To raise, or not to raise.

(This is a long post about my views on an important issue in Israel. I apologize to those who were waiting for my witty post about being MacGyver in SF, or my guide to handling sleazy salesmen. These are yet to come).

‘Tis this time of year in Israel, when the air cools (we wish), autumn shows its signs on the tree leafs, the government decides to increase university tuition and the student unions threaten to strike. Lately, a university strike in an academic year is almost as sure as pita bread in San Francisco being thin and stale.

If you know me, you would know I used to be a firm supporter in raising tuition in Israel. I think what’s going on with university funding is absurd.

As an example, a typical business school professor in Tel-Aviv University’s Recanati school makes roughly NIS 17K a month (roughly $5K for the dollar-inclined), which is two thousand dollars (a month!) less than the typical 28-year old software engineer he teaches on how to stop being an engineer and become a “manager” with an MBA. No wonder Israel is not only a lead exporter of high-tech to the US, but also of leading professors.

So, why did I say “used to be”?

Well, like someone who presumes to be able to model and calculate everything, I wanted to show hard evidence that going to university in Israel is cheap. So much cheap, I thought, that even doubling the tuition would still be OK.

I once read a paper article written by some stupid (couldn’t find a better word) student union member that claimed that being a student in Israel costs NIS 100K a year (~$30K). He naturally included rent, food and transportation into the calculation. Not only this, but he also included a new computer. Yes, every year.

To set things clear, rent, food and transportation are not student costs. A person has to live somewhere, eat and go to other places even if he not a student. Only tuition, book costs and other specific university costs are real expenses…

So I opened a beloved Excel worksheet and started crunching numbers. I was basically trying to see what return (as in interest return on capital invested) does getting a degree in Israel have. This is typically showed using an IRR (Internal Rate of Return) calculation.

As an example, if I invest NIS 100 this year in something, and get back NIS 110 in the next year, this would be 10% IRR, since I received 10% interest on my investment in 1 year.

What does this have to do with an academic degree?

Well, getting a degree has two parts:

1. Costs, costs and more costs - You go to university, you pay tuition and other expenses, and you also do not work (or so students claim), so you’re “losing” the money you do not make by not working, which is called an alternative cost. This alternative cost stuff always reminds me of Chekhov’s “Rothschild’s Fiddle” and putting down the cost of coffins as loses, even if the coffin is for your wife.
2. Money, money and more money – Supposedly, a person with a bachelor’s degree makes more money than a person without does. This is the return on the investment, until a person stops working (at the age of 67 in Israel).

Now, suppose you took a loan and decided to invest it. You could invest it in the stock market and get 8%-9% a year on average, or you could go to school, spend 3+ years there and get the investment back through the salary increase.

This means that the increase in salary of an undergrad in Israel should result in an IRR of at least 9% to make it worthwhile to go studying.

But lo and behold, it doesn’t.

Here’s a table that summarizes 4 types of people: Aya, Boaz, Carmit and David.

1. Aya graduated from high school in Israel after 12 years and began working at the age of 22 for the average salary of a non-academic.
2. Boaz graduated with a 3-year undergrad (not law, engineering or a master’s) and started working at the age of 25 for the average salary of an academic in Israel.
3. Carmit graduated with a 4-year degree, or completed a master’s degree, and started working at the age of 27 for the average salary of a person with 16+ years of education in Israel.
4. David graduated from a typical US college and started at the age of 22 for a typical salary of an academic in the US. Numbers are converted to NIS at $1=NIS 3.5, but changing the rate doesn’t change the result.

	Aya	Boaz	Carmit	David
Years of study	0	3	2 (After BA)	4
Yearly Tuition + Extras	0	10,000	15,000	42,000
Yearly Alternative Cost	0	65,880	81,840	108,150
Total Investment	0	227,640	193,680	600,600
Age started working	22	25	27	22
Average Yearly Salary (NIS)	65,880	81,840	126,420	174,650
Yearly increase from non-academic salary	0	15,960	44,580 (compared to bachelor’s)	66,500 (compared to US non academic)
Return (up to age 67)	0	670,320	1,783,200	2,992,500
IRR	-	6.04%	20.83%	9.39%

Notes:

• It’s amazing how a 3-year degree in Israel doesn’t affect the average salary so much.
• The main conclusion is that at current tuition costs and salaries, unless planning to go for a 4-year program or more (engineering, MBA and so on), going for an undergrad in Israel isn’t worthwhile.
• I think the government should investigate into why the return is so low. I believe it has something to do with productivity and the type of jobs people get out of university.
  
• I certainly can’t explain people going for a private college and paying 3 times as much, unless their salary afterwards goes way up.
  
• To read a bit about the sources of the data and other relevant details on this table, go to the end of this post.
• Salary and IRR, of course, are not the only rationales behind going to school. There are social, political and other issues as well. But still, it should at least get you your money back...
  

I once asked a Danish friend why the Danish government pays the full tuition + living expenses for 6 years of study in Denmark. The answer, which quite surprised me, was:

“The government wants people to pay more taxes. If people go to university, they earn more money afterwards, bring more money to the country, and thus can pay more taxes.

So, the government is actually investing in us so we can pay her more money eventually and contribute more to the country. So, since it’s an investment in the country, the government should cover it.”

It sounded strange at the time, but given the numbers above, it makes some sort of sense.

Something is clearly rotten, but not in the Kingdom of Denmark.

- Ron

Disclaimers, Notes and Additions:

• The salary numbers are from 2006 (Israel) and 2005 (US). Things have probably improved a bit in Israel since.
• The average salary numbers were taken from the 2006 Israeli CBS survey, and 2005 US College Board “Education Pays” publication. I suspect the Israeli numbers are not accurate, but they are used everywhere.
• I guess the Israeli side numbers include teachers’ salaries, which is quite low in Israel.
• I used average numbers, which is highly inaccurate. For example, I assumed the same salary for a person throughout his life. It should be OK, on average.
• I didn’t take inflation into account since I assumed the salary will go up along with inflation. I also didn’t use any discount rate on the cash flow.
• The table is for illustration purposes, I have a much more detailed Excel. Email me if interested.
• Taxes also worsen the case a lot. People, who make more money, pay more taxes and the IRR becomes actually lower.
• I wonder whether the student would once use simple math to illustrate their claims, and reach an agreed formula with any government instead of striking and ruining students' academic years...