College costs/prices

Essay: the federal role in controlling college prices and spending

Persistently rising college tuitions, high spending per student, and mounting student debt burdens have re-emerged as key issues in Washington. Secretary Arne Duncan has called on college and university officials to show more urgency in keeping down their prices and spending, the House subcommittee on postsecondary education has held another hearing to wring its hands about college unaffordability, and President Obama has now summoned a select group of college presidents and higher education thought leaders to consider what can be done. 

Federal efforts in the past have focused on shining a spotlight on institutions with the highest rates of tuition growth and exhorting college officials to do more to restrain their spending growth and rein in their price increases.  Recent news stories indicate that these largely symbolic approaches will continue to dominate the debate as the focus seems to be on extolling the virtues of those schools or states that freeze or reduce their tuition levels, move to three-year degrees, measure learning outcomes, or find ways to use technology to lower their costs per student and hopefully their prices

But these efforts are unlikely to yield satisfactory results, just as previous efforts have failed to slow cost and price growth or to reduce the amount students must borrow to pay for their education and related expenses.  They will continue to fail unless the aim is to reshape the relationship between governments and institutions and the rules that determine how much students can and do borrow.  Federal and state officials must recognize that the signals embedded in a number of policies have contributed to the past growth in costs, prices and student debt -- and then do something about it. 

A good place to start this effort would be to get the facts straight.  The higher education debate in recent years has been littered with many misstatements that make it difficult to have an honest discussion about what needs to be done.  It is asserted that many potential students are being scared away from higher education by the higher prices, that attainment -- the percentage of adults with degrees -- has been flat for decades, and that federal and state funding of higher education is dwindling.

The facts, though, are that enrollments are at an all-time high of 20 million students annually, degree attainment rates for all age groups have risen consistently and sometimes very rapidly for more than half a century, and public funding of higher education has increased at an explosive clip over the past decade.  Pell Grant spending and tuition tax credits more than tripled in real terms from 2000 to 2010, while federal funding of university-based research and federal student loan costs for interest subsidies and defaults grew by at least 50 percent in constant dollars during the past decade.  Even state and local funding of higher education grew by 10 percent in real terms during the 2000s; it’s only when the rapid increase in enrollments over the past decade is factored into the equation that state and local support on a per-student basis shows a significant decline in constant dollars.

Two of the statistics that have been accurately portrayed in recent debates are that college charges have increased at more than twice the rate of inflation over the past several decades and that student loan debt burdens have grown enormously, both in terms of the number of students who borrow and in how much they borrow.  These are the troubling statistics that need to be addressed.     

In trying to figure out what might be done to lower the rate of college tuition increases and reduce student debt burdens, it is worth first considering the following economic proposition:  In the absence of federal, state, and local government financing of higher education, the sector would produce far fewer students and graduates, at much higher prices than is currently the case.  In this model, government financial support flows from the belief that higher education is a public good that requires it be offered to a larger share of the population and at more reasonable prices than what the private sector would provide on its own.

At the state and local level, this public intervention in higher education occurs principally in the form of operating support that allows public institutions to charge much less than what it costs per student to provide that education and a financial capital commitment to build enough seats at public institutions to ensure that many more students are able to attend than what private entities would offer.  States and local governments now spend roughly $80 billion annually to support current operations, and despite recent slowdowns in funding and large increases in tuition and fees over time, they still provide far more than half of what public institutions spend on instruction and administration.

Another key aspect of state policy is that most states limit how many students can enroll at their best public institutions below what would typically be demanded at those subsidized prices. The unintended consequences of the combination of these longstanding policies may be that public institutions typically spend much more per student than they would if they were strictly private entities.

One principal federal intervention in the higher education market stemming back more than a half century is the provision of student financial aid in the form of grants, loans and work-study funds, as well as service-related benefits such as the GI Bill and a range of tax-related benefits that help students pay the prices charged by a wide array of public, nonprofit, and, increasingly, for-profit institutions. 

With recent large increases in Pell Grants and tax provisions, the federal government now spends roughly $100 billion annually in support of students in the form of non-repayable aid, tax breaks for students, and loan subsidies and default costs. This demand-driven strategy has certainly worked in stimulating enrollments far, far beyond what the private sector would have provided on its own.  The unintended consequence of these federal policies, though, may be that prices and possibly the spending per student are far higher than they would have been in the absence of federal aid.

The other major federal role in higher education is support for university-based research, which now amounts to more than $50 billion annually and represents well more than half of what universities spend for research.  The volume and variety of the theories, patents and discoveries produced with federal support of research conducted on campus make this undoubtedly one of the great public policy initiatives of the past half century.  But there is also little doubt that the amount spent by universities on research-related activities is much more than what would have been spent if the federal government had not been involved, and has contributed to overall increases over time in spending per student, at least when it comes to the many universities whose faculties conduct that research.  One culprit here is that the federal government, through the indirect cost system that governs federal research grants, reimburses universities for what they actually spend to administer research programs.

The synopsis above suggests that federal policies have contributed to rising prices, spending per student and debt burdens, and that it is thus appropriate for federal policy makers to consider how they might reduce the inflationary forces at work in the current system.

What to Do (and Not)

So what should federal officials do to address these very legitimate concerns?  One answer to avoid is a heavy reliance on regulatory efforts such as price controls in higher education – they will not work in the long run and they will no doubt ultimately lead to a misallocation of resources.  There also is little reason to believe the federal government has the capability of figuring out what the nation’s 4,000 institutions of higher learning should charge to make the system work better.

There is also reason to be concerned about the shift toward much greater federal regulation of the academic functions of institutions that began in the George W. Bush administration and has continued in the Obama administration, in the form of the federal government getting more involved in the accreditation process, defining credit hours, and other intrusions into academic matters.  This flies in the face of what has made American higher education the envy of the world -- a wonderfully diverse system of institutions that blossomed without government controls but rather through a reliance on self-regulation and professional judgment to help assure quality in academic matters.

A much better place for federal officials to address the very legitimate and pressing concerns about ever-growing college prices and wrenching student debt burdens would be to change the signals that institutional officials receive from federal policies for student aid and university research that lead to price and cost escalation rather than moderation.  In addition, federal officials might consider how they could encourage states to change their funding formulas in ways that slow cost and price growth.

In terms of federal aid and its effect on prices, I argue that Pell Grants have not had much of an effect on the prices that institutions charge in part because the size of the grant a student receives is not tied to the price of the college he or she attends. I think the bigger concern for Pell Grants is a possible substitution effect whereby their growing availability may have been an important factor in the documented shift over time of institutional aid funds and discounts away from the poor and toward middle class students. In this regard, a big unanswered research question is whether the recent huge increases in Pell Grant funding in the past several years have further increased the degree to which institutional aid is being shifted up the income scale. Stay tuned.

But student loans are the bigger concern when it comes to the possible effect of federal policies on pricing. Although there is no definitive causal evidence, there is a strong correlation over time between student and parent loan availability and rapidly rising tuitions. Common sense suggests that growing availability of student loans at reasonable rates has made it easier for many institutions to raise their prices, just as the mortgage interest deduction contributes to higher housing prices.

It is also the case because of student loan program design that the only students who now pay full price are those from wealthier families and many of the students who borrow because sticker prices are used to determine student loan eligibility. It is this feature of the student loan structure than needs to change if the pattern of ever-mounting student debts is to be reversed.

Skin in the Game

In short, institutions must have skin in the game if we are to put a dent in the size of student debt burdens.  Currently, colleges can just maintain or raise their prices and shift the cost-sharing to loans for a broad range of their students. This needs to change. One way to accomplish this would be to require that needy students not receive all their aid in the form of loans.  In effect, this would mean that institutions must offer discounts to their needy students who borrow, thereby reducing their debts.

Moreover, something has to be done about how much students can borrow for living expenses.  Now, community college students who face $2,000 or $3,000 in tuition and fees are eligible to borrow $10,000 or more to cover their total expenses.  This applies at all institutions for students who live at home or off campus.  This provision should be changed so that reasonable limits are placed on how much these students can borrow.  Ditto for students living in dorms or on meal plans – they should not be allowed to borrow excessively large sums for this form of consumption.  Such a change would likely have the beneficial effect of reducing how much institutions charge for these non-education services.

We must also change the borrowing policy for students taking remedial courses.  Currently, because federal student grants do not cover the full cost of remedial coursework, most students who require remedial work are forced to borrow large sums to pay for courses that do not provide college credit.  We should move instead to a performance-based system in which students would not be charged tuition for remedial courses and the providers of remediation would be  paid a fee by governments for doing so, with the providers who do the best job of increasing the competencies of these students getting the most reimbursement and the most business.

Another necessary student loan reform is to reduce federal student loan subsidies while the borrower is in school.  Under the current rules, students with family incomes well in excess of $100,000 attending higher-priced institutions qualify for federal payment of interest while they are in school (including while they attend graduate school).  This provision should be eliminated or at least limited to Pell Grant recipients. This may seem harsh medicine, but the benefit is very expensive, not well-targeted to those most in need, and serves as an incentive for students to borrow more than they otherwise would.   Maybe this is one area where bipartisan agreement could occur, as the House of Representatives has made such a proposed this year.

The proper way to deal with the issue of reducing heavy repayment burdens is to allow students to repay based on their post-college income, as the Obama administration, to its credit, has recognized.  What administration officials don’t seem to have recognized, however, is that ameliorating the adverse effects of high debt levels through income-contingent repayment serves as a further encouragement to institutions to keep their prices high and let the loan system deal with the consequences.

In the case of federal support for university research, we should move to a system of uniform indirect costs in which all universities are reimbursed the same amount for their administrative costs regardless of whether they rent or own their facilities and buy or lease their equipment.  And we need to eliminate or sharply reduce earmarks for university research facilities, as Congress somewhat reluctantly has done in the last year. The earmarks lead to higher costs just as in other cases when politicians decide who gets public funds, costs tend to rise.

At the State Level

For state governments, the biggest cause for concern is when the state funding formula is based on how much each institution spends per student. This is an invitation for cost creep -- when institutions are paid of the basis of how much they spend, they are likely to spend more. This problem could be addressed if states developed formulas that paid institutions on the basis of normative costs -- what it ought to cost to educate a student in a given field of study rather than what it does cost.

Another needed area of reform in state financing is to get out of the mindset that the only way public institutions can react to cutbacks in state funding is to increase tuition for existing students. For a given level of state funding, cost recovery rates can also be increased by increasing the number of students paying current prices. One reason this politically popular solution is not being used more often is that institutional officials – encouraged by their faculty members -- tend to worry more about quality being diminished by having more students than the consequences of limiting access.

One possible solution is for states, rather than capping enrollments, to build enrollment floors that are based on the number of students funded by the state.  Under this arrangement, public institutions would be allowed to decide how many additional students to enroll in various fields of study based on faculty workloads and capacity utilization and whether the marginal costs of enrolling additional students were less or more than the tuition and fees collected from those students.

While the federal government does not and should not have a direct role in decisions about what and how costs are reimbursed or how many students enroll at public institutions, one could imagine the benefits of a federal incentive approach that provided funds to states that adopted these kinds of rules for normative costs and enrollment floors.

So the answer to the question about what federal officials should do is not to rely on spotlights and megaphones to change institutional behavior.  The federal government could take several steps that would help move us in the direction of lower costs and prices and less money borrowed by students. 

But to be successful such an effort requires recognizing that it is never a good idea to pay organizations or people based on what they actually spend because inevitably they will spend more to get more. And it is always a good idea to keep politicians away from how public funds are allocated because that will inevitably result in more money being spent.  If the president’s discussion with the college presidents were to recognize these two principles, we could be well on our way to a more sensible set of federal policies that would limit the growth in college costs and reduce student debt burdens in the future.

 Arthur M. Hauptman is a public policy consultant specializing in higher education financing issues.

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The Disruption Is Here

A recent essay here by Robert Archibald and David Feldman challenged the idea of a "higher education bubble." They argued that a degree, even an expensive degree, is still worth it. They correctly pointed out that a degree is not an asset that responds to supply and demand like other markets. Their point that "on average most of us are average, and the data show that college is a very good investment for the average person," is true enough. But their real message was: there’s no need to panic, the status quo is still working. I disagree.

Said essay is part of a broader continuing discussion, this round set off by Peter Thiel's statements surrounding his 20 Under 20 Program encouraging students to "stop out" of college – with the idea that they are more likely to achieve entrepreneurial breakthroughs on their own than with more formal education.

Thiel is a managing partner at one of the venture investors, Founders Fund, in my company, Inigral. Ironically, Inigral serves educational institutions with our Schools App, and most of our clients are traditional colleges and universities. (Schools App is a community platform inside Facebook and on mobile devices that helps to welcome the incoming class during the admissions, orientation, and first-year experience, making sure students find their “fit” and get off on the right foot.) So my company helps keep students in college while Thiel is going around talking about the potential value of "stopping out."

Given this irony, people often ask me what I think about Thiel’s comments suggesting that higher education is in a bubble. Here's what I think: He is mostly right, but the future prospects for education are more optimistic than Thiel suggests for two primary reasons: 1) Though it looks like an economic bubble, it's unlikely that there will be a precise moment in which the market crashes. Instead, there will be a slow market shift towards amorphous market entrants that can deliver relevant, quality education conveniently and affordably. 2) There's a path forward if folks in higher education understand the processes of both disruption and change management.

Thiel's critique of higher education isn’t that degrees have no value. It’s about whether the industry is ripe for disruption, which I have defined in the context of education here. Thiel correctly observes that higher education is a market with unsustainable price increases based on irrational confidence. It’s true. Tuition has grown at rates that astound and outrage since the early '90s, and these prices seem unable to turn course. Our system incentivizes institutions to pursue selectivity, gargantuan research, and increased spending per student (small class sizes, student services, physical plant).

As of yet, there's no market mechanism to reward high levels of student success for the least possible cost. This is irrational. Thiel’s critique is based on an unstated assumption: market forces are starting to unleash on institutions that have not had to learn to thrive in a post-Internet, mobile device-oriented, and competitive marketplace. Indeed, few are currently asking themselves the important questions and embarking upon the dramatic transformations that will allow them to thrive.

This bubble is not going to suddenly crash; degrees are not normal assets that can be bought and sold on the open market. Even more importantly, the irrational confidence in education is founded on some fundamental truths: education produces opportunities for individuals, an educated population can both compete globally and provide a great foundation for democracy, and I would add that an education is an end in itself -- a transformative process that provides a near-priceless value. To boot, almost all of our nation's postsecondary institutions are filled with smart people who can not only survive, but also thrive if given the right road map, tools and opportunity.

Higher education should be transforming as quickly as it can. Whether or not there's a "bubble" that will be dramatically "popped" does not change the bold reality of an oncoming future, what I propose to call the Great Disruption.

Here's a suggested survival guide:

First, regard any continuing education programs, night school, certifications, or alternative models of education as start-ups within your organization. If you don't have one already, start a fully online program. Allow these groups to act as independent entities that can explore different models of how to educate and serve students. Hire the best, smartest, and most courageous people to run them. Allow them to innovate, and have your main operation learn from their innovation actively. Do not assume that their models cannot inform your traditions, because the speed at which traditional institutions learn to adopt these new models will determine how healthy they can stay when the full market forces of disruption start to occur.

Second, embrace "blended learning" and competency-based assessment. Move away from seat-time-based models in an attempt to bring rapid cost efficiency, especially to our more generic courses. We're already trying to teach our "Econ 101" courses to 500 students at a time. Why not go at them with even more scalable models to the point where one course can serve nearly unlimited numbers of students? It’s already possible through lecture capture, video content, blended learning, different technology supported models of coursework, participation, grading, and assessment. What needs to exist but doesn’t yet will come rapidly once the market starts to demand it.

Third, actively seek vendors as partners that can provide technology to "scale" any of your existing processes out of the classroom -- marketing and communication, financial aid, student services, community building, and student success. Over the past 30 years or so, technology has been used within the existing educational model and within the operating framework of our institutions. Institutions need to look at technology differently -- they need to see it as an opportunity to transform what they do and help them adapt.

The reality is that in higher education, there is a lot of spending focused on improving student success, but not all the efforts scale and their outcomes are often difficult to measure. Too often, success is measured anecdotally because there's no scalable way to gather real-time information, but this changes with schoolwide software. A small handful of schools, in particular Purdue University, seem capable of building this technology internally, with projects such as Mixable and Hotseat. But most colleges and universities will find that they are not very good software developers. Even if they can build something they will have trouble building upon it and maintaining it. So colleges should seek this kind of software from others.

Fourth, actively seek to take advantage of the Internet as services arise that are of interest to your students, your faculty and staff, and more importantly -- your market. Put lectures on iTunes U and Youtube, get your professors on Academia.edu and Notehall. Send your students to StudentMentor and StudentAdvisor. See what happens. Something will pop up that will remarkably improve or change what you do. One thing is for sure: we're quickly going to move to a model where "all-star" faculty members who have amazing reputations as both thinkers and teachers will probably be your best foot forward on the Internet.

Fifth, just adopt good management practices from business. Decide who you are and what you are good at, and start cutting the rest. Hold people accountable. Who is responsible for persistence and completion? Give people incentives. Who gets a bonus if the persistence and completion rates go up? Constantly improve institutional efficiency and effectiveness: who’s responsible for identifying opportunities to improve and taking the necessary steps?

On a personal note, my biggest fear is that our institutions in higher education are not structurally capable of making efficient and courageous decisions that will allow them to innovate and thrive through the coming Great Disruption. As a result, probably the biggest element of focus needs to be on change management and reorganization that will provide true accountability for student success, as well as create incentive systems that reward risk taking in pursuit of excellence and efficiency. Having said that, the worst thing to do would be to spend all your focus as an administrator going through a painful and time-consuming reorganization that delays pursuing the five tips listed above.

The cost-cutting race is on. And the Great Disruption is just beginning.

Author/s: 
Michael Staton
Author's email: 
info@insidehighered.com

Michael Staton is CEO of Inigral.

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