Obama, Higher-Education Costs, and Student Aid

Richard Vedder

Whatever else one might say about President Obama, he has good political instincts, so the heavy emphasis he is placing lately on college costs suggests this issue is breaking through the minimum threshold level of interest to make it a topic in the coming presidential/congressional campaigns. His suggestion that colleges should lose federal aid if they raise tuition too much will probably resonate well with many of all political persuasions; a former top GOP member on the House Education Committee, Buck McKeon once proposed something very similar.

I found myself in a little mini-debate with University of California President Mark Yudof about this last Friday on the PBS “NewsHour.” President Yudof, whom I greatly respect, made the usual argument about falling state appropriations being a major cause of rising college costs. I conceded that point, but argued that College Board data show that total federal student assistance in inflation adjusted dollars went from $64-billion in 2000-1 to $169-billion a decade later (see page 10 in “Trends in Student Aid 2011″)–a compounded annual increase of 10.2 percent a year. The more student “financial assistance” we give, the bigger the problem gets. Rather than alleviating the problem, this vast expenditure, which I liken to dropping money out of airplanes over college campuses, has been associated with a worsening of the financial strains of higher education on both students and society.

Rather than reduce loan interest rates, expand Perkin loans, and engage in tuition control incentives, a better, more effective, and efficient approach would be to end or radically revise our student loan/grant system. Nine problems:

  1. Grant aid is disbursed without any reward for academic excellence, and, indeed, more money is disbursed to mediocre students than good ones; I once estimated (with little criticism) that for every Pell Grant recipient who graduates, almost two drop out.
  2. Student-loan money is disbursed at below-market interest rates for loans of this risk level with no regard for the student’s prospects of either academic success or ability to repay the loan. As Alex Pollack of the American Enterprise Institute (among others) hassuggested, college admission and student financial-aid policies would radically improve if the colleges had some “skin in the game”–if they were forced to cover some of the costs of a student’s loan default.
  3. Elaborating, those who facilitate making the loans, that is, the colleges, are not the ones who bear the risk of default, exactly at least part of the problem that led to the housing bubble and collapse.
  4. The implicit lowering of college costs associated with loan and grant subsidies has contributed to too many persons overinvesting in college–pursuing degrees only to end up as customer-service representatives, taxi drivers, bartenders, mail carriers, parking-lot attendants, etc. (the number of college graduates in the aforementioned occupations alone rivals the number of uniformed soldiers in the U.S. Army).
  5. Loan commitments grow with tuition increases; limiting loan commitments to some maximum amount would curb the desire and ability of colleges to raise fees. Similarly, sharply increased Pell Grants have further allowed some colleges to raise fees.
  6. The aid programs are increasingly viewed as entitlements for moderately affluent middle-class persons, so that the proportion of recent college graduates coming from low-income families is lower than in 1970, when federal financial-assistance programs were small.
  7. The growing federalization of governmental financial assistance threatens to undercut a university system where decision making is made in a highly decentralized fashion, encouraging innovation, competition, and entrepreneurship.
  8. The rise in the proportion of college students with limited cognitive abilities or discipline, encouraged by the federal student-aid programs, has led to a real if not precisely measurable decline in academic rigor and performance in America’s colleges and universities. Also, as Jackson Toby has pointed out, low college-admissions standards, aided by federal aid programs, have contributed to declining rigor at the K-12 levels, as students feel less compelled to achieve well academically in order to get into college and get financial aid.
  9. There are too many federal programs: they are too complex, and often are at cross purposes with one another–for example, tuition tax credits help rich kids while Pell Grants are designed to increase the proportion of college students from low-income groups.

There is even more, but that makes the point. I fear the Obama proposal to incentivize colleges to reduce tuition increases will turn out costly and bureaucratic. And how is one going to determine what is a “just price” or tuition increase (borrowing from Saint Thomas Aquinas)? Also, college have sneaky ways of circumventing tuition controls–raising room and board rates, extra fees, etc.

Raising the issue is good, but let’s look at the real problem. Washington has been more the problem than the solution.

This article first appeared at the Chronicle of Higher Education's Innovations blog on January 30, 2012.

* Photo: REUTERS/Jason Reed

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