a black box, Wizard of Oz behind the curtain method. Often they require philanthropic donations and lower, subsidized interest rates. Small wonder that few of them have scaled when there has been ready access to credit elsewhere. (I have read a lot about the problems of microloans and would be willing to lend books out to people in September.)
For the foreseeable future, I think asking students to pay a percentage of their future earnings, isn't a bad idea. (It could even be structured as an option and hedged against.) I have more thoughts on that later.
2009-05-31
20:00:19
I think we have a misunderstanding on how we are using the term cap. I'm talking about a repayment cap. (As in I will repay unto 150% of the present value of my education with interest or will be tithed until 2050, whichever occurs first.) The cost of our education costs what it costs and the students need to repay that. You're talking about a tuition cap for future students and I haven't said a word about that.
Re: educational loans: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=967379; http://www.bankruptcyinformation.com/FAQ-20.htm
While you're right that you can have loans excused if you have no ability to pay it back, that is something different from personal bankruptcy. From what I understand it is very difficult to prove have educational loans discharged.
This whole peer-to-peer lending thing is really brand new but it seems like it would work for education financing where alumni already donate to their alma mater and invest in their students. I'm presenting it as an alternative to your idea that alumni can front the money for stock in students. Since educational loans have special provisions attached to them, they produce safe returns. The stock in students idea might not produce the same amount since it is entirely dependent on whether the voluntarily-tithed students want to earn lots of money. That's really all I can say.
And as for the main premise, I really don't see how we can resolve that without data that we both lack. Game theory seems to be Carl's side. The path to some high-earning careers like iBanking seems pretty fixed and I think those students will know if they are entering them when they make the decision to tithe or not.
2009-06-01
15:27:44
adding to the conversation a but late....but dean vos has said publicly that the reason we are not need-blind for international students is that 1) we can't afford to be and 2) we don't have to be.
2009-06-01
20:18:37
Charles,
It's not analogous to rent control at all. Paying more for a better product? Those that decide to pay the full amount can do so through regular tuition payments instead of this boondoggle. The cap just ends up limiting the earning power of those who are currently poor while it does nothing to affect the incomes of those who can pay at the time they attend college.
Besides, it is no more limiting than the current system. If a family wants to donate money to the college its children attend, it can do so.
2009-06-03
09:01:05
Andrew,
This is a basic econ. lesson. When you institute a cap for protected groups, it almost always falls to richer students in other classes to pay the burden. (Hence rent control analogy for housing which almost always forces the middle class and upper middle class to pay for the city's needs by locking lower rents or housing values so low.)
In effect, a cap will drive up the cost of those richer students and they will weigh coming to CMC.
I've got a number of articles that show the damaging effects of caps, if anyone's interested.