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Sending Your Kid to College

Don’t Assume You Will Send Your Kids to College: An Investment Thesis

In 2014, The Economist asked, “Is a university degree a good investment?” While the article concluded that statistics support the proposition that a college education generally makes good financial sense, it also concluded that, “like so much else in economics, [it] boils down to supply and demand.” In other words, a college education does not always make sense from a strictly financial perspective. Indeed, the article notes that a student attending a poorly regarded college should expect to earn less over the course of her career than if she had not attended college at all.

This is one of the reasons that, over the past few years, many have predicted the demise of higher education. Indeed, Nathan Harden prophesied in his groundbreaking piece for The American Interest magazine that:

“In fifty years, if not much sooner, half of the roughly 4,500 colleges and universities now operating in the United States will have ceased to exist. The technology driving this change is already at work, and nothing can stop it. The future looks like this: Access to college-level education will be free for everyone; the residential college campus will become largely obsolete; tens of thousands of professors will lose their jobs; the bachelor’s degree will become increasingly irrelevant; and ten years from now Harvard will enroll ten million students.”

The Imminent Collapse of the Private University

The real story of the American higher-education bubble has little to do with individual students and their debts or employment problems. The most important aspect of the college bubble story—the one we will soon be hearing much more about—concerns the impending financial collapse of numerous private colleges and universities and the likely shrinkage of many public ones. And when that bubble bursts, it will end a system of higher education that, for all of its history, has been steeped in a culture of exclusivity. Then we will see the birth of something entirely new as we accept one central and unavoidable fact: The college classroom is about to go virtual.

Harden’s article, as well as an excellent follow-up piece by Stuart Butler, are well worth reading. Butler’s article, Tottering Ivory Towers, does an excellent job in comparing the disruption that is occurring in higher education to past disruptions, including the transistor to the vacuum tube and the Internet to newspapers. The observations he makes are worth studying, especially if you have an investment in for-profit colleges or are thinking about investing in a company that will seek to upset the higher education status quo.

For example, Butler explains:

“[E]ntrepreneurs with new technologies and new business models typically aim first at customers who have been ignored or underserved by traditional industry leaders. That makes it easy for the current industry leaders to ignore them—a critical mistake—leaving the upstarts to occupy a sector of the market of little interest to industry leaders. Sony went after teenagers, who typically are not in the market for expensive electronic furniture or crystal-clear, concert-quality sound. Online news aggregators first aimed at busy multitaskers sitting at their computers, and at young people with distinct tastes and only casual interest in the news. Their targeted customer initially was not the lawyer in Brooklyn or in London who was interested in reading a three-part, prize-winning article on the Middle East or relaxing with the crossword.”

The Rise of the Online Education

The same has been true in higher education. Early versions of online courses appealed to students who could not easily maintain a regular schedule, or who needed more time to understand the material. Major universities are beginning to introduce more blended, online courses into their regular programs as a tweak to their offerings. Although most see these as an added benefit for their traditional students, rather than as tools to build completely new markets for nontraditional customers. These nontraditional students may include those who can only attend school part-time or those who cannot afford a traditional degree.

Mark Cuban, American businessman and owner of the Dallas Mavericks, also compared higher education to the newspaper industry. This came nearly a year and a half before Butler’s article. Cuban’s blog post appeared 10 days after The Fiscal Times reported that Moody’s gave the entire U.S. higher education sector a negative outlook.

We can already see change in the air. You’ve heard of  MOOCs, right? If not, you are behind the times. Check out these articles from edx.org, mruniversity.com, coursera.org, nytimes.com, and class-central.com to get up to speed.

Recognizing and Accepting Alternatives to Traditional Degrees

Nonetheless, Butler’s prediction, that “the really [b]ig change[s] will happen in America when employers start routinely recognizing alternatives to traditional degrees at traditional, accredited universities [and] [t]hat may not be too long in coming,” is a key insight: what large corporations are up to, in terms of their hiring practice, may be like the proverbial canary in the coal mine.

So, while this piece may help persuade you to shed investments in some of the publicly traded, for-profit colleges that exist, does it help you devise an investment thesis around disruptive educational ventures?

Check out Udacity, the Minerva Project, Southern New Hampshire University’s’ College for America, and Capella University’s Felxpath. That might give you an idea.

In any event, if your kids are still young, it will not be the foregone conclusion you thought it would that they attend college.

Editor’s Note: This is an updated version of an article first published on January 26th, 2015.

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About Jonathan Friedland

Jonathan Friedland views his role as a business lawyer simply: to help clients make money at every opportunity and to protect their interests at every turn. His national practice emphasizes corporate structuring, corporate governance, counseling on day-to-day business affairs, M&A, and corporate restructuring. Most of his clients are privately owned businesses and their owners, particularly…

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