Warnings of Unintended Consequences

In his State of the Union speech Tuesday night, President Obama delivered a brief message to colleges and universities: they are "on notice," and risk losing some federal money if net tuition prices continue to increase. 

Just as quickly, Obama moved onto the next policy proposal without providing any further detail, such as what would constitute “skyrocketing” tuition prices or what federal money might be yanked if colleges do not fight them.

Still, even the suggestion of using federal financial aid to force colleges to lower prices drew criticism from many higher education experts Wednesday. While they said it was difficult to judge a proposal that, so far, amounted to an applause line in a speech and a single sentence in a document the White House released afterward, many cautioned that the idea could have unintended consequences.

College affordability has become a popular theme for the Obama administration as the 2012 presidential race heats up. Until Tuesday night, though, the administration’s public appearances and private meetings centered largely on productivity: officials praised new methods of delivering higher education without attacking more traditional colleges and universities. Criticism of pricing and "value," a word the administration used in the "blueprint" outlining the president's proposed State of the Union policy, have been mostly relegated so far to the administration's (and Congress's) intensified scrutiny and regulation of for-profit institutions.

The State of the Union marked a shift. Obama reasserted the administration’s commitment to federal financial aid, but he said institutions and states would need to do their part. States should make higher education spending a higher priority, he said, while institutions should keep prices down.

In his words, several experts in the economics of higher education heard an echo of a short-lived proposal from 2003: Rep. Howard (Buck) McKeon, a California Republican who was then chairman of the Committee on Education and the Workforce's 21st-Century Competitiveness Subcommittee, proposed penalizing colleges that increased their cost of attendance by more than twice the rate of inflation for two consecutive years, including cutting off federal aid. Colleges attacked the idea as calling for "price controls," and McKeon's bill never made it out of committee.

The White House, unlike McKeon, would focus on net price, the average price students pay after financial aid, perhaps providing a reprieve for the many private colleges (and some more selective publics) that charge high tuition but accompany it with generous financial aid. The rate of tuition increases could be measured against inflation, as in the McKeon plan, or simply judged comparatively, as the Education Department already did this year in releasing a “hall of shame” of colleges with the biggest increases.

“We assume, based on the materials that accompanied the speech, that what the administration might do is condition eligibility for campus-based programs on the rate of tuition increases,” said Terry Hartle, senior vice president for government and public affairs at the American Council on Education. The campus-based aid programs -- the Perkins Loan Program, the Supplemental Educational Opportunity Grant Program, and campus work study -- are those in which funds are allocated to colleges and universities to distribute, rather than flowing directly to students as is the case with Pell Grants. The administration proposed a revamping of Perkins Loans in 2009 that could serve as a model for the new proposal.

Details on the plan were so scant that it was hard to predict what the eventual criteria would be, Hartle said, adding that he thought the administration was more likely to put money for work-study jobs and supplemental grants at risk, rather than conditioning eligibility for the much larger Pell Grant Program on tuition prices.

Still, most assumed that any plan would follow the basic McKeon model -- and forecast dire unintended consequences: accelerating existing trends toward larger class sizes and more use of adjunct, rather than tenured, faculty; keeping costs high by adding new fees for students, even if tuition prices stayed the same; and punishing public institutions that are suffering in large part because of decreasing state support.

“Focusing on the net price that colleges charge is focusing on a symptom of a very complex process,” said David Feldman, chairman of the economics department at the College of William and Mary and the co-author of Why Does College Cost So Much? “It’s naïve to think that you can jawbone down the net price without jawboning down quality.”

College costs have increased for many reasons, many related to large-scale trends in the American economy: costs for services, such as health care and education, are rising faster than inflation in every sector; state legislatures have cut funding for higher education; and increasing income inequality means that college is less affordable for the average American, even though incomes over all have increased in recent decades.

Some people believe “that there are just million-dollar bills lying on the floors of universities all over the place,” Feldman said, and that universities will find that money if threatened enough with budget cuts. But costs have not risen because higher education has become more inefficient, and budget cuts usually lead only to tradeoffs between quality and price, Feldman said.

“The administration has to think about unintended consequences,” he said. “If they focus, with laserlike precision, on a symptom, net price, and not a cause, they may induce states and universities to do things in order to avoid losing Pell Grant funding that really are counterproductive.”

Or the threat could end up making little difference for students, said Burton Weisbrod, a professor of economics at Northwestern University who studies the economics of nonprofit organizations and the effect of performance incentives.

Tuition might decrease or hold steady if colleges are forced to keep it that way, Weisbrod said. But he predicted an accompanying increase in student fees: new fees for using the library, for example, or for other expenses that previously were considered part of tuition.

“That begins a kind of cat-and-mouse game, which is the sort of thing that goes on in the whole regulatory environment all the time when organizations look for some way around regulatory constraint,” Weisbrod said. “It’s how to succeed without really succeeding.”

Even some that praised Obama’s general point said they worried that imposing price controls would make the situation worse, given the many reasons for increasing costs and the possible threats to institutions that have also lost state funding.

“Taxpayers need to stop subsidizing tuition with no guarantee that tuition’s not going to go up in the future,” said Jonathan Robe, administrative director of the Center for College Affordability and Productivity. “Rather than limiting aid explicitly based on the rate of tuition going up, perhaps the better thing is to restructure federal aid programs.”

Given the concerns about punishing colleges that raised tuition to make up for decreasing state funding, an even vaguer promise from the speech -- requiring states to support higher education -- may be a linchpin for the administration’s plan. One possibility is requiring “maintenance of effort,” which denies funds to states if they do not continue their support of colleges and universities at certain prior levels. But in the most recent use of maintenance of effort, some loopholes -- including using additional stimulus funds to qualify, or waivers granted by the Educational Department for exceptional circumstances -- may have lessened the requirements’ impact.

For public universities, an influx of additional state or federal funding would be a true game-changer, Weisbrod said, adding that it won’t happen. And he said he could see no way to use funding cuts to improve higher education policy.

“What I think is possible is to have serious and sensible discussions about the various alternatives and how we can deal with them,” Weisbrod said. “But there’s no free lunch. We’re not going to be able to maintain, let alone improve, the quality of education while simultaneously reducing the amount of funding.”