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How Education Arbitrage Is Setting Our Students — and the Economy — Up for Failure

written by: •edited by: Carly Stockwell•updated: 11/22/2015

Let’s be honest — everyone knows someone who had trouble finding a job in his or her chosen industry following college graduation. Plenty of recent grads have had trouble finding a decent-paying job at all.

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    Today, 48 percent of employed U.S. college graduates have jobs that require less than a four-year degree. And this isn’t because these graduates aren’t looking hard enough or are unwilling to relocate for the right job. It’s because there’s a huge imbalance between the number of university graduates and the number of jobs waiting for them.

    This systemic breakdown is known as education arbitrage. It not only affects our job market and national economy today, but it can also cause a range of troubles for generations to come.

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    The Reality of Education Arbitrage

    The term “education arbitrage" means different things to different people. For employers, it refers to the inefficiency in value between higher education and work productivity in the marketplace. But for the student, it’s about the disparity between higher education and earning potential.

    Most recently, education arbitrage has been used to describe the imbalance between supply and demand in our labor markets. There are more highly educated workers in the market than jobs available for them, which is why we now have more college graduates working in retail than we have soldiers in the U.S. Army.

    So how did we get to this point? Well, let’s just say there’s no one sector to blame.

    Government-sponsored fixed-rate student loans don’t allow for risk-based pricing, which could correct the fluctuating market. So while these loans are helping more students pay for college today than ever before, they’re also exacerbating the imbalance in the job market. As a result, the value of college degrees has decreased while college tuition has nearly quadrupled over the past 35 years.

    Without risk-based pricing on loans, colleges and their expansive offerings are all equal in the eyes of loan lenders and receivers. But that’s just not the reality. An art graduate won’t earn the same income as a finance graduate, just as a graduate from Wichita State University isn’t likely to earn the same income as a graduate from Harvard University with the same degree. Yet all of these graduates will face the same loan payments and interest rates, regardless of their job prospects or earning potential.

    In 2013, our nation’s student loans topped out at over $1 trillion, and the delinquency level on those loans reached 11.5 percent, the highest among all forms of credit. Yet there’s no structure in place for incentivizing students to match their institutions and degrees to the marketplace.

    As a result, more and more college graduates are struggling to pay off their student loans on time, not to mention buy houses, purchase cars, or make investments for the future. If we don’t take action to correct this imbalance soon, the negative effects of arbitrage will plague us for decades or more.

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    How to Stop the Effects of Education Arbitrage

    Higher education and our off-balance job market won’t change easily. But if major stakeholders address how they’ve contributed to the problem and take steps to mend the broken system, we may have a chance. Here are areas in which educators can get involved:

    • Contact government decision makers. Educators have a strong voice and should be pushing legislators for sound policy that might not be the most popular but is in future students’ best interest. The government must begin floating the interest rate for student loans. If loans are dynamically priced based on their return on investment, it will allow the free market to level out with supply and demand in the labor markets. Lower-quality institutions and degrees with less job demand will either diminish in supply or be eliminated completely.
    • Encourage discussions about funding. Educators and administrators don’t always see eye to eye on issues, but educators’ thoughts and ideas are crucial to the business of education. Institutions need to be funded based on graduate job placement and earning potential — not graduation rates. That way, these institutions will be forced to stand by the quality of their product, just like any private industry. This will encourage schools to better emphasize and financially support the programs that produce the best job candidates.
    • Provide guidance to families. Educators are often the guiding voice for students’ and parents’ decisions. Through this impact, educators can inspire critical discussions about how and why students pick certain institutions and degrees. Students and parents must better educate themselves on the institutions and degrees that offer the best return on investment (tools like PayScale can help with this process). While it’s a nice idea for kids to freely choose where they want to attend college and what they want to study, those opinions may change when they sit down and truly look at the facts and figures.
    • Strengthen direct communication with employers. Educators are building the future workforce. It’s important for employers to be engaged with educators to match education to the labor markets. In the future, employers should put more effort toward actively reaching out to educators to discuss the direction in which labor markets are heading. Educators and employers can evaluate how the future of education needs to change to accommodate the changes.
    • Reevaluate measurement methodology. Educators need to break the old mold of education testing and measurement; it is highly inaccurate in gauging whether someone will be an effective worker. It doesn’t account for qualities such as creativity, ingenuity, confidence, and values. These are major components that the private sector looks at when assessing human capital.

    Employers need to begin hiring workers based on indicators of high human productivity and output — not just education level. This will require employers to put more effort into training, but it will give all qualified applicants, regardless of their education, a fair chance at the position. This move will also push back on the overproduction from universities and change the social thinking that a four-year degree automatically equates to a better or more qualified candidate.

    When it comes to higher education, more isn’t always better. We have to act to correct education arbitrage at every level before it causes irreparable damage to our economy and future education system.

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    About the Author: Dusty Wunderlich is the founder and CEO of Bristlecone Holdings, a high-growth network of consumer and business-to-business finance platforms and financial technologies. Its mission is to democratize the world of finance for the better. Dusty is a current recipient of the Twenty under 40 Awards in Reno, Nevada, and is a member of the Young Entrepreneur Council.