The Tuition is Too Damn High, Part X: So how do we fix it?

September 6, 2013

I can't promise I'll explain this as well as Clarissa would, but I'll try to be as clear as Ferguson in this situation. (Nickelodeon)

As I hope this series has made clear, it’s tough to speak in general terms about what’s driving the increase in the price of college. The story differs greatly from school to school, and among categories. But one can, in general, divide the institutions into three camps, each with its own set of issues.

For public colleges offering master’s and bachelor’s degrees and for community colleges, the problem is simple. Spending has not increased much at all, but tuition has. There’s been a straightforward shift from financing based on state spending to financing based on student tuition. To get tuition down again, some other entity is going to have to fill the gap left by state cuts.

One option would be a federal takeover. Unlike states, the federal government doesn’t have to run a balanced budget, so funding is less erratic. But open-ended federal support runs the risk of creating the kind of perverse incentives that have driven spending up so dramatically at research universities.

One approach would replace current state aid with a federally financed Pell Grant-style voucher for low-income students, with the voucher's value pegged to the average per-student price of a public non-research university in the start year and then rises with inflation. That keeps pressure on schools to not spend excessively, while preventing the cost-shifting onto students that’s happened in recent years.

We could also institute a revenue sharing program, like the one that existed in the 1970s, wherein states are guaranteed a piece of the federal tax pie as a way to stabilize their funding streams. The New America Foundation's Michael Lind has a smart proposal along these lines. Another approach would be a one-time infusion of federal funds into public college endowments, with the proviso that the endowments be used to prevent increases in tuition.

There are also more market-oriented options. Public support for colleges funded through progressive taxation is a way of having one generation of (predominantly) college grads pay for the education of a younger cohort. But there are other ways of using the earnings premium of college to finance the upfront price of going. Student loans are meant to do that, but have so far failed, as they grab earnings at the start of people's careers, when the earnings premium is least pronounced.

A reformed system, such as universal income-based repayment, or Oregon's "Pay it Forward" plan, might get closer to the goal of financing college through the economic benefits it provides to graduates. Even better would be "human capital contracts," as proposed by Milton Friedman and developed by Miguel Palacios, in which students and investors sign agreements for the former to pay a percentage of income back to the latter, who in turn provides tuition money upfront. The percentage would vary based on how much the tuition is and what the investor predicts the student will make. That's probably the most direct method for using your future earnings to pay for tuition now.


Why not give these guys a free ride? (Justin Lubin/NBC)

But the simplest approach would be to just make community colleges free. They’re already the least expensive higher education institutions in the country, and there’s no evidence that they provide an inferior education to more expensive schools. And as the Miami-Dade system is showing, there's no reason why community colleges can't provide quality four-year degrees on top of the two-year programs for which they're known. Securing state or federal funds to eliminate tuition, perhaps tied to cost controls to prevent spending from spiraling out of control the way it has at research universities, and to the provision of bachelor's degrees, would be a straightforward solution. If that was accomplished, then spending problems at other kinds of schools wouldn’t be a major issue. We've already guaranteed free access to a K-12 education to all American children; what's a few more years?

Meanwhile, public and private research universities have a totally different set of issues. Playing a small but nonzero role is the Baumol effect, which is when the need to pay highly educated workers’ salaries drives up spending. But that only explains increased pay for faculty and researchers, not for the growing ranks of administrators at research universities. More important than Baumol is the amenities arms race, wherein schools need rich students to cross-subsidize poor ones, attract them using pricey student services, and are left with increased spending at the end of it all.

But at day’s end, the basic problem with research universities’ spending, as Howard Bowen pointed out, is that there is no incentive for anyone to keep it down. In a for-profit setting, administrators are rewarded for maximizing revenue and minimizing spending. That’s fine in many industries, but it’s not what you want in higher education, as it often means that colleges maximize revenue by raiding Pell Grants and minimize spending by providing subpar instruction.

But the non-profit approach is untenable as it stands as well. As long as they can gain access to ever-increasing piles of money, schools will take that money and spend it. The problem is the access to money, not any need to spend on particular causes per se.

One way around this would be to adopt a voucher approach like the one outlined above, or in Andy Gillen’s “super Pell Grant” proposal. If the government effectively caps the rate of growth of school revenue, they can cap the rate of growth of school spending as well. But this general logic can be applied without blowing up the entire structure of federal higher ed subsidies. For example, one could cap the amounts of principal eligible for federal student loans, similar to how Fannie and Freddie cap the size of mortgages they’re willing to guarantee.

This would also be a good solution for the third camp of schools: private master’s and bachelor’s institutions, where research university-style spending increases are going on, but aren’t the only thing going on. They also need to find a way to make up for their loss of private donations in recent years. That could be addressed by directing more government funding toward them, or by an effort on those schools' part to reduce spending, hopefully through efficiency improvements.

The worry with proposals like the super Pell Grant or student loan caps, as with all price controls, is that it risks damaging the quality of the institutions. That’s a valid concern. But it raises a troubling point: we, at the present moment, have literally no idea how good different higher education institutions are. We don’t know anything about which are better at imparting given bodies of knowledge, which are better at getting their students paying jobs, which are better at producing voters and soldiers and other contributors to civic life, or any number of other outcomes.

This is improving somewhat as the Consumer Financial Protection Bureau moves to require schools to disclose their employment outcomes on financial aid forms. But the best data we have is secret. The Collegiate Learning Assessment (CLA) and National Survey of Student Engagement (NSSE) are both widely conducted assessments that hundreds of colleges use and of which barely any report the results. When they do, the results are surprising.


On the CLA, "Non- to Less Competitive institutions (those with Barron’s 28th edition values of 1-2) show the highest average effect size (.83), compared to Competitive to Competitive Plus institutions (Barron’s values of 3 and 3.5; average effect size of .76), which in turn have a higher average effect size than Very to Most Competitive institutions (Barron’s ratings of 4 or higher; average effect size of .62)." (Source: )

Kevin Carey reported in the Washington Monthly that when the University of Texas released its CLA results, the schools that produced the largest gains did not include the flagship campus in Austin. The best campuses were UT - San Antonio, UT - El Paso, and UT - Perminian Basin. Meanwhile, the NSSE found that selective schools are no likelier to engage in effective teaching practices.

But schools are loathe to release this data. They just have no reason to. They benefit tremendously from the asymmetry of information between them and students. That’s why when the University of Nebraska at Omaha (not to be confused with the flagship at Lincoln) boasted about its CLA scores, other schools promptly attacked it.

What needs to happen, if we are to find ways to reduce college spending without reducing quality, is to mandate schools make employment, income, and learning outcomes available to all prospective students. That’d take a lot of work. As Carey has noted, it’s actually illegal to compile a database of student records at the federal government level, due to a law pushed through by Rep. Virginia Foxx (R-NC) with the help of the American Council on Education and other interest groups.

Sens. Ron Wyden (D-OR) and Marco Rubio (R-FL) have teamed up to try to change that. Their bill, the Student Right to Know Before You Go Act, would make information on a whole bevy of topics publicly available. Students would know average earnings by school and by major, graduation rates, rates of going on to post-graduate degrees, average loan burdens, and much, much more. They don’t include learning outcomes data, but still, this would mark the greatest increase in higher education transparency to date.

Naturally, the American Council on Education and others in the higher ed lobby realize they have something to lose, and so oppose the Wyden-Rubio bill. But House Majority Leader Eric Cantor has backed it, suggesting that it may have a shot at final passage. Indeed, higher ed institutions should hope it does. If lawmakers, especially at the state level, continue to be in the dark about the value of higher education funding, it stands to reason that they will continue to cut funding in favor of programs like Medicaid or police departments that have an easier to observe impact. Without better data, there’s no way to defend the contribution that college makes to our economy and our society, and no way to make that benefit cheaper for those who need it.

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Neil Irwin | September 6, 2013