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Let’s make 2020 the year when we reduce families’ exposure to higher ed financial risk

By:

Jan 8, 2020

Looking back on 2019, two stories in particular surfaced a fraught dynamic in Americans’ relationship with higher education. First, the college admissions scandal saw wealthy parents breaking the law—and going to prison—trying to get their kids into well-regarded universities. Second, Senator Rand Paul introduced a bill that would encourage Americans to use their retirement savings to pay down their own student debt or that of their children. 

What do these stories reveal? The irony that getting a college degree as insurance against the risks of an uncertain future requires risking that very future in the process. 

Risk, worry, repeat

Americans have been risking their futures to a remarkable extent. In her recently published book, Indebted, author Caitlin Zaloom explores how attending college has risen to the status of a sacred middle-class value—intertwining parental love with a duty to spare no expense in paying to realize their childrens’ potential. As the costs of college have vaulted upwards, and the assumed indispensability of a degree has grown more acute, Zaloom notes that “gaining access to higher education usually involves an engagement with the world of finance so significant that it has redefined what it means to be middle class.” 

The results are proving worrisome. The federal student aid system issues loans not only to college-goers, but also to their parents and even grandparents. This on top of the 529 tax-advantaged savings plans parents and grandparents may already have been funding for years. Add it all up, and families are drawing down on earnings and savings both present and future, and across generations, to pay for a four-year degree—leaving 29% of surveyed families “frequently or constantly stressed” about their future financial security. This financing machine is holding intergenerational mobility hostage for a ransom of multigenerational debt and anxiety.

That the federal government keeps creating investment vehicles and expanding the degree financing apparatus, which Zaloom dubs the “student finance complex,” implies a discouraging acceptance of the skyrocketing cost of college. Leveraging behavioral economics to incentivize responsible, long-term financial decision-making is all well and good. Using it to prop up an egregiously overpriced higher education system is not. Nudging families to pay for college by draining their coffers quite literally from cradle (529 accounts) to grave (retirement savings) feels more like the latter.

Empowering families to break the cycle

With families exposed to this much risk, it’s time to help them better manage it. After all, universities and edtech investors go to considerable and rather sophisticated lengths to manage and mitigate their own risks. Why shouldn’t families do the same? 

Thankfully, beyond witnessing some discouraging higher ed headlines, 2019 also saw growing momentum around three strategies for improving the risk/return equation for learners and their families. Here are some innovations that will hopefully gain traction in the new year.

1. Reducing risk through radical affordability

While long-time disruptors such as WGU and SNHU continue to scale their low-cost, online bachelor degree options, holding tuition around $7,000 and $9,600 per year, respectively, two less usual suspects threw their hats in the “radically affordable” ring in 2019. 

In April, Minerva Schools announced that it is licensing out Forum, its homegrown online platform. If all goes well, Forum will empower institutions to implement active learning for classes containing as many as 300 students, potentially bringing annual tuition down to roughly $5,000. Then in August, 2U and the London School of Economics announced a three-year, fully-online bachelor degree in data science and business analytics, for the total price of $25,000 for students outside the UK. 

Time will tell if these price points hold up, but if innovative institutions can reliably bend the cost curve in 2020 and beyond, learners and their families will have a variety of lower-risk educational opportunities with proven outcomes to choose from.

2. Reducing risk by passing some of it along

The federal student loan system places the burden of poor workforce outcomes squarely on the shoulders of college-goers and their families, and eventually of the American taxpayer in the all-too-often case of default. 

Encouragingly, a growing number of traditional and alternative education providers started sharing that burden through innovative financing models like income share agreements (ISAs) and deferred tuition agreements, in which students pay less when they make less, or pay nothing at all if earning below a certain income. These financing arrangements not only reduce the graduate’s risk, but also make the education provider’s tuition revenue contingent on its graduates’ earnings, better aligning the school’s incentives with that of its learners.

Another approach to redistributing risk is to leverage employer-pay models. Guild Education, a company that helps employers like Chipotle and Starbucks ramp up tuition-as-a-benefit programs, just reached unicorn status in November. Coding bootcamps are seeing rapid growth in the corporate training market as well, with employers shouldering the cost to upskill and reskill their teams.

3. Reducing risk by improving outcomes

Education providers can also take the approach of reducing levels of financial risk by improving financial outcomes. This can be done in several ways.  

Some learning providers are increasing the ROI for their learners by consulting closely, or even integrating with, employers in designing their curriculum. Whether they be innovative liberal arts institutions developing new strengths in teaching hard skills, or short-course programs designed for quick, high-impact career pivots, these providers help their graduates become more visibly employable and help them signal their skills to employers in a language employers value and understand.

In another ROI tactic, many traditional institutions are doing the hard and important work of improving retention rates and even of readmitting students who previously stopped out, filling the cracks through which too many students fall when life gets in the way. Better supporting students makes attending college more of an investment and less of a lottery ticket.   

It is in everyone’s best interest to enable individuals to invest in their own potential, and in that of their children. Insufficiently addressing the risk side of the equation, however, can amount to exploitatively monetizing learners’ aspiration and parental love. 

 

We are entering a golden age of learning, with technological solutions and new business models opening up an ever-growing array of options for individuals seeking progress in their lives. It’s my hope that 2020 sees more innovators facilitating access to these opportunities at more reasonable levels of risk, both within and outside the traditional degree-granting sphere, so that learners don’t have to gamble away a promising future in the pursuit of it.

As a research fellow on the Christensen Institute's higher education team, Richard helps investigate novel business models in postsecondary education, professional development, and lifelong learning.