Ratings Are Not So Easy

On his education bus tour, President Obama is urging, among other suggestions, a new rating system to ensure that more families are able to afford higher education. I think we can all (well, almost all of us) agree that the rising costs of a bachelor’s degree need to be constrained, and we must find ways that facilitate middle- and lower-income students entering and graduating from college. The value proposition matters, and “debt without diploma” is unacceptable.

What is vastly harder to agree upon is how to address the problem, rather than just wringing our hands over it -- which we have been doing for far too long.

Let’s start with the president’s idea of rating colleges based on graduation rates and prospective earnings, among other variables.  To be sure, given the president’s reference to U.S. News rankings in his speech today at the University of Buffalo, one wonders whether “ratings” are similar to or different from rankings – apart from using different variables.

On the surface, these two data points may seem easy to calculate. And advising families on how to compare and contrast college offers seems wise. But devising a quality rating system will require deep insight into how the world of higher education actually works – on the ground, in the trenches. As the president noted, Secretary Duncan needs to garner suggestions from a wide range of educational constituencies.

Here’s why.

First, we know that more-elite institutions that serve Pell-eligible students have higher graduation rates than open-access institutions that enroll Pell eligible students. What accounts for this disparity is subject to debate, but arguably, part of the answer is that the richer institutions “cream skim” and only take the “best” among the low-income students. 

For example, students who are selected to be Posse Scholars graduate from college (largely highly selective institutions) at a rate of 90 percent -- which is stunningly good. But, it is worth remembering that the 640 Posse Scholars enrolling each year are selected from approximately 15,000 applicants.

This means that elite institutions, absent some adjustment, would rank higher than non-elite institutions on graduation rates without any explanation as to why that is occurring.  And the lower graduation rate of less-elite institutions may be at least partially explained by the lack of preparedness of their students. For some students and their colleges, a graduation rate of 40 percent is success, not failure.

Second, if we only calculate graduation rates of true first-year, full-time cohorts, we will be missing the mark in terms of who is actually enrolling in college today. Students with previous credits, transfer students, adults returning, part-time students and veterans would not be counted in the calculation, although at least some of these data points will be included as IPED’s data are improved over time.

Third, earnings are certainly occupation-based.  Graduates who become teachers and nurses and police officers earn less than students who are employed by investment banks or hedge funds.  Clearly, success in higher education cannot be measured based on earnings alone. 

Yes, college graduates should not be underemployed or employed in fields that do not take advantage of their education.  But how we calculate “sufficient” earnings is critically important, and more earnings are not necessarily better for the public good.

Finally, there is a built-in assumption that students and their parents will pay attention to and use the ratings effectively.  Experience suggests otherwise.  Despite transparency in the realm of consumer protection, consumers still make irrational and unwise choices, as behavioral economists have noted. 

Indeed, as scholars point out, consumption decision-making is often based on non-economic determiners.  And we already have early evidence that the current scorecard has not worked as expected – despite best efforts to share its availability. Moreover, the income-based repayment program – also publicized – has not had the expected uptake among students who could benefit from it, as the president himself noted.  We need to make disclosure “smart.”  We also need to focus on how to engage families in conversations about money.  And educational institutions need to see that their obligations to advise students about loan repayment extends beyond graduation, particularly since initial payments often commence six months post-degree.   

So if we proceed with graduation rates and earnings as indicators, we need to be cautious in terms of how we calculate both and be aware that even the best ratings may not help the very audiences we seek to persuade. 

Indeed, possible key users of the ranking system are high school guidance counselors. But, as a recent report from the Public Agenda notes, this group of professionals is struggling to counsel students for college effectively.  Thus, their caseload and training may make their uptake of any new ratings problematic, absent major changes in their education and training.

As an additive or alternative to the president’s suggestions, I think we would be wise to make change where the “default” position benefits students and their families.  So, as one example, what about enacting legislation, through an amendment to the Bankruptcy Code, that enables students and parents to discharge burdensome private and public loans through bankruptcy?  

A recent study by the Center for American Progress suggested the dischargeability of select public and private loans (with a robust definition of what constitutes nondischargeable qualified student loans.) The Consumer Financial Protection Bureau and the Department of Education issued a report in 2012 suggesting reconsideration of the nondischargeability of private student loans.

To anticipate the suggestion that easing bankruptcy’s discharge will create a moral hazard, my experience over 30 years of working with debtors and consumer finance suggests that this common concern is not supported by the evidence. 

The availability of bankruptcy and the opportunity for dischargeability of specified debt has not led to a wave of abusive bankruptcy filings.  As I always have said, most people do not wake up in the morning and say, “Yippee. I get to file bankruptcy today, having failed at America’s rags-to-riches dream.”

Surely the president has latched onto an issue that matters – a college education for the betterment of individuals and their families and society at large.  This is because, at the end of the day, we need an educated citizenry to preserve our democracy. The real issue is how we make that accurate idea a reality. As with most difficult issues, the devil remains in the details.