How Could We Use a Price-to-Earnings Premium in Higher Ed?

Students: Using a PEP to Inform College Choice

Each year, nearly 20 million students attend an institution of higher education, most with the primary purpose of increasing their employability and gaining long-term financial security. While there are also many intangible benefits that students can gain by attending an institution — better informed and engaged citizenship, social networks, and personal development, to name a few — there is a widespread belief that students should at least be able to earn enough to pay down their college costs in a reasonable amount of time after they complete their credential. If a student is considering a handful of options of where they want to go to school, a PEP can help clarify which institutions are more likely to offer a better economic investment.

Institutions: Using a PEP to Boost Overall Performance

Just as students can use a PEP to better inform their college choice, administrators can also use the metric to evaluate the effectiveness of their institution and target resources toward programs that show good outcomes for those who enroll. While an institution-level PEP can provide administrators with a birds-eye view of how they are doing for their students economically compared to similar institutions, a program-level PEP can help identify which fields of study either cost too much, lead to insufficient earnings, or both. The US Department of Education (Department) could produce this information for institutions — building on its recent release of program-level data — or administrators could gather it by collecting employment information from former students.

Lawmakers: Using PEP to Inform Consumers and Target Dollars to Institutions that Serve Students Well

Over the last decade, lawmakers have considered better ways to ensure that federally funded institutions and higher education programs deliver value to the students they enroll. Currently, the main federal law in place to try to provide some protection for consumers — known as the Cohort Default Rate — is easily gamed and hardly affects any institutions. The other main rule — known as Gainful Employment — was put in place in 2014 to ensure that career education programs leave their graduates earning enough to pay down their educational debt. Yet, the Gainful Employment rule has since been rescinded and re-upping it is seen by many as a political non-starter. This leaves a gaping hole in measuring return on investment that a PEP could help fill, either through additional measures of transparency or by using it directly to more efficiently target federal dollars toward effective college programs and institutions that deliver good outcomes for their students.

Conclusion

Practically, an institution should provide its students with the ability to pay down the cost that they paid to earn their credential within a reasonable amount of time. Weighing costs and future earnings in a single measure — as the PEP does — provides a way to evaluate which institutions provide students (and taxpayers) a strong bang for their educational buck. Just as Wall Street investors use a price-to-earnings metric to judge the value of stocks, students should similarly be able to assess their postsecondary options based on their likely return, and institutions should use the PEP to provide better offerings to their students. Likewise, lawmakers should also be able to assess how well institutions serve their students before allowing billions in federal dollars to flow to schools that may provide limited economic returns for those who enroll.

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