There were two recent news stories about college affordability that caught my eye. These weren’t your typical stories about marginal students who maybe shouldn’t have gone to college at all but got roped into taking out a lot of debt to enroll and later dropped out and were stuck with debt, but no degree.

That is a large societal problem – and I’ll address it to some degree – that requires developing alternatives to college to get ahead for those for whom college isn’t the right path (technical schools, apprenticeships, etc.).

Today’s focus is the other side of the coin. The high achievers who are able to get into the best schools yet college is still a bad financial outcome for them, because the cost is way too high relative to the benefit. While it may seem a paradox that success (the ability to get admitted to an elite school) sets you up for failure, there are some places where this is true.

Before getting into the substance, let’s begin with the conclusion. All the problems related to the value of a college (or graduate) degree result from the distorted market for higher education. The system is designed to maximize prices for tuition, rather than maximize the number of students with positive outcomes. Just one more example of solving for local maxima over global maxima.

This is a direct function of the subsidy for education that comes from government loans and aid. This is Econ 101 type stuff. Subsidies only partially benefit the recipient of the subsidy.

They mainly benefit the entity that provides the subsidized service, especially when that entity has the ability to raise prices, which colleges and universities clearly do because there is no condition on aid $ to limit pricing.

“Unprofitable” Majors

Back to our paradox: the highly capable student with low odds of financial success. This most obviously comes into play with successful students who pursue degrees in low paying majors, with the most stereotypical case being the arts.

Two recent stories highlight this challenge. First, the challenges of being a graduate student in film at Columbia. Even though these students are among the best and brightest, most of them make very little money – at least initially – unless they are one of the few to make it big.

Yet, because it’s Columbia, and thus expensive, they carry staggering debt loads with little prospect of paying them off. We can debate whether they should have chosen a lower priced school – and we will later – but it doesn’t serve society well when talented young people are not able to succeed.

The second story is about the Yale drama school. David Geffen (the music producer) donated $150M so Yale drama majors can go to school for free. While very generous of him, one has to question – and I will – whether this is a good use of $150M. It’s like giving a football player with a torn knee a painkilling shot to keep playing instead of going in for surgery to fix the problem.

If Yale can’t find a way to provide an education at a price that matches the market’s needs, well, maybe they shouldn’t have a drama major any longer? Does one need to go to Yale to succeed in acting?

The “Stamp”

This brings us to what is the value of an “elite” degree. Is it what you learn or is it the reputational gain? From my personal experience, it is largely the latter. I didn’t go to an elite undergrad. Yet, when I had to compete against those people later, I did plenty well.

When I later went to a top graduate program, I learned a lot and there were a few classes that wouldn’t have been the same elsewhere, but most of them I would have had a pretty similar experience at a “lesser” school. It’s the student, not the school.

Are there more top students at the top schools than the middle schools? Sure, but just like a top college athlete at a small school can have just as much pro success as one who went to an Alabama or Duke, the top of the class at most schools can hold their own at the more highly regarded institutions.

So what is the value you get out of a “name” school? It’s the badge or the stamp or whatever you like to call it. It’s the signal to prospective employers that you made it through a top program so they should hire you. It is also the networking benefit of “being in the club” that can help you advance.

The stamp can be very beneficial if you’re going into banking or medicine or law or even staying within academia. In other professions, it doesn’t really mean much. I dare say if you are looking to be an actor or a movie producer, your success has little to do with where you went to school and more with whether you can entertain people.

I am admittedly not very familiar with that world, but I don’t think too many casting calls begin with “I see you went to Yale. Do you know …”. You either can act well or you can’t. Most people who get into entertainment also know that it takes time to have success and you will probably struggle financially until you make it.

Knowing that, why would one choose to saddle one’s self with a lot of debt if you can go someplace cheaper, be just as talented, learn largely the same skills, and not subject yourself to a significant financial burden? Some of this is societal (we create expectations for children to aspire to go to the top school whether it’s the right choice for them or not), but part of the reason is because we make it acceptable through the availability of debt.

Subsidies Limit Competition

The problem with subsidies isn’t just that they raise prices. They also limit competition. It’s no coincidence that the government is most involved in health care and education and those two sectors have the most pricing power and the least ability for a buyer to shop on price. I mean, if the FTC wants to focus on monopolistic behavior, they should leave Aon alone and force colleges to compete on price and value.

What do I mean? Because very few people pay the sticker price, it is an irrelevant number to most people. It’s like the list price for a medical procedure. “I only pay my co-pay. Why do I care what the insurance company pays the hospital???”

For college, it’s “the government gives me financial aid so I don’t pay list and I can borrow the rest, so I can ‘consume’ however much college I want, regardless of the list price.” Therefore, the motivation is always to select the most prestigious option you can gain admittance to regardless of the price.

In a functioning market, people would consider whether the extra cost of attendance provides enough value or if they should consider a similar school that might cost 20% less instead. People buy the kind of car they can afford. They buy the size of house they can afford. But when it comes to college, affordability is somewhat of an afterthought because of the subsidies.

Colleges love that they don’t have to compete on price. First, it’s good business for them. They can keep raising the price and know the government will pay. But more importantly, they don’t have to justify their value to students. They can point to their selectivity and rankings and hope you ignore the cost.

In a healthy market, selectivity would be irrelevant. Does Amazon limit the number of Prime members?

The Solution Is Deregulation

While removing loans and aid may sound scary, it would likely lower prices. Why? Look at airline deregulation. Prices have done nothing but come down once airlines had to compete with each other.

If colleges got paid directly by consumers, they would have to demonstrate the value they provide. Some would continue their current path of building fancier and fancier campuses and charging more. Others would dial in the excess and charge less. Consumers would self sort by what’s important to them.

Buying habits would change. If you are in a major where pedigree matters, you will still pay more for the top schools. If you major in something where that is less important, you will skip Yale Drama and choose something more affordable.

Some schools would go away because they couldn’t attract students at a price that lets them cover their costs. That’s OK. That’s how competition works.

By the way, there is some evidence that colleges will compete on price when forced to. Wealthier families that don’t get aid and pay full freight have begun to see success asking for discounts off list before they make a decision (of course, this requires you don’t fall for the other pricing trap which is early decision = another way of locking people in to a high price).

With competition, we will not just lower prices but improve value. Certain schools that might be considered “mid tier” today would find ways of standing out for certain specialties.

The top tier schools would realize that charging $100K/yr for a major where you make $30K after graduation doesn’t make sense. They will drop those majors and rationalize their costs.

As schools rationalize their offerings and begin to specialize, they have less overhead and can lower tuition. Now, school is more affordable for everyone.

Is this a lot more complicated than I just made it sound? Of course. We can’t drop student aid overnight. But if we are planning a direction for the future, it can’t be more loans or especially not debt forgiveness.

It needs to be more about how to create competition and price transparency. That’s the only way to prevent more stories like what’s happening at Yale and Columbia.