Making the most of educational investment

Korean college system needs market forces


The following was contributed by Daniel E. Suh, professor of economics and finance, Graduate Program for Technology and Innovation Management, Pohang University of Science and Technology (POSTECH). ― Ed. 

In the first class of my investment course, I always toss out a question to my students: Have they ever made any investments?

For a moment, the class usually remains silent. I tell them I know that they have all, in fact made an investment. Then a student or two understands where I am coming from and provides the answer ― education.

A new school year began this month in Korea, and higher education has been rocked by tuition fee controversies both here in other countries.

In England, college students took to the streets for violent protests against a whopping threefold increase to the 2012 tuition fee caps. Italian students also staged violent protests to vent their anger over the government’s slashing of higher education funding. In the United States, hit by the worst economic downturn since the Great Depression, college tuition fees became an additional sore spot.

Korea is no exception. In early January, the Korean government urged tuition fee freezes in a meeting with 22 notable universities. In 2009, the leaders of university student associations shaved their heads in protest.

As a Korean-American who has lived in America for 35 years, I have observed an interesting contrast between Korea and the U.S. on this issue, with profound social and economic implications in the context of their historical backgrounds.

Who pays and who reaps?

In Korea, college tuition is primarily the responsibility of the parent, not of the student. Take a Feb. 16 Korea Herald article. It begins with the story of a worried housewife whose twins were to start university this month. The mother is quoted saying that her sons’ education would cost her a fortune, which was out of her range. She goes on to say that the couple’s savings and other financial investments for their retirement would not be enough for the enrollment fees.

The article also reports that the mother is “not the only parent having to shoulder ever-soaring university tuition fees.” A Korea Times article (April 15, 2009) reports that the surging costs even threaten “the lives of parents and students,” and suicides of some students and parents are “annual rituals early every year.”

In the U.S., we never read such reports. The primary financial responsibility usually rests with students, not with parents. Most students are expected and are willing to manage college education costs for themselves, their parents standing by if need be. We can find a long list of successful Americans who earned their way up from a tender age, regardless of the wealth of their parents. Among them are Warren Buffett ― widely known for his integrity and wealth ― and John C. Bogle, founder of value-investing in mutual funds, to name a couple.

My search for articles in the New York Times and the Wall Street Journal over the past three months retrieved almost two dozen articles on tuition fee issues. In contrast with Korean newspapers, a Jan. 24 New York Times article reports the burden as being on students, and introduces a sophomore who struggles to make ends meet while worrying about her student loans. She, in deep education debt at the age of 20, juggles her study and a campus job to pay for tuition.

A Jan. 6 New York Times article quotes a mother, who expressed her concern, but in a matter-of-fact way: “I don’t have peace about kids just starting out at 22 with $200,000 in debt for their education.” The article introduces two college students, both of whom work while in college to pay for tuition, as do many American college students.

Social and economic implications

Investment requires a decision on today’s known sacrifice for tomorrow’s unguaranteed reward. College education is a major investment in life. Someone makes sacrifices over four years for unguaranteed rewards for the rest of their life. Among investments one makes in his or her life, however, education probably is the best, because its risks are less uncertain and its rewards are more sure.

The investor who sacrifices should also be the beneficiary of the rewards, as an economic decision is about cost and benefit. Then rational decisions are made for an optimal value of investment or for the maximum difference between benefit and cost. Of course, investment in education is not fully comparable to a profit-oriented investment, and the benefit of investment in education is notoriously difficult to measure.

In America, the student primarily takes financial responsibility for his or her future rewards. An American student generally carries both risk and reward. Being financially responsible for his or her college education, one naturally becomes more serious or motivated to get the appropriate value from it, running the gamut of career decision-making and long-term choices for maximum value: Get a college education or an industry job? If college education, go to a four-year or two-year college? Study in an area in which one is most talented or most interested?

The articles I retrieved from the two American newspapers are colorful in illustrating the alternative choices in the face of the increasing tuition fees. The articles report the search by American students for valuable education choices: whether an elite college is worth the cost; alternative schools in Europe for lower tuition but not lower quality; two-year colleges that burst at the seams due largely to tuition increases; and an unsavory story of students getting married to save on tuition. If displayed on a flyer, the articles look like classified advertisements in a competitive market.

On the other hand, in Korea, parents primarily make financial sacrifices for higher education, while students are the beneficiaries of future rewards. Korean students carry practically no personal financial risk or sacrifice. Naturally, we hear little discussion on alternatives to “ever-increasing” tuition fees. Furthermore, with more than 80 percent of high school graduates heading to colleges in Korea, the demand for college education is not so elastic with regard to tuition fees. When demand for a commodity or service is insensitive to price changes, the consumer bears the brunt of price increases.

A main issue of the debate should be how to introduce market forces so that tuition fees are kept at a minimum while the quality of education is improved, as is often experienced in a competitive commodity market. That is a core issue for a public good which carries externalities. That is also a basic issue on how to make government or monopolistic industry more efficient through a competitive market mechanism.

Options add value. Being more financially responsible, the Korean student would consider more options for optimal value for the most important and best investment in life. With more options under their belts, Korean students would further enhance the value of their time, energy, and financial sacrifices.

By Daniel E. Suh