Dropouts Cost More Than $12 Billion a Year

Critics of American higher education usually focus on the deficiencies of college graduates —for example, their critical thinking isn’t much better than that of college freshmen, or they increasingly end up in relatively low-paying jobs requiring few high-level skills. Yet an indefatigable retired South Carolina college professor, sometime state legislator and relentless purveyor of collegiate statistics, Harry Stille, points out in a new study that a “continuing national scandal” arises because massive amounts of resources are devoted to unsuccessful attempts to educate students who ultimately drop out of college. Dr. Stille measures not the success (graduation) rate, but its inverse -the failure rate, for public institutions. Nationally, almost two out of five college students fail to graduate in six years, using data that corrects for some of the measurement problems arising from student transfers. He calculates what state subsidizes students from state appropriations, estimating that nearly $12 billion in appropriations annually are largely wasted on students who drop out.

Moreover, as Stille observes, that $12 billion is the tip of the iceberg, as other resources are also used educating those drop outs. He calculates the perceived wastage of state appropriations by state, with numbers ranging from a low of $16 million in New Hampshire to a walloping $1.207 billion in Texas. Doing an admittedly back of the envelope calculation, I would estimate that the present value of all of the costs of educating these non-graduates over a generation approaches one trillion dollars.

High Failure Rate in the West

Yet Dr. Stille’s data show that there are enormous state variations in college failures. There are seven states where half or more public university students failed to graduate: Alaska (68.5 percent!), Idaho, Arkansas, New Mexico, Louisiana, Utah, and Nevada. Yet there are another seven states where the failure rate is dramatically lower -less than 30 percent: Iowa, Virginia, Delaware, Washington, New Hampshire, Pennsylvania, and New Jersey. What explains these huge interstate variations? Why do about 45 percent of students fail to graduate New York and Texas, but one-third or less in California, Illinois or New Jersey

Compare the high failure (over 50 percent) and “low” failure (less than 30 percent) states. All of the high failure states are west of the Mississippi River; most of the “low” failure states border the Atlantic Ocean. But why is that? What is different about mostly western states with high failure rates compared with mostly eastern states (exceptions: Iowa and Washington) with relatively low rates of non-completion?

The high failure states are low tuition states, while the low failure states charge high tuition fees. Looking at 2013-14 College Board data on average public four-year college in-state tuition fees, in the seven high failure states, the non-weighted average tuition was $6,325 a year, while it was an extraordinary 82 percent higher –$11,494 annually–in the states with low failures. The lowest tuition state in the low failure group, Iowa, had higher tuition fees than the most costly of the high failure states (Arkansas).

This is consistent with a basic economic behavioral principle. When something is expensive, people use it carefully–the financial cost of failure is too high. When something is relatively cheap, incentives to use it prudently are reduced -the financial costs of dropping out are lowered. I have long believed that is why relatively higher priced private colleges have significantly lower dropout rates than public institutions, even after controlling for such other factors as admissions selectivity.

Why Accept Unprepared Students?

That said, I also agree that Harry Stille is asking the right question: “why do senior [four year] institutions enroll or need… poorly prepared students in the first place?” The answer: it is often financially advantageous to schools to admit them. Of the nearly 1.8 million taking the ACT’s college-entrance test in 2013, barely one-fourth were considered ready for college in all areas examined (Reading, English, Math, and Science). Colleges admit students knowing full well that many of them have a high probability of failing.

What to do to stop this? Here are some ideas:

  • Make colleges have some skin in the game with respect to students defaulting on loans because they failed to complete their degree and get a good job;
  • make schools shoulder some of the loss associated with the default;
  • Tie state school funding to the number of students graduating, not the number enrolled;
  • Set minimum admission standards (Stille suggests 910 SAT scores or a 19 ACT score); alternatively, tie state funding partially to student quality, rewarding schools who are selective in their admission practices, thereby reducing dropouts;
  • Force low-performing high-school students to attend community college, allowing them to transfer to four-year schools only after a year or two of good academic performance;
  • Pay college presidents largely based on student performance indicators -graduation rates, average postgraduate earnings, retention rates, etc.
  • Move to the relatively successful model of high tuition fees and modest state subsidies.

These ideas all have problems, the largest of which is that some of them incentivize schools to engage in even greater grade inflation than at the present. Quality control standards need to be incorporated into any new policies. All in all, however, our efforts to provide “college for all” have been accompanied by high levels of resource waste, academic failure, and student disillusionment accompanying financial pressures (high student loan debt). This must change.


  • Richard Vedder

    Richard Vedder is Distinguished Professor of Economics Emeritus at Ohio University, a Senior Fellow at the Independent Institute, and a board member of the National Association of Scholars.

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