The Impact of Crushing Student Debt on American Society: Causes, Consequences, and Solutions:

Changing Higher Education Podcast 164 with Host Dr. Drumm McNaughton and Guest David Linton

Transcript: Changing Higher Ed Podcast 164 with Host Dr. Drumm McNaughton and Guest David Linton

Welcome to Changing Higher Ed, a podcast dedicated to helping higher education leaders improve their institutions, with your host, Dr. Drumm McNaughton, CEO of the Change Leader, a consultancy that helps higher ed leaders holistically transform their institutions. Learn more at changinghighered.com. And now, here’s your host, Drumm McNaughton.

Drumm McNaughton  00:31

Thank you, David.

Our guest today is David Linton, author, and economist. David has worked as a director of portfolio construction manager of research at Pacific Life and a vice president of Portfolio Manager at PIMCO, one of the top investment firms in the world. David is no stranger to higher ed. He’s taught at the University of Southern California’s Marshall School of Business and is about to start a new gig teaching at UT Austin.

David has written two books. Foundations of Investment Management has become a mainstay among aspiring professionals who want to bridge the gap between an academic understanding and practical application of investment management strategies. And his latest is Crushed: How Student Debt Has Impaired a Generation and What to Do About It. This book examines the problems with student loan debt. David joins us today to talk about what universities must do to graduate students on time career ready with little or no debt. David, welcome to the show.

David Linton  01:34

Yeah. Thank you, Drumm, for having me.

Drumm McNaughton  01:36

My pleasure. I’m excited to have this conversation with you. This is fortuitous. You have a book coming out called Crushed: How Student Debt Has Impaired a Generation and What to Do About It. But before we get into that, tell us a little about you. Our audience wants to know who you are and why you wrote this book.

David Linton  02:01

Thank you very much. That’s a great question. I am an economist and investment manager. My background is in asset management. I currently work for a large multinational firm managing their cash and investments. Before that, I worked at PIMCO and Pacific Life in a portfolio management role.

But I was drawn into this topic, field, and academia more generally four years ago. I wrote my first book, Foundations of Investment Management. The idea of that book was to bridge the gap between formal education and what people in my capacity should know the first day they join the firm. With that, I was able to start teaching as well. So I spent time teaching an evening investments class to MBA students at the University of Southern California (USC). I have since then moved to Austin and will teach a similar course at UT Austin’s McCombs School of Business.

The impetus to write the book on student debt, in particular, and post-secondary education more broadly, came when I was onboarding as a faculty member at USC. I had gone to USC as an undergrad 20 or so years earlier. I had thought the campus was beautiful and that the school and education were wonderful then. But every change they had made since then was just amazing. The buildings are great. The lawn was even better manicured. Every facility was top-notch. The price was expensive then, and now it’s really expensive.

So I asked a lot of administrators, “Why is this going on? Why is it so expensive? Why is this so nice?” What I discovered was that it’s really not unique to USC at all. It’s indicative of every flagship school and almost every other post-secondary school in the nation. Thousands of institutions all feel this pressure to have not just better education but a better experience. But I couldn’t get these questions out of my head. Why is this so expensive? Why is there so much debt? What are the motivations? Is this optimal? And it was kind of through the lens of an economist that I tried to answer all these questions. Around the same time, I overheard a podcast with Elon Musk, and he was joking about how he designed the Model S as the car he wanted to drive and not for other people. So I wrote the book Crushed as a book that I’d want to read. It answers all my questions about what’s going on and why.

Drumm McNaughton  04:47

That’s interesting. Going back to your experience at USC, not only teaching but as an undergraduate, did you find the education was any better when you came back?

David Linton  05:01

The quality of faculty is similar, maybe a little bit better in terms of the objective metrics, like years of tenure, experience, or papers published. The classrooms are nicer. They’re brighter. They’re newer. There’s more technology available in them. The students are similar and maybe a little better. Their incoming SATs and GPAs are even higher. But in terms of the skills that people leave with, they’re probably pretty similar.

Drumm McNaughton  05:32

Okay. It’s interesting because we have $1.7 trillion with a “T” in student debt, which would have been a little less except for the Supreme Court. Oh, well. We’ll blame SCOTUS for all the problems.

Has the cost of college gone up that much over what it was 20 or 30 years ago?

David Linton  06:02

That’s a great place to start. That was the first thing I started looking into when I was researching my book. The amount of student debt is a function of how much people borrow, and people borrow the difference between what they have to pay and what they can afford. Looking at the data in 1969, the cost of public college education was $1,545, 19% of the median household income.

Drumm McNaughton  06:32

Was that per year or total?

David Linton  06:35

Per year.

David Linton  06:36

In 2020, it was just under $29,000, or 42% of the median household income. That’s about two and a half times more expensive as a function of household income. On an inflation-adjusted metric from 1969 to 2020, it’s between three and a half and four times as expensive, which means that the cost of four years in 1969 was basically the cost of one year in 2020.

When you put it in that context, it makes perfect sense that people are taking out debt because, with the exception of maybe the top 5% of income earners in America, it’s outside the range of affordability.

Drumm McNaughton  07:15

Now, is this cost per student? Or is this cost to students? There’s a difference.

David Linton  07:23

It’s both. The cost per student has gone up a lot. But the cost for each student that comes in has gone up a lot as well. That’s driven by the breadth of the increase in services and things that universities now offer. Whereas in the past, the primary focus was student instruction. The secondary focus was admin. Now, we have nicer campus facilities, larger research departments, public services for the community, and other ancillary services. So if you think about what college was in 1800, it was very bare bones. There was a dorm, library, lecture hall, and an admin building. That was basically it. There were four or five buildings.

Drumm McNaughton  08:12

Well, we also needed stables for the horses. Come on!

David Linton  08:17

That’s a good point. Yeah.

Drumm McNaughton  08:21

We didn’t have to have multiple parking lots for automobiles. There was one stable.

David Linton  08:27

I’m sure student work was probably on the adjacent farm that you could go to.

Drumm McNaughton  08:34

Absolutely. Why do you think we have an agrarian calendar?

David Linton  08:39

It all comes together so nicely. The services offered to students have really increased the cost to the students. I’m not trying to cast any judgment or say it’s right or wrong or good or bad. It’s just simply the reality of the situation. The cost to maintain the facilities at your typical flagship universities, in an order of magnitude that’s higher than it was 20, 30, or 50 years ago, and the cost of student instruction has gone up surprisingly, despite the technology and ability. I think it’s a function of class sizes generally being smaller, particularly since the 1970s.

Administrative expenses have gone up as well. There are more administrators per student. And then lastly, there are more services available, particularly medical and, more recently, mental health services. Again, that’s not a judgment call. I’m not saying whether that’s good or bad or if we should or shouldn’t offer those. It’s simply from looking at the data on what the drivers of these increased costs are. This is what I discovered.

Drumm McNaughton  09:41

Also, campuses, especially flagships, are small cities, and the president is the mayor of the city. He has a city council, which is his board of directors. You have all these things. I’m sure we’ll dig into it, but I also have to wonder if part of it on the cost side has to do with public support of higher education. The amount of support states used to give was anywhere from 50% to 70%. Now, if you’re getting 12%, you’re doing really, really well. The other piece is the median income for folks paying for college. It hasn’t grown at the same level as one would expect, especially over the last 30 years. How do those factors play in?

David Linton  10:40

I think what you are initially speaking to is the declining public support hypothesis for the cause of tuition inflation. In 2017, Professor Douglas Webber of Temple University tested that hypothesis. What he found was that roughly for every $1,000 in state budget cuts, students pay an extra $300 or $315 more per year in tuition and fees. So there’s definitely a direct correlation. So whenever budgets are cut, tuition does go up. But it’s only by about 30%, which means the other 70% is coming from something else.

And it only explains part of it. There are other theories at different ends of the spectrum, like the Bennett Hypothesis from Bill Bennet, U.S. Education Secretary under Reagan. I think he’s still at Fox News. He penned an op-ed in The New York Times.

Drumm McNaughton 

He’s pretty old at this point. Sorry, William.

David Linton 

In 2015, the Federal Reserve of New York released a paper, “Credit Supply and the Rise of College Tuition.” The data seemed to suggest that it was largely correct. Colleges increased the sticker price by about $0.60 and reduced grants by about $0.20 for every $1 of incremental student loans that were made available. We can combine the Bennett Hypothesis and the Client-Public Support Hypothesis, and we get a more complete picture. But that’s still kind of an academic explanation. These are datasets that you’re going to tease out.

What I really think is that, from speaking to administrators, presidents, and others, the story that comes out is that they care about things like rankings and performing well vis-a-vie their competitors. They know what colleges the other students are applying to, and they care about having a similar or better college experience. And that’s always been top of mind. They want to have not just a higher GPA and LSAT for incoming classes, but they also want the students to win. They’re there to have a great experience, with beautiful facilities, great lectures, fantastic teachers, good athletics, more medical services, and tasty food. We joke about this. It has created something of an arms race between colleges. They look at each other and want to be as good or better than the colleges on either side of them. Again, it’s not a judgment call. It’s not something that’s good or bad. But it is certainly a big motivation that’s contributed to increasing tuition prices.

Drumm McNaughton  13:16

You also hear plenty of stories about lazy rivers, climbing walls, etc.

David Linton  13:25

Yeah. It’s funny. We didn’t talk about this before the call, but I had the picture of the lazy river in my book.

This is a true story. I was writing the chapter and had a picture of the lazy river. My then-eight-year-old daughter walks in and asks, “Daddy, what are you doing?” I’m like, “I’m writing about the cost of college.” And she says, “What’s that?” And I said, “Oh, that’s LSU.” Then she’s like, “It just says LSU.” And I said, “No, that’s a lazy river.” And then she says, “Oh my god. Can I go to LSU when I go to college?” And I was like, “Wow. This was really effective. Ten years from now, my daughter is going to apply to LSU simply because of that lazy river.”

Drumm McNaughton  14:02

She’s got the subconscious memory of it.

David Linton  14:05

Sure. I’ll be honest. If I were a kid, I’d want to go to LSU or another school with a lazy river. That would be awesome. I can’t blame them.

Drumm McNaughton  14:13

If somebody from LSU is listening to this podcast, you have a student coming up. It’s 2023. So a prospect for the class of ’37.

So public support has dropped. There’s the arms race. There are beautiful campuses and a lot of other things as well. You have more regulations, board administrators, etc. There are a lot of things I know that could be done about this. But one of the things we chatted about is the purpose of higher ed. Before we came on the air, you mentioned how few institutions think about cutting costs. I was more than a little shocked.

David Linton  15:08

I spoke with a number of administrators about their budgeting processes, what they look to do, and how they look to accomplish it. Regularly, some of the things they focus on more publicly is, in three or five years, what departments they will expand or what new faculty they’ll hire, or constructing a new building once a year or every other year.

I always ask the question, how important is cost rationalization? Is one of your top five priorities delivering the same quality education or same quality experience but with 2% fewer resources every single year? And I’ve never had anybody say, “Yes, that’s very important to us.” It’s more of a “No, we have a budgeting process, and each department has to fit within their budget. There’s a back and forth.” But I’ve never seen or heard of any president providing a mandate that says every department has to have the exact same quality service at inflation minus 2% for the next five or ten years. It’s an incremental approach, which is why I like it. But it’s also something I’ve seen in corporate America.

I’m sure corporations and businesses outside, people and managers are tasked with how to do more with less. You have ten employees? Can you have nine? You have eight software providers? Can you do the same with six? You’re proposing this project? Can we defer it for three years and see if we need to revisit it? I think if that mandate came from the top to maintain the quality and each year get incrementally more efficient, then it can be implemented.

I had a number of conversations with John Katzman, who founded Princeton Review. He’s on the record for saying he thinks up to a third of overall expenses in universities could eventually be cut without damaging the education experience. Rather than taking a dramatic approach of just jettisoning departments, you can be very specific about finding out if a campus can run a building more efficiently. It’s at 30% capacity. Can we increase it to 50%? These dorms are vacant for four months of the year. Can we do something with that facility? This building needs maintenance. But can we defer it for five years because we’re anticipating replacing the building altogether?

Drumm McNaughton  17:35

Oh, deferred maintenance. There are billions of dollars in deferred maintenance. John can take that one off the table right now. People are already doing that one.

David Linton  17:47

Right. The idea of the Six Sigma approach is that you get incrementally better constantly over a very long period of time. The other approach that I think presidents would at the least maybe consider is this. There are a few specific examples of schools saying they’re not going to raise tuition or we’re going to cut costs. But the big fear for presidents is that they put themselves at a competitive disadvantage. Now, again, not right or wrong, they care a lot about rankings and how they compare against their competitors. If one school says they’re going to maintain or cut tuition and all their competing schools they look most closely to are not, they’re going to be fearful of falling behind, and probably for very good reason.

It would be much more palatable if a broader group like all Pac-12 schools or all Midwest liberal arts schools that happen to compete with one another collectively announced they are not going to raise tuition by more than inflation each year for the next ten years so that it goes back to the school departments to figure out how to do more with less every single year. I could be wrong, but if that becomes the norm, it will help schools regain the initiative and take back over the broader discussion.

You can sense the winds in the nation that there’s more and more frustration directed towards post-secondary education, right or wrong. But if the schools start controlling the narrative by announcing these voluntary caps or raises of tuition, I think it would provide them with an opportunity to gradually make changes without any dramatic policy change, whether it’s jettisoning tuition, debt, departments, or anything like that. There would be a lot of benefits to that kind of leadership.

Drumm McNaughton  19:52

That makes a lot of sense. One of the challenges we’ve seen is that there are many different things going on. There are policy decisions that need to be made, institutional decisions. But the purpose of higher ed is changing, at least from a perception perspective. It used to be for the public good, creating good citizens, etc. The main focus now is career readiness. We need to look at it differently, don’t we?

David Linton  20:25

That’s a really good point. Looking at history, there’s been this pendulum swinging back and forth. Are colleges meant to train clergy? Are they to help farmers grow more tobacco? The focus has changed every 50 or so years. Going back to the ’60s and ’70s, they wanted more mathematicians and engineers for a space race. But that led to a dramatic increase in demand and price. Now the focus seems to be, again, on the financial side. Since it’s so expensive and with the incremental earnings of certain degrees, there’s a focus on a potential negative rate of return on the cost of certain educational pathways. Hopefully, if the overall cost of tuition and education falls, we can encourage people to better themselves and society and think about jobs as secondary or as a tertiary consideration.  But with this financial commitment, career readiness is top of mind for most households.

Drumm McNaughton  21:58

So we’re looking at institutions maximizing the number of people who graduate on time, are ready to join the workforce, can live a productive life, and can repay their debts with minimal problems.  Now, do I sound like an economist?

David Linton  22:25

I think you do. The last component of repaying debt with minimum concern speaks to all sorts of benefits to both the individual and society. To go off on a bit of a tangent, there’s a growing body of research on what student debt actually does to young adults. I wrote a whole chapter about that, trying to summarize this body of literature and its adverse consequences. In more ways than you’d otherwise think, people with student debt have lower GPAs, more mental health issues both in college and when they graduate, are less likely to buy a house, get married later, have children later, are less likely to start a business, are more likely to go into a high-paying job they otherwise don’t want, and are less entrepreneurial.

As a result of this, society is hurt when you give people in their early mid-20s $30,000, $40,000, or $50,000 in debt. So when we think about removing that impediment or that burden on young adults, it helps both society as well as the individual. That’s why it’s such an important topic. But it doesn’t have to be dramatic. There are ways presidents can focus on that.

A couple of years ago, US News & World Reports added graduation indebtedness to one of its criteria for rankings. That’s great. It’s 5% or, at least, the last time I looked. Hopefully, it can increase that consideration. That will help schools, again, reprioritize getting students through with minimum debt. It’s a public good, in my opinion.

Drumm McNaughton  24:14

Yeah. Many of the presidents I speak to, especially on the podcast, say it is becoming increasingly top of mind for them to figure out how they can hold the line on student debt. If we can reduce it, we can get more graduates. I had a conversation with someone today who prides themselves on getting students graduated on time with little or no student debt. Their placement rate for jobs within six months of graduation is 92%. That’s fabulous. We’ll be doing a podcast on that here in a few weeks. So tune in, folks.

David Linton  25:01

That’s excellent. You have one listener, so I can take a mental note of where I should send my three kids. That’s important.

Drumm McNaughton  25:07

Absolutely. I tend to like big picture policy kind of things. There’s not much from a university perspective we can do with the policy other than voting. People respond to incentives. So what is the incentive structure that a president should have besides wanting to do good? Other industries have had the same thing from a policy perspective. You have the CAFE standards, etc. What can boards do? What can presidents do? This leads us to the last question.

One of the last questions I always ask is, what are three takeaways for university presidents and boards? But, frankly, what can boards and presidents do to hold the line on tuition? Why is it important for them? Why is it important for their students?

David Linton  26:09

I think the adage that what is measured is managed is very applicable here. Do colleges even know the average debt per student when they graduate and the degree to which they’ve been able to pay it off in five or ten years? If the answer is no, the first step is to figure out exactly what that is. If you’re on the board of the university, establish the objective. If you discover that 30%, 40%, or 50% of students ten years out are unable to repay their debt, one objective can be for the president to somehow improve that. That can be a very hard objective to reach. But once it’s measured, they can look into the data.

Are there certain types of students that are unable to pay? Are there specific academic thresholds that make it unlikely for students to graduate or more likely for students to take on more debt if they don’t cross them? Are there certain areas of study where students are more or less successful when it comes to repaying their debts or not having debt? Then establish a clear objective. For example, within five years, your delinquency rate of student debt will drop from 20% to 10%, or your graduation rate will increase from 70% to 80%. Or the amount of debt upon graduation will decrease from $30k to $20k. Of course, if the board is able to set these types of objectives, they will be very difficult to reach. But, at least, they will rise to the top of a hierarchy of priorities that presidents and their administrators and department heads will have to cope with. So it starts at the top. Establish what the real objective is and how you’re going to measure that. Then let the president and administrators figure out how they can best achieve that.

Drumm McNaughton  28:03

That is a fabulous suggestion, especially in light of what I’ve heard from multiple guests recently about students not being willing to go to college because they’re unwilling to take on debt. We’re seeing this more and more with Gen Z folks. They’ll go, “Well, I’m not willing to take on $30,000 or $40,000 worth of debt. So I just won’t do it. They don’t stop and think about the benefits of a college education. They’re thinking more short-term than long-term. Even so, to grow enrollment, you must have these things top of mind. Students really care about it.

David Linton  28:54

Yeah, exactly. Of the Gen-Zers I have spoken with, there are more and more of them 5 or 10 years older than them who have had adverse outcomes. They didn’t finish their degree, they went to a for-profit school, they stopped out and are now $20,000 in debt, and they don’t have a better job. There are many ways that people get discouraged. Changing the narrative and being able to demonstrate objectively is important.

I remember when my parents were taking me to college, and they asked, “What’s the dollar value? Is that $25,000 a year really worth that $25,000? That was a nontrivial percentage of their salary. Now it’s even higher. So the answer has to be, “Yes, here’s the data. Here are the numbers. Here’s why we think your student will be able to take out x amount and repay that within y years, and here’s the evidence of the people who do it. And, oh, by the way, if they study this and take this minor, they’ve got an even better chance of repaying it in full and on time. We care about that and will follow up with the child in the future to ensure they have the tools they need. We care that everybody is better off, not just once they’re in but once they’re out. We’re making that an objective, from the board to the president, to the department heads, to the professors.” That can go a long way in improving outcomes.

Drumm McNaughton  30:17

You’re absolutely right. So one takeaway is the board setting very big, audacious goals, as far as addressing graduates with debt, etc. What are two more takeaways?

David Linton  30:39

Most schools have an annual or semi-annual process whereby they look at objectives. They look at big, broad changes they’re going to do down the pipe, whether it’s new facilities for staff or a department. Then they rank them in order. Cost-cutting should be in the top five. It doesn’t have to be dramatic, either. It can be to freeze, maintain, or have budgets increase at inflation, minus 1%, every single year and then force the department heads to figure out a way to work within that framework. It’s the Six Sigma approach.

As part of that, I am sure that any school in the business department may appreciate that because, suddenly, every professor that’s not in the business department will want to see what Excel models with the NPV calculations they can have for them to use that framework to put forward ideas. This will allow them to say, “Yes, university president, we would like to build this building. And here are the assumptions to make sure it has a positive internal rate of return.” If you can’t demonstrate that, then we’re not going to build it. And we’re going to do more, with just slightly less every single year. That should be burned into the minds of all the people that pull the purse strings.

Drumm McNaughton  31:55

Okay, good. Next one.

David Linton  31:57

The last one is to bring in a consultant or faculty to figure out ways that you can increase revenue to the school without raising tuition. It’s not just about cutting costs. Tuition can be anywhere from 15% to 50% of the school’s budget. Tuition is a small amount. Where do they get other resources? Are they selling their services to other areas? Are they more efficiently utilizing their facilities and campuses? Are they reaching out to the public or the community? Are they having camps on campus? Are they utilizing their research? Are they partnering with other businesses? Are they ensuring that there are other revenue streams whereby the school can contract and go along the way? If you have an engineering department, how many engineering companies are you working with on research and development or other projects and contracts? You have brilliant professors and students. There are certainly synergies to be had and ways to be creative.

Drumm McNaughton  33:02

I remember working with one client in Saudi Arabia who had a consulting department, and they wanted me to go over and train faculty on how to be consultants.

We have come to the end of our time, David. Thank you so much. What’s next for you?

David Linton  33:26

I appreciate that. I have the book coming out in just a couple of weeks, and then I have my fall class. That will take me through December. I also have three young kids. So I’m pretty busy. I have difficulty thinking out further than six months, but I hope to be back. I’m excited. I’ve listened to your show in the past. I appreciate the opportunity, and I hope your listeners enjoyed this.

Drumm McNaughton  33:50

I am sure they will. David, thank you so much for being on the show. We greatly appreciate your thoughts and your time.

Thanks for listening today, and I’d like to give a special thank you to our guest, David Linton, for sharing the insights he learned about higher education and student debt while researching and writing his newest book, Crushed.

Tune in next week for a real treat as we welcome Dr. Sethuraman Panchanathan, director of the National Science Foundation (NSF), to the show. Panchanathan will share the latest news from NSF, including a number of new programs designed to help smaller universities land important research contracts that will help them collaborate on research with like-minded institutions.

Thanks for listening. See you next week.

34:43

Changing Higher Ed is a production of the Change Leader, a consultancy committed to transforming higher ed institutions. Find more information about this topic and show notes on this episode at changinghighered.com. If you’ve enjoyed this podcast, please subscribe to the show. We would also value your honest rating and review. Email any questions, comments, or recommendations for topics or guests to podcast@changinghighered.com. Changing Higher Ed is produced and hosted by Dr. Drumm McNaughton. Post-production is by David L. White.