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Bloomburg Editorial Board
Rethinking College — and How to Pay for It
America’s higher education system is no longer providing value for money.
October 22, 2019
No advanced society can thrive without a well-functioning system of
higher education. College can be an equalizer, providing opportunity to
all regardless of race or class. It can enhance human capital, boosting
the economy’s productive capacity. It can make people better citizens.
On all these counts, the U.S.’s system of postsecondary education is
falling short. Fixing it will require rethinking what it should be
aiming to achieve — and how to pay for it.
It used to be that only a privileged elite had access to college. That
began to change in the late 19th and early 20th centuries, as the U.S.
expanded its state universities to produce skilled workers for the
Second Industrial Revolution. After World War II, government subsidies
such as the G.I. Bill and Pell Grants made a four-year education at
state institutions free or at least affordable. This helped push the
share of young adults with a bachelor’s degree to 29 percent at the end
of the century, from just 6 percent in 1940. This investment played a
crucial role in America’s post-war economic success.
Lately, though, that virtuous system has fallen into disrepair. For
one, it has become too expensive. The price of a college education has
outpaced both incomes and federal grants, as administrative bloat and
cuts in state funding have led private and public institutions to
increase their tuition fees. This has hit the poor hardest. For the
lowest-income quarter of students, the average annual cost of
attendance (including living expenses, net of grants) reached about
$11,600 in 2016, roughly 30 percent higher in real terms than in 1996.
That’s about 80 percent of average family income for this group:
Cost matters a lot. When people can’t afford the full cost of
attendance — including tuition, books, food and rent — they struggle in
college or don’t even apply. Studies suggest that a $1,000 increase in
price reduces enrollment by about 4 percent, as well as harming
performance and graduation rates, especially for lower-income students.
The federal government has sought to fill the breach with a crazy quilt
of loan options, both subsidized and not: Stafford, Perkins, Plus loans
for parents, and a system intended to consolidate them all. No matter
the choice, those who enroll emerge with increasing debts, which weigh
on the economy by impairing their ability to start families, buy houses
and save for retirement. As of June, total student debt stood at an
estimated $1.48 trillion, or about 36% of disposable income. That’s up
from $250 billion, or 12%, in 2003.
The ballooning costs and debts wouldn’t be so bad if schools provided
value for money. At an individual level, they typically do: The median
annual income of people with a bachelor’s degree is about twice that of
their high-school-educated counterparts. College graduates are also
happier and less likely to die of heart attacks.
Unfortunately, the benefits appear to have little to do with what
people actually learn. A 2009 survey across 25 institutions found that
four years of college had only a limited effect on critical thinking,
complex reasoning and writing. About a third of students saw almost no
improvement at all. A separate 2006 study, based on the 2003 National
Assessment of Adult Literacy, found that just 31 percent of college
graduates could correctly explain and compare opposing newspaper
editorials.
So why is a degree so lucrative? In part because employers see it as a
sign of inherent qualities: Here is a person with the intelligence,
persistence and demeanor to get through four years of college. Research
shows little earnings premium for otherwise good students who, for
whatever reason, fall just short of receiving a diploma. And the
premium attached to the diploma persists even in jobs such as
bartending. The market values the piece of paper much more than the
education. To a troubling extent, college has become an expensive and
time-consuming credentialing exercise.
In some cases, higher education doesn’t even serve that lesser
function. Black Americans, for example, disproportionately end up with
diplomas of dubious value from nonselective or for-profit schools —
thanks in part to aggressive marketing and a dearth of information
about better alternatives. As a result, they often go deep into debt
for nothing. This helps explain why, despite decades of progress in
closing the education gap with whites, the average black family has
made no progress in narrowing the wealth gap.
The combination of big debts and low-quality education has caused a lot
of financial distress. People who earn degrees from well-respected
institutions can usually handle the burden. But those who drop out or
attend for-profit schools, or who were simply unlucky enough to
graduate into a weak economy, often find themselves with obligations
they can’t hope to pay — and can’t discharge in bankruptcy, thanks to
the special legal status of student debt. At the end of 2018, the
90-day delinquency rate on federal student loans stood at 11.4 percent,
up from 7.8 percent in 2008.
How, then, to improve a system that isn’t reaching everyone who could
benefit from it, and isn’t doing enough to enhance the skills of those
it does reach?
There’s no quick fix. Proposals to make higher education free for all
or forgive student debt would primarily benefit the wealthy, who
already account for the majority of college-goers and loans
outstanding. Also, debt can be a legitimate way to finance an education
that provides a high return. Its growth can even be seen as a positive
sign, reflecting Americans’ desire to invest in themselves.
Removing public support and letting the market sort things out is not a
great option, either. For one, it would cut off access to additional
millions. Also, at its best, higher education creates broad social
benefits — such as faster economic growth, lower crime rates, better
health, greater civic involvement — that private actors lack the
incentive to pay for. That’s why the government got involved in the
first place.
That said, policy makers can take steps to improve the system. Consider three areas: access, cost control and quality.
Access
For too many Americans, money is the main obstacle to getting a college
education. Yet the existing system of Pell Grants, federal loans and
tax breaks spends a lot on people who don’t need it. About half of the
American opportunity tax credit, for example, goes to households with
more than $50,000 in annual income — with little or no effect on
enrollment. Loan subsidies skew even more toward the wealthy: The top
half of borrowers by income account for almost two-thirds of all
student debt outstanding.
The government should replace this tangle of subsidies with a single
grant program focused on poorer students — including those in the
middle class for whom college has become increasingly out of reach. If
properly targeted, even the current level of spending could go a long
way toward covering the full cost of attendance for those who need it
most.
The government’s approach to student lending, with no consideration of
ability to pay, has left too many people with unbearable debt. That’s
bad in its own right, but it also discourages the less well-off from
embarking on college. Better-targeted federal grants would reduce the
need for students to go into debt. Still, borrowers will continue to
face risks beyond their control, such as falling ill or graduating into
a bad job market.
To mitigate these, repayment of all new loans should be tied to income.
Automatic deduction from paychecks would help avoid unnecessary
defaults. Congress should give bankruptcy judges more leeway to write
off loans, and the Education Department should revive its initiative to
offer forgiveness in the most egregious instances of for-profit
colleges conferring worthless degrees. Also, the government should
simplify its dizzying array of prepayment plans and make them more
accessible.
Importantly, a four-year undergraduate education needn’t be the only
option. Other programs — including apprenticeships and short-term
retraining — can provide the skills that the job market demands. To
that end, the government should increase its support for community
colleges, and federal grants should be extended to worthwhile
certificate programs lasting less than a year.
Last but not least, students and families need better information about
the available options. A kid growing up in a poor neighborhood might
not know anyone who went to college, and faces an onslaught of
advertising from less-than-scrupulous institutions offering unduly
expensive educations. To remedy this, the government should give high
school students and their parents clearer guidance: Here are some
quality institutions that you can attend free if you start preparing
now.
Cost Control
The current system rewards colleges for raising prices. Families fill
out the Free Application for Federal Student Aid to estimate what they
can afford, but the result has no effect on what institutions can
charge. Consider a student who qualifies for $10,000 in grants and
loans. If the college charges $5,000 in tuition — leaving the student
$5,000 for books, room, board and other expenses — it’s forgoing
additional income. Why not capture the full federal subsidy by charging
$10,000? This is precisely what colleges tend to do, often using the
extra money to supplant state funding.
The government should provide money only to those schools that agree to
charge no more than what the FAFSA says students can afford — while
meeting other conditions, such as enrolling a reasonable share of
low-income students and investing in instruction and academic support.
This would curb tuition and sharply lower costs for the poorest
families, in many cases to zero. Most important, it would reward
colleges for keeping costs down.
To achieve the greatest impact, any reform of federal funding should be
structured to encourage greater responsibility on the part of the
states — which in the last decade radically cut funding for higher
education. Washington could, for example, channel more grant money
through the states, getting them involved in monitoring compliance and
offering bonuses to those that restored funding to designated levels.
This could vastly increase the total resources devoted to meeting the
reform’s goals.
Quality
All accredited institutions have equal access to government aid. Even
schools with terrible outcomes and the highest loan default rates get
as much money per student as the best schools. This rewards bad actors
for skimping on instruction and engaging in aggressive marketing to
bring in as many people as possible. The Trump administration has
aggravated the problem, reversing an Obama-era effort to shut down one
of the worst accrediting organizations.
In general, it’s too hard to know how colleges are performing. Even
sophisticated researchers won’t find comprehensive information on
student outcomes, such as median earnings: In 2008, Congress
effectively forbade the government to gather it.
To shed more light on quality, Congress should allow the Department of
Education to bring together the tax and other data needed to provide a
complete picture of the expected return of different schools and
programs. All this information should be available on the department’s
College Scorecard website, along with other metrics on transfer and
part-time students and veterans. Such transparency can help students
avoid aiming for degrees they can’t complete, or ending up with big
debts and worthless diplomas.
Armed with improved data, federal and state officials could do a much
better job of ensuring that taxpayer dollars are well spent. Initially,
they could track the share of students who graduate in a timely manner
and go on to earn a living wage, reducing aid to institutions that
failed to meet reasonable thresholds. Ultimately, they should also
monitor learning outcomes, to ensure that programs are building human
capital rather than merely selling their imprimatur. This must be done
carefully: Schools will try to game whatever metrics the government
chooses. That said, at least one recognized standard already exists,
and academics are working on measures better tailored to specific
fields.
This year, Congress is aiming to reauthorize the Higher Education Act,
creating a rare opportunity to take action. Many of these proposals on
access, cost control and quality have bipartisan support. Some would
require new spending. Fully meeting the needs of the poorest students,
for example, could cost the federal government almost $40 billion a
year, and state governments almost $20 billion. Finding the money may
require economies in other areas. But if this investment would help
restore the role that higher education once played in the U.S., the
price would be well worth it.
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