Replacing Our Failed System for Financing Higher Ed

The system of financing higher education in the United States just doesn’t seem to be working. News reports document skyrocketing prices, out-of-control spending and institutions that cater to the rich. We’re told that colleges benefit while students from lower-income families suffer, facing high prices and competition for spots from students who can afford to pay more. One can only conclude that Gordon Gekko is running these institutions.

Yet those problems are a symptom of a failed system of financing higher education. If we want an affordable, high-quality higher education system, we need to change the way it is financed. We need greater government funding along with regulation to maintain quality while avoiding excessive spending.

Our current higher education system is not affordable for most students, but the high sticker prices that attract the most attention are a poor gauge of affordability. They represent the amount that high-income students pay to cover all their educational expenses, but most students pay less than that because they receive financial aid. The real reason college is not affordable for most students is because they don’t receive enough financial aid. They pay less than the sticker price but more than they can afford.

This occurs because there is not enough money in the system to provide sufficient financial aid. States, unfortunately, focus on affordability at public institutions by maintaining a low sticker price for their residents, but the sticker price is only paid by higher-income families. States provide additional direct funding to their colleges and universities, but not enough. And when states reduce support to those institutions, the institutions respond, typically by cutting financial aid. Private institutions without massive endowments are also underfunded, with limited public support or investment returns available to maintain quality and affordability.

So, university leaders use several strategies to increase their revenue. Public universities recruit high-income students from other states who pay a premium to attend. Both public and private institutions also enroll high-paying international students to increase revenue. They build fancy dorms and other facilities to attract them (even though that is a risky investment). The additional revenue these students bring in could enable colleges to offer more aid, helping reduce the cost for those lower- and middle-income students who enroll. On the other hand, the increased competition could displace lower-income students who can’t gain admission, can’t afford the high net price to attend or don’t even know that they wouldn’t pay the sticker price.

To be sure, colleges and universities sometimes make bad decisions. But these decisions may not be motivated by malice but by financial necessity. Avoiding them may require improving the financial environment in which those decisions are made.

What would a more equitable college pricing system look like? A college education provides a large economic return, on average, and every student deserves the opportunity to get one at an affordable price. That means lower-income students should pay very little, high-income students should pay considerably more and middle-income students should pay between the two extremes commensurate with their ability to pay. These prices need to be transparent so that students can easily make well-informed decisions.

But this system would not generate enough revenue for institutions to cover their expenses unless high-income students paid enough to subsidize the more numerous low-income students. The federal government is the best source to fill in the gap, at least at public institutions, between what students can afford to pay and what the college spends. It already subsidizes many activities that enable families to acquire basic life needs like food, housing and medical care. Enabling students to obtain a college education regardless of their families’ finances similarly makes sense, because it provides benefits that extend beyond the student receiving the education.

Government guarantees to fill in this gap, though, mean that institutions would face no spending constraints and lose the incentive to efficiently provide a high-quality education. Some form of regulation would be necessary to set spending at a reasonable level that also maintains the quality of our higher education system.

A true free college system covering all educational expenses for many or all students represents an extreme example of such a financing system. Everyone would be able to afford to attend college, and all financing would come from the government. The system I propose here would achieve the same goal—ensuring college is affordable for everyone—at significantly less cost to taxpayers.

The goal of our higher education system should be to efficiently provide a high-quality education system that offers affordable options for obtaining the economic benefits of a college degree. That is not the higher education system we have in place now. But it is one we can have with a better understanding of the flaws in financing our current system and some additional help from the federal government. Rather than hunt for villains, we should start working toward that goal.