Monthly Archives: April 2013

Cooper Union and the Grandeur of Free

Cooper Union, a small engineering and arts school in the East Village, has made the announcement that they will begin charging tuition to students who have less need for financial assistance. The tuition will go from $0 for all students, to a maximum of $20,000 for an unspecified percentage of students.

This sounds like an inevitable decision for a small university based in the heart of New York. Studios in the area that rented for $400/m twenty years ago are now renting for $2,500. Property taxes are following the same rapid trend. Universities are in a kind of “arms race” to build the best facilities in order to attract the greatest talent. Presuming they’ve got some kind of health plan for their employees, they’ve picked a deadly trifecta of rising costs

The Deadly Trifecta

It is also a catastrophic decision for the appeal of an otherwise small and frugal school. In 2011, Cooper Union had a lower acceptance rate than Yale, Princeton and Brown. They pride themselves on being one of the most diverse of the smaller schools, both culturally and economically. With only 1,000 students and a few old buildings, this is an anomaly that can be greatly attributed to the appeal of “free”.

We are attracted to free in a much greater sense than we are attracted to “very cheap”. Would the line outside Ben & Jerry’s be the same length if they advertised “$.01 Cone Day”? No, it would be much shorter. Cooper Union has done their version of “50% off Cone Day”. A $3 ice cream cone is still not a great deal.

In a battle of market forces versus historic character, I am of the mind that the market wins 95% of the time. The old opera house will eventually come down so that the high rise can be built. So it is in this case. But I don’t think that Cooper Union has considered the magnitude of how this changes their university. In this case, we may be looking at a market decision that will eventually lead to an institution’s demise.

Prediction: Would not be surprised to see them reverse this decision. Why don’t they just put ads on all the chalkboards and pre-load every student’s phone with Facebook Home?

Is Crowdsourcing Irrational?

I’ve been spending a lot of time lately trying to put together a website, and in doing so I’ve thought a lot about the effects of crowdsourcing. When I have a question about how to do something (which is every time I build a new piece of the site), I can always find the answer online in places like Stackoverflow or the WordPress forums. Usually I can find the answer with one Google Search, and very often I find that the entire functionality is pre-built with something like a public Git or a WordPress plug-in. This content is usually high quality, often being verified by other members of the community, and it is always free.
Crowdsourcing is a fascinating thing for an economist, because it is such a large group of seemingly irrational people giving away their assets for free. Is there an economic cost-benefit equation behind crowd-sourcing, or does it break the laws of classic economics in a huge way? Here are three potential explanations, in no particular order:

  1. Crowdsourcing creates a greater eco-system for all involved. Think of “a rising tide lifts all boats” or the incredible amounts of money governments spend trying to recreate a Silicon Valley. A person who shares his work with others will benefit from the improvements of the entire community more than he will suffer from the effects of new competition.
  2. Crowdsourcers are just egotistical fools, so infatuated with getting their intelligence in a public forum that they will disservice themselves to do it. 
  3. Everyone out there is trying to promote themselves and realize long term benefits, much like a blogger who writes for free might do until he can sell his content for fees or ad space.
I would have a hard time believing that any one of the above reasons have given rise to the huge tidal wave of crowdsourcing. I’m either missing reasons, or true, unselfish altruism is alive and well on the forums of Stackoverflow. 

A Back-of-the-Napkin Case for Skipping School – Part 2

The rising cost of college has been well documented and debated over the last decade or so. Usually, these articles end with the obvious, and important question “when will it stop being worth it?” At some point, the cost of attaining an education will outweigh the benefit of receiving an education. I’d like to outline a holistic cost-benefit analysis, but using all back-of-the-napkin calculations.
Let’s start with some numbers. I will presume that a typical college education costs $150,000 after all aid, and that this debt takes 15 years to pay off. (This post is two-part, and part one explains how I got these numbers). I will also ask the web what the lifetime value of a 4-year college education is over a high-school education, and the Wall Street Journal states it is between $300,000 and $1,000,000. Let’s say $500,000, but we could easily redo this experiment with another number.

1. Real Costs and Real Benefits 
So far, we have a straightforward model. The cost of a degree is $150,000 and the benefit is $500,000. Net benefit is $350,000

2. Opportunity cost of earnings while in college
Continuing to be straightforward, we know that while serving 4 years at university, Facebook tells us that our non-university friends are making “straight cash” and buying way better cars than we have. The opportunity cost of those for years of earnings is, let’s say, $30,000 x  4 = $120,000. We’ll round down to $100,000.

3. Opportunity cost of Risk-Taking Ability
Remember that we’ve decided in part 1 that our graduate will be paying for his college education for around 15 years. This means that from the age of 22 – 37, our subject’s risk-taking ability is curtailed by his obligation to his lender. Let’s look at it a few ways:

  • The lifetime cost of a child is estimated at just under $400,000. Our student’s college loans are like having half a child at the age of 22.
  • Taking a simple average, our subject pays $10,000/year in college loans. If he instead invested $10,000 per year at a 5% return, he would end up with $225,000 at the end of 15 years. If he added no more principal after 15 years, he would still have close to $500,000 at the end of 30 years. 
  • According to Business Insider, the odds of startup success are 20%. The average IPO valuation is $250 million. I’ll resist the temptation to do an expected value on that (No I won’t! It’s $50,000,000.) But let’s be realistic and say that your ho-hum lawn care business can be sold for a $1,000,000. Expected value is $200,000. 
Despite these silly examples, debt servicing is the most damaging cost of college that gets sometimes overlooked. It creates a generation of non-innovators. And it increases in a non-linear way as the monetary cost of college increases. For a student paying $20,000 per year at 5% interest, it will take 3 years to pay off $50,000 but 41 years to pay off $350,000.

How we value this cost can be a judgment call. But I will use our third example from above and call it $200,000. For larger debt loads or a subject who has a higher tolerance for risk, I think this number could be much, much higher.

4. The WTHC Cost
Finally, the Who-The-Heck-Cares cost. A rational economic model states that we will work for our entire careers in order to realize as little as a $1 advantage over our non-college brethren. If the average lifetime income of a non-college educated person is $1,000,000, then a rational person should go to college if the average lifetime income after college costs is $1,000,001. As if in the coffin of our now dead college-educated person, he is wearing his alumni ring, holding that $1 and smiling smugly.
But less rational (real) people must ask themselves what the personal, non-monetary costs of giving up your 18-22 years to a university are, and then the cost of structuring your life around paying for those 4 years. Especially with the availability of substitutes which are available now, with free MOOCs or local community courses available for a fraction of the price, and social and networking opportunities like MeetUp.com allowing non-college attendees to be socially “plugged in”. 
Two factors, the rising costs of college and the greater availability of substitutes, have led us to a point where a traditional college education is on the cusp of not being worth it. And with the diverse number of factors that go into it, I can guarantee that many people are already overpaying. The student who does not qualify for financial aid, goes to an expensive school for a traditionally low earning potential career (art history?), and has an appetite for risk is almost definitely overpaying.
I would like to find the brave 18 year old who decides that a traditional education is not worth the rising costs, and this person will build their own curriculum and be better off than his traditionally educated peers. 

A Back-of-the-Napkin Case for Skipping School – Part 1

Let’s do a back of the napkin calculation, and try to figure out
1) how much a typical college graduate can expect to owe when they leave college, 
2) figure out how much a typical graduate can expect to make upon graduating,
3) and then calculate how much he will pay for how long and make a judgement call on the value of his investment. 

(Image Credit: http://elitedaily.com/)

Education at a private university today is nearing $60,000 per year when you include the tuition, fees and housing costs. Luckily (yes, sarcasm) financial aid is also helping to pay for many students. So let’s say an average student manages to scrounge $30,000 per year in assistance from Uncle Sam, the university, and his parents. For a typical four year run, that comes to $120,000 in debt, if we don’t count interest accrual. Let’s say this student worked at a few summer jobs and kept his costs down, and then round that number down to $100,000.

1.) Our student owes $100,000.
Our student is average. He wants to work in marketing, because he likes watching commercials on tv, and he thinks he could make some good ones. He is also lucky, because he lands a job out of school as an analyst. He earns $40,000 per year. (Some quick Googling suggests this is average.) Our student pays taxes and only takes home $32,000 per year. He is also loyal, and will receive standard raises with the same company for the foreseeable future.

2.) Our student takes home $32,000 in his first year, with raises of 5% each year.
Our student has many options at this point. He can pay the minimum payment, he can pay some manageable portion of his income, or he can entirely devote himself to paying off his loans and put the maximum possible percentage of his income towards loans. Our student sees about $2,700 per month on his check, so he decides to pay a manageable $700/month, and he doesn’t change that as his income grows. Without interest, we can calculate that this takes about 12 years. But if we include a 5% interest, we see it takes just over 18 years and our student has paid a total of $150,000. If he increases his payments as quickly as his salary increases, it will take 12 years for a total cost of $137,000. If he is more unfortunate, and can’t find a job or make payments for a year, then only pays the minimum payment (to a minimum of a $200 payment) then he’ll be paying for 33.5 years and a total of $166,000!

3.) our student could easily find himself paying $700/month for the next 18 years for a total cost of $150,000
Now how do we justify this cost of 4 full time years of opportunity cost, then 18 years of diminished earnings? Let’s look to part 2