Federal appeals court weighs in on for-profit group's challenge to tightened Education Department rules, siding partially with industry on marketing-related regulation but upholding most of lower court decision.
Submitted by Anonymous on February 16, 2012 - 3:00am
The following are excerpts from a recent exchange between Bob Shireman and Michael Clifford as moderated by Ariel Sokol (and edited by Inside Higher Ed).
Ariel Sokol: If the new gainful employment rules are good for regulating for-profits, why shouldn't they be used for every single Title IV institution?
Michael Clifford: For-profit institutions have argued for the last several years that they have been targeted. After all, if federal oversight (e.g., 90/10, GE) is good for the for-profits, why isn't it good for all of higher education?
This question is at the core of sector participant duress. There is an inherent unfairness that all institutions are not governed by the same rules. And let's not play games that the current regulations are structured based on statutes already passed by Congress. If we're going to establish a relationship between income and debt, it should be associated with all schools. The excuse isn't to say that Congress won't bite, but our lawyers have concocted a legal way for us to regulate at least part of the industry where we believe excesses exist.
The for-profit industry would have found the regulations much more palatable assuming that all institutions were subject to the rules. Rather than be a battle of for- vs. nonprofit, the issue would have been reframed as good vs. bad institutions.
Bob Shireman: Most of the regulations apply to all types of institutions. The gainful employment regulation uses the statutory definition of career education programs, which includes most for-profit programs as well as public and nonprofit programs of less than two years. If, in fact, all the schools that run afoul of the regulation end up being for-profit institutions because their students end up with worse outcomes, I hardly see that they would have cause to complain. As a friend of mine said, that would be like bank robbers complaining that the bank robbery statute only applied to them.
One fundamental rule that applies only to nonprofit and public institutions is that no one is allowed to hold an ownership interest in the college’s revenues and assets. That prohibition exists to protect consumers and taxpayers. If Michael does not want that rule to apply to his colleges, then it is logical and appropriate for other rules to substitute.
Ariel Sokol: Let me ask the question a bit differently -- why shouldn't every single postsecondary programs have published debt to income ratios and repayment rates accessible to accreditors, academics, and the general public?
Bob Shireman: It should. Graduates' earnings information is already available in Florida and one or two other states, at least for public institutions. One issue that needs to be addressed is how to account for people who go to graduate or professional school after their bachelor's degree....
Ariel Sokol: Is there something specific to career education that requires additional scrutiny?
Bob Shireman: Career education is more amenable to accountability metrics because it is more directly related to a particular job. In their experience with the early GI Bill, Congress found that for-profit providers could not be trusted to deliver on the more vague, long-term bachelor's degree outcomes, but that career programs could be policed more easily. So for-profit providers were allowed in as long as they were focused on direct job preparation.
Michael Clifford: We are seeing a convergence of "career education" and "academic education". Metrics are metrics. Everything is measurable or should not exist.
Ariel Sokol: What are the ramifications of institutions no longer using enrollment metrics to compensate counselors, and do you feel that it goes far enough to change the culture among institutions?
Michael Clifford: The way incentive compensation was frontloaded to enrollment counselors was wrong. It is wrong not to have incentive compensation for every institution employee. There should be some bonus system based on cash, professional development programs, sabbaticals, vacation time, research time, etc. as different payment options across the board for all faculty and staff at an institution based on the outcome of the students who have graduated. These metrics should be measured for ten years after graduation, with staggered bonus programs not unlike other industries. If people are doing a great job, then they should be compensated accordingly.
Bob Shireman: As to Michael’s idea, what outcomes would you measure, and how would you attribute those outcomes to individual teachers, staff and other factors? Education is not like widget factory where you can tell precisely how much value each employee is contributing and can so easily and accurately assess the quality of their work.
As to Ariel’s original question, it is clear from numerous investigations of the industry that compensating recruiters based on enrollment helped produce a culture in which hungry recruiters were preying on the vulnerability of potential students struggling to earn a living and build a future. Such incentive pay, however, was not the only factor creating this predatory environment; investigations by Senator Tom Harkin and others have brought to light a series of internal documents and practices from a number of for-profit education companies teaching recruiters how to get potential students to focus on their own internal pain and turmoil – these coercive tactics often appeared to be company policy or tradition. Scrutiny has now forced several companies to disavow such approaches, at least publicly. Time – and further scrutiny – will reveal if the new regulations and internal reforms are enough to change the culture.
Ariel Sokol: Why is there no accountability in higher education regarding student outcomes?
Bob Shireman: Two developments in 2011 provided considerable momentum to efforts to encourage greater attention to student learning outcomes. The publication of Academically Adrift, revealing that vast numbers of graduates of traditional institutions failed to make any gains in critical thinking skills during college, has made it more difficult for colleges to deny that there is a problem. And the Carnegie-led re-examination of quality in the business degree has energized soul-searching by leaders in that discipline, the most popular undergraduate major. Colleges increasingly are using measures like the Collegiate Learning Assessment to identify strengths and weaknesses in their institutions, and having a focus on verified learning is becoming part of what contributes to a college’s reputation.
That said, we should be careful about wishing for a college outcomes test to compare colleges.
Reasonable people disagree about the goals of higher education (analytical skills, factual knowledge, communication skills, initiative, curiosity, confidence, creativity, diligence, employability). Measuring them can be tricky or impossible; and determining causation is even more difficult (the students might have done well because of their academic or family backgrounds, the professor’s teaching, the advising and support, their peers, the facilities, the technology, or their own initiative). Pressing colleges to focus on the easy-to-measure can skew higher education in ways that may improve some institutions but could narrow or deaden the curriculum in many others. We need higher education to lead to boundless ingenuity; standardized outcomes are antithetical to that goal.
Which colleges are good at stimulating boundless ingenuity? The difficulty in measuring something like that explains why reputation – a brand that can be trusted – is so dominant in the higher education market. As an alternative or a supplement to some of the current efforts to produce better assessments, I am intrigued by the idea of digitally capturing the actual coursework that thousands of students do at various colleges. Examining the actual evidence of student achievement – the material that faculty judge as worthy of conferring a degree -- would value the variety that is a part of higher education’s strength, and might allow some of the less measurable goals of higher education to show through.
Michael Clifford: Accountability will come about the way Adam Smith desired. The consumer and the producer will eventually establish accountability. It is my belief that the Federalization of Higher Education Movement will not bring additional needed accountability. We need to localize all aspects of education. Look at the phenomenal impact that crowd sourced evaluation is having on small business across America with startups like Yelp. What the federal government should do — as well as the states with support from all accrediting agencies -- is to demand absolute, full transparency from all post-secondary educations -- for-profit and not-for-profit alike -- in a centralized website so the consumers can evaluate the producers.
This will bring about true accountability.
Our family does not sponsor any educational institution that has something to hide. We demand clear, open transparency to our donors, our investors, staff, faculty, regulators, and -- most importantly -- students, their families, and employers. The only way to compete in an open free market is with open free data.
The divisive nature of our partisan politics has driven a dangerous wedge between for-profit and nonprofit education, with the business models of the nonprofit schools in danger of becoming obsolete. They can only survive on dwindling state and federal resources plus endowments are suffering, and fatigued donors. In California, I've not heard a single college president talk about efficiencies -- every speech is to each constituency who can continue to give, grant, or fund their operations with no consideration for cost cutting or efficiencies. This is a dead end — and even the 1% can’t afford it!
Bob Shireman: Don’t forget about the other consumers: the employers and society at large who want college degrees to actually mean something. If these end users are not a part of the equation, then a rational consumer will simply seek the college that gives him a degree for doing nothing. Indeed, today I can go online and figure out which courses at a college are the Mickey-Mouse options where I can get an A without doing much work at all. Using some type of data transparency isn’t a bad idea; what, specifically, would you suggest?
Ariel Sokol: Why do you think that problems at specific for-profit colleges end up condemningthe entire private sector, while issues in the traditional sector don’t raise the same concern?
Bob Shireman: Higher education is a trust market, in which the buyer has to trust that the product is what it seems. The student can’t judge whether a curriculum and standards meets the expectations of employers, of a discipline, or of society, and they can’t know whether it will meet the grander goal of tapping their full potential. To the extent students are able to judge their college educations it occurs when it is far too late to get a refund. Much of medical care has similar dynamics, which is why the government has a rigorous process that attempts to avoid snake-oil problems by licensing medical doctors and testing new drugs for safety and effectiveness. In higher education, the government and accreditors declare institutions as worthy of our trust who in turn anoint the faculty and staff.
Exploitation can occur in any sector, but the awesome power of the profit motive makes the scandals more likely and more audacious in the private sector. “That represents a weakness in the for-profit model,” says Kaplan CEO Andrew Rosen in his recent book. “People can exploit the short-term opportunity for-profits that’s inherent in this model in a way that hurts students, taxpayers, and the entire industry.”
The for-profits get slammed as a sector because the incidents confirm the rational fear the companies are taking advantage of the trust relationship. In the same way, it is rational for people standing in line at the DMV to curse the lack of a customer-service profit motive in that transaction. The appropriate reaction is to acknowledge the problematic incentive while demonstrating a resolve and a system for preventing abuse. Instead, when we began our regulatory efforts at the Education Department -- which applied to all sectors -- the for-profit colleges portrayed our effort as an attack on the sector and turned the whole regulatory process into a referendum on for-profit higher education writ large. After that, every piece of data, every anecdote, proved the sector’s outright denial to be overstated. In this sense the reputational damage to the sector was largely self-inflicted.
Michael Clifford: Bob makes some excellent points about trust. The concept that the government can declare institutions worthy of our trust is flawed. Government should empower not restrict.
Bob misses the last 30 years of powerful lobbying by large state institutions on government bureaucracies to slow down or crush entrepreneurs -- rebels with a cause -- who are trying to improve the education system because they are a direct threat to the status quo. This extremely powerful lobbying by the status quo has influenced public perception by taking very small problems and exploiting them across an entire sector.
Profit and power are motives that can be used for good or evil, but I believe that public opinion regarding trust of state institutions, private not for-profits, and especially community college systems are deteriorating at an almost biblical rate. It’s interesting to note that over the last year and a half, we have not seen any “occupied” demonstrations on for-profit colleges -- only nonprofits. Might it be that the people attending the for-profits schools are completely focused on getting in, getting out, and getting on with their life with careers?
Bob, I have personally spoken with the CEOs of most of the schools who informed me that they were never invited to participate but were singled out as the sole problem in the education sector. Why hasn’t the IRS begun similar investigations into the rampant abuses within the nonprofit postsecondary education systems when it comes to use of funds? I must say, I take issue with your comment that it was an “apples for apples” discussion. The resulting regulatory landscape clearly does not confirm a fair and balanced equal playing field, nor has it done anything to help students get a better education at an affordable price, nor does it provide professional development, increased salaries, or benefits for faculty, nor does it attract quality leadership from the private sector to teach. I find it disingenuous to say that “the reputational damage to the sector was largely self-inflicted.”
Bob Shireman: I appreciate that some students want to “get in, get out, and get on with their lives.” The way to accomplish that is to skip college and just take a test that demonstrates what you already know and can do. We should figure out a way to subsidize that so that these students’ time and our taxpayer dollars are not wasted. To be worth a substantial taxpayer subsidy, education needs to do more, motivating and inspiring students to learn and create beyond their previous zone of knowledge and comfort.
As for the CEOs who told you they were singled out as the sole problem in education, I can neither defend them nor can I explain or confirm the accusations. I can see an extraordinary amount of evidence produced by government and media investigators of blatant, cynical abuses in the for-profit sector resulting in serious harm to students and taxpayers. I also see problems and scandals emerging at public and nonprofit institutions regularly. They don’t band together and complain that they are being attacked for being public or nonprofit. Why do so many for-profit leaders play the victim card instead of working to prevent, confine and repair the problems that do come up?
Ariel Sokol: What is a good actor in for-profit postsecondary education, and how do you define it? What is a bad actor and how do you define it?
Bob Shireman: A good actor recognizes the information asymmetry in the higher education transaction and endeavors to correct this market imperfection by serving as a neutral adviser to potential students and to enrolled students. A bad actor (in any sector) takes advantage of the information asymmetry. A very bad actor takes advantage of the information asymmetry with the most vulnerable consumers.
In the recruitment phase, good actors make suggestions of other options potential students could consider and encourage them to compare; bad actors feed on students’ misperceptions about the magic that a college degree can do. (“People with a B.A. in office management can run a hospital, making up to $180,000 or more! We’re accredited by the same agency that accredits Harvard! We have classes starting tomorrow, let’s get you signed up!”) Very bad actors leave many students worse off, and often justify their deeds by posing as saviors of the poor.
In providing the education, good actors have a challenging curriculum that inspires and motivates students to work hard in ways that lead to deep learning; bad actors – too common in all sectors -- have a curriculum and faculty that may look fine on the surface but fails to engage students in ways that inspire lifelong learning.
Michael Clifford: Great job, Bob -- you nailed it on this one!
Let me just add that for the last 14 years, I have encouraged any institution that we sponsor financially or help create or manage going forward to fulfill what I lovingly refer to as our “Four Gospels of Higher Education,” which are to: (1) lower tuition and fees every year; (2) provide broader access; (3) graduate faster with less debt; and (4) get an education with a purpose. Over the last ten years, it has been my experience that if the leadership of an institution can focus on those four metrics in all of their strategic planning, the “good actor” in every group emerges.
Ariel Sokol: Why has the cost of education outpaced inflation over the past 50 years? What are the mechanisms to reduce the cost of higher education?
Bob Shireman: The cost of delivering undergraduate education averages something under $10,000 annual per FTE at community colleges, about $12,000 at state colleges, and $15,000 or more at public research universities. Spending is much higher at some public institutions and especially at the brand-name private universities which have been competing for star faculty, building the most up-to-date facilities, and adding the latest equipment. Amenities to compete for students have also played a role. The escalating spending at elite colleges leads others who want to join the club to spend also if they can find the money.
At public institutions, spending has increased somewhat more than inflation because education is labor intensive. A good professor choreographs a student’s interaction with carefully-selected content, finding ways to motivate the student to put in the brain effort necessary for learning. It is difficult to replace these complex, nuanced judgments with either cheaper labor or with technology. When innovation does occur (e.g., calculators, or Rosetta Stone language learning programs) the boundless nature of higher learning means that new challenges often replace the old objectives rather than reducing the requirements for a credential.
One way to reduce costs is to demonstrate that excellent undergraduate learning can occur at colleges without star faculty and expensive facilities.
Here’s another approach. “Full-time” college students today spend far less time in class and studying than college students did 40 years ago. Let’s reboot the system, elevating standards to significantly increase student academic engagement while reducing many majors to three years. The result would be students who do more college-level work than they do in four years now, while finishing a year earlier.
Michael Clifford: Bob, you highlight the fact that the big issue is that college is labor-intensive. Why has government, especially while you were at the department, not created a regulatory environment to put pressure on all institutions to lower costs? I’m not an advocate of price fixing or margin monitoring, but the current system of giving more loans to students who are unaccountable to pay higher tuition of a result as such flawed policies as [the] 90/10 [rule] seems to create a big part of the mess that we are now experiencing. Why isn’t government creating accountability levels that encourage, not penalize, institutions to lower tuition? I guess my prejudice would be that government does not know how to lower costs and only knows how to demand more.
When I read the speeches regarding policy from all of the presidents and chancellors of state institutions, not once has anyone mentioned cost cutting, efficiencies, or issues like labor demanding more benefits, entitlements, salary increases, and guaranteed lifetime employment for no work called tenure. Help me, Bob, with this issue.
Regarding labor costs, I think that he is missing putting the “big turd” on the table: tenure.
When I went to pay for my daughter’s parking fees at UCSB, I walked across a very large parking lot with hundreds of spaces reserved right next to the classrooms. As I doled out my $1,500 per year for a parking place, I asked the wonderful student worker clerk who all those parking places were reserved for. She snickered, “Tenured faculty… a bunch of really old people who haven’t been here in 15 years but they still get a parking place… and people like me have to work at this job just to try and stay in school.”
Just like any of our current government financial problems, we must take a scalpel to the “entitlement mentality.” We must begin to direct our limited resources where they will have the most impact.
I would argue that the enormous amount of waste in the nonprofit sectors that are trying to create star faculty, building expensive buildings that are hardly used, and bragging about the latest equipment does very little to improve learning outcomes.
To effectively educate America’s middle class and compete on a global basis, we need to integrate private sector professionals with the highly unionized and entrenched current faculty. No doubt, this will be a difficult endeavor for leaders. Learning is mostly about motivation, and if we inject innovation like Bob references (calculators, Rosetta Stone, or the latest Apple textbook self-publishing software), we can continue to challenge students to learn more cost-effectively….
In both nonprofit and for-profit sectors, increased involvement and regulations from the federal, state, and special licensing institutions consumes an enormous line item budget expense. In institutions that I financially sponsor (both nonprofit and for-profit), I estimate that at least one-third of the leadership team’s time is spent navigating a very complex regulatory environment. Why can’t we simply teach and measure the results?
Bob Shireman: When I testified with the CEO of DeVry a few months ago, he got a lot of mileage out of his declaration that we should regulate based on outputs instead of inputs. Everyone nodded: we all like the idea. But no one puts forward an actual proposal for how to do that. One offered analogy was that rules regarding the construction of the building were designed to ensure that we would not be crushed by a collapsing roof or unable to exit in a fire. These rules were portrayed as a good, outcomes-based approach. After the hearing I realized the analogy made no sense at all. In fact, those rules are about inputs – the materials, the dimensions, the workmanship -- not the outputs.
We need specific proposals for measuring outcomes, not constant, repeated exhortations that outcomes measurement is the way to go. Measuring outcomes is the key to reducing costs, because it eliminates the argument that an innovation has reduced quality.
Ariel Sokol: Do we as a society need to have 4,000 institutions of higher education? Would it be preferable to see a consolidation of higher education institutions to eliminate duplicative costs?
Bob Shireman: A convincing economics literature suggests there are inadequate incentives for public and nonprofit entities to combine even when it clearly would be efficient to do so (the participants sit tight because they can’t sell out their shares to monetize the efficiency as a for-profit would do). This calcifying dynamic does seem to be at play in higher education and in K-12 education.
Michael Clifford: My answer would be that we need more than 4,000 institutions of higher education. We need more specialized institutions to address the global job market. We need fewer institutions that try and be all things to all people. I would much rather see institutions with the highest quality, expert faculty on very specific job niches with the cross-pollination of bloated expenses, facilities, bureaucracies, and internal politics that cost so much time and money for a normal state/public/nonprofit institution. This will require a tremendous upgrade in the accrediting commission's abilities to monitor more and more multiple institutions. No longer can you have a volunteer 30-year English teacher from a community college in Nebraska reviewing a high-tech technology department that offers the latest SEO technology with marketing and business support for an evaluation. We need to have specific horses for specific courses.
We need to become much more localized in our administration and approach to education. Local citizens will understand how to leverage local resources to compete globally....
Ariel Sokol: Many postsecondary education companies are implementing quality enhancing initiatives, and Apollo Group implemented its orientation program, while Kaplan rolled out itsKaplan Commitment plan. In your opinion, are these moves sufficient to prevent misrepresentation?
Bob Shireman: They are good steps. I like the concept of a no-risk free trial that helps students to understand what they are getting into.
Michael Clifford: I was recently asked an accrediting commission meeting to define “quality”… I said it is like pornography… I know it when I see it. We all need to better define “quality.” It is my belief that we will see many more initiatives like this in the near future, but not based solely on the regulatory pressure. I also like the "test drive" concept. It's a very innovative approach to introducing students to the institution and should be instituted at all public state and nonprofit organizations as well….
In the future I can see auction sites (not unlike eBay) as platforms for students bidding on various courses. As technology develops, we will begin to see "roll your own" degree programs that will enable students to take various courses from specialized universities, culminating in a degree and a resume for their dream job. To market various degree programs on a bid basis, institutions can manage the enrollment process across the board by having flexibility in placing a student in the right degree program just like many other industries….
In the future I predict that we will see regionally accredited institutions that can be profitable without Title IV student loan funds. As technology continues to create efficiencies, as staff and faculty embrace innovative online delivery models, and as legislators, regulators, taxpayers, and accrediting agencies are faced with increased challenges regarding access, we will see these new all cash models emerging.
Institutions will provide degrees in exchange for 10% of the student’s salary for a better than average return on investment. Students will own stock in for profits after graduation as a bonus for completing on all metrics above average. Innovation will be spread across the sector in all departments….
Bob Shireman: While I recognize the nod to Justice Stewart’s famous line, I would have preferred a comparison to measuring beauty, virtue, integrity, or faith. Your Honor, let the record show that after insisting that we should measure outcomes, Michael’s specific suggestion for how to accomplish that is to show it to him because he knows quality when he sees it.
Ariel Sokol: Many for-profits have engaged in substantial self-regulation in addition to complying with the new regulations. Presumably this is having the effect of improving the studentexperience and protecting consumers (possibly to the detriment of an institution's financialcondition). As such, can one say that Bob Shireman and the Department of Education are heroesin that they catalyzed needed reforms?
Michael Clifford: The Department of Education and Bob should be credited for identifying real problems that the for-profit sector should have self-regulated. Unfortunately, in my opinion the prescription did not fit the diagnosis.
Thank goodness that this is not brain surgery, except for the poor students' brains. Then Congress mucked it up with bipartisan bickering that did nothing but hurt the institution and students. Then came Wall Street to monetize the bickering. The solution should have been the accrediting agencies working with the state governments….
Bob Shireman: The public policy issues in higher education are complicated and fascinating. They also matter in a big way, especially for the disadvantaged, for upward mobility, for the vitality of our future economy. I appreciate higher education leaders and innovators who dive in and grapple with the questions about how to address those tough public policy dilemmas; I look forward to more good dialogue....
Ariel Sokol: Are the program integrity rules sufficient to maintain appropriate conduct by institutions over the long haul?
Bob Shireman: History suggests not. The regulators, the colleges, and consumer groups all need to be vigilant so that problems do not re-emerge.
Michael Clifford: Hopefully, just like the Japanese Admiral said in “Tora Tora Tora,” the last two years has indeed awoken a sleeping giant. From my travels with the leadership of both large nonprofit universities as well as for-profit universities, it is clear that this wake-up call has launched the first real, unified lobbying effort for postsecondary education beyond the nonprofit scramble for public money and grants. The for-profit industry better continue to fund, pay attention, and make a legitimate case based on real outcomes and real data, all driven by innovation if it deserves to maintain its licenses. By the way, I hate our system whereby the only way to win is with lobbyists.
Misrepresentation has always been the real problem in this business sector. In fact, misrepresentation is always the problem in any business or nonprofit sector. Lying is wrong.…
Ariel Sokol: Should for-profit and nonprofits operate under the same set of rules?
Bob Shireman: Mostly, yes. But there are differences between for-profits and nonprofits that should not be ignored. Owners of for-profit companies have the right to seize the uncommitted net assets of the enterprise at any time, creating an incentive for efficiency and growth. This incentive can have an ugly side, especially when the consumers are unsophisticated and the government is largely paying the bill. Managers of nonprofit (and public) institutions relinquish their claim on the unrestricted net assets of the enterprise as a way of assuring customers and funders that the resources are dedicated to education. With a product that is difficult to judge, this invites trust that the college will not cut corners or grow in ways that undermine quality.
Treating for-profits the same as nonprofits would mean that for-profit owners would have to give up their equity stake in the company. Some have taken this step. However, for those who choose to maintain an equity stake it is appropriate for public policy to recognize the potential hazards and apply appropriate protections.
Michael Clifford: Bob, I read your response three times. I must say that it irritates me when government leaders insult students, their families, counselors, and employers as “unsophisticated.” This is the haughty, typical government-run approach to over-regulation. Our Founding Fathers believed that each American was smart enough to govern themselves under the Constitution to seek life, liberty and the pursuit of happiness; they never said that people were unsophisticated, stupid, and lacked the ability to make choices! I have answered hundreds of student inquiry telephone calls, reviewed numerous application essays, and interfaced with parents, employers, high school counselors over the last 12 years. I also have met with immigrants who barely speak or read English that want to get into our colleges.
Never, in all of those encounters, have I met a student who was “unsophisticated.” Nor have I met a student who says, “I really hope that the U.S. government helps protect me from your school.” These students are vigilant shoppers; they ask the right questions. We, as an industry — both nonprofit and for-profit — need to have more transparency, with full disclosure on all issues to help them in their search. These students understand better than the government that they are making a gigantic time commitment plus possibly the largest financial commitment that they will make in their life other than a home mortgage….
Ariel Sokol: Should the government provide student loans rather than the private sector, and if sowhy?
Bob Shireman: The conservative economist Milton Friedman first suggested a government loan program as the right approach to a market failure that tends to cause people to under invest in their own training. If the government is shouldering all of the default risk and is making the underwriting decisions (who can borrow, how much, at what price, for what training, at which institutions) then taxpayers should also get any earnings on capital to help compensate for the cost of those risks. That said, the government should and does rely on private sector companies to do the actual work of collecting payments on the loans. (See a video of my explanation of the history and finance structure of the student loan program at http://www.newamerica.net/events/2009/future_federal_student_loans).
Michael Clifford: Adam Smith might be suicidal if he reviewed the philosophical approach to what is now a governmental monopoly of underwriting and servicing student loans. What is the tricky area of "student" loans? Credit risk. Most students that I have spoken to don't even understand what they are getting into. Yet the United States Department of Education holds the schools responsible for the students' use of the money they borrow.
The schools do all their work getting the money, educating the student on what they are getting into, and then hand it to the student, hoping and praying that the student uses it for school, and then the schools get penalized if the student doesn’t pay it back even if they didn’t use it for school. Wow. What a broken system.
To add insult to injury, the government contracts out all loan collection which creates a layered, bureaucratized structure ensuring that it will cost more money to collect the loans than a traditional, purely private sector context. Do the numbers.
Fundamentally, my friend Bob's Shireman’s thinking (known lovingly in some circles as the “Shirementality”) is a micro view of student loans, which reflects a macro view to extend government intrusion or takeover of most of the U.S. economy….
Ariel Sokol: Should Congress consider imposing some kind of risk-share program on for-profitschools?
Bob Shireman: I like the concept, but operationally it is severely flawed: the school most able to set aside funds for risk sharing would be the school that spends the least on instruction while charging the highest tuition possible. Clearly there’s some serious design work that needs to be done for the concept to work.
Michael Clifford: I don’t like any kind of notion of Congress “imposing” any programs on any schools, whether they be nonprofit or for-profit. The federal government should stay out of the “imposing” business in higher education.
Having stated my philosophy, I think that states should provide a free market regulatory environment based on risk sharing for both nonprofit and for-profit schools. It is time for some innovative pricing models that reward students, faculty, and staff for desired positive outcomes.
Ariel Sokol: Could the federal government do a better job at accreditation than the accreditors?
Bob Shireman: Without private accreditors to rely on, the federal government would have to turn to someone to help make expert judgments about quality. It’s likely to be the same types of people and organizations who are now involved in accreditation. So I’m not sure it would end up much different than what we’re seeing now.
Michael Clifford: The concept of regional accreditors works because it is much more localized. The leadership at WASC knows what the citizens of California and Hawaii need better than the people in the Department of Education in Washington D.C. The more localized that we can make education, the better that we will be able to compete globally. If I could wave a magic wand, I would give more power to innovative accreditors like Dr. Ralph Wolff at WASC, Dr. Sylvia Manning at HLC, and Dr. Belle S. Wheelan at SACS.
They are on the front lines intervening, interacting, innovating, instituting, and providing a “get it done” atmosphere for educators. Give them more resources and more power and let them level the playing field between nonprofit and for-profits in order to inject more efficiencies and better outcomes for students….
Ariel Sokol: What are your thoughts regarding public private partnerships between non- and for-profitinstitutions?
Bob Shireman: Among four-year colleges, I expect we will see more partnerships with for-profits taking on a vendor role, bringing innovation and efficiency through new platforms and processes for teaching and learning while leaving the ultimate decisions about quality to the nonprofit institutions. The growth of for-profit institutions may be stronger in vocational education, where the clearer objective makes accountability easier. For-profits have performed best in that space….
Michael Clifford: We are seeing such incredibly explosive and rapid changes, driven by Silicon Valley’s digerati, not across every business sector, that dinosaur-type leadership in K through 20 education is hurting students and employers. I am astonished at the public school system here in San Diego, which has huge gaps in their teaching of hands-on, real-world knowledge. Students aren’t taught how to open a bank account, vote, balance a checkbook, or write a résumé, and high school students don’t have a grasp on American history for the first 100 years of our country. They do not know how to collaborate or process critical thinking, and their communication skills — other than texting or Facebook — is almost nil. The classroom configurations are outdated and ineffective. I cringe when I drop my 14-year-old daughter off at high school, thinking that she will be fixed in an uncomfortable chair looking straight ahead for six long hours at a 27-year-old talking head who is reading from last year’s notes. It is a painful experience to subject my very bright, creative teenager to at this time in her life. No wonder she is completely diverted by her community of friends rather than thirsting for knowledge!...
Ariel Sokol: What is the future and role of online in higher education, and how should theDepartment of Education confirm the quality of online programs?
Michael Clifford: It is my belief that online education has just begun disrupting K through 20 education. Again, I feel that all of these quality outcome governance issues should be as localized as possible, with the accrediting bodies being given most of the power.
Twenty years from now, educators will look back at those "cute, beautiful things called campuses." While there will always be a place for a campus experience, there is no way to educate the United States – let alone the world – without delivering education via mobile phone-like units. Online education delivered from the cloud, anywhere, anytime, on any device will create a lifelong learning approach to education. "Roll-your-own" degree programs will enable a student to take a history course from a specific institution and a specific professor in a very specific niche while taking math from another institution's professor, with their entire educational experience culminating into a degree that is the resume for their desired job and career. Global corporations will begin to write the resumes for potential employees before the student starts college, with assorted payment plans attached to performance upon graduation. All of this can be done through the technology of online education.
Bob Shireman: A high-quality education is not a one-way interaction that can just be “delivered.” Unfortunately, much of higher education is not high quality, and I am eager for new approaches that can inspire and guide learning. Technology is key, but I do not expect it to replace all live or face-to-face human interaction in education.
Ariel Sokol: What should the role of the for-profit sector be in educating future generations in faceof dwindling federal and state funding?
Michael Clifford: As I shared elsewhere in this interview, I believe that we will see emerging for-profit institutions that do not rely on Title IV funding. The deployment of technology in the online learning space combined with innovative approaches by regional and national accrediting agencies will create this global phenomena.
Many free degrees already are being offered, but the next key will be when the accrediting agencies adopt all of these new emerging models. I believe that we will soon see an "all you can eat" online regionally accredited model based on a monthly subscription fee of perhaps $99 per month to serve as a self-paced, self-motivated accredited degree program.
Bob Shireman: I agree we are seeing the development of some pretty interesting options for the self-motivated learner.
The real efficiency will come with innovations that motivate the student who is not self-motivated, providing them with expert guidance without involving nuanced judgment by people who need to be paid.
Michael K. Clifford is founder and chairman of SignificantFederation.com, which has invested in Victory University and United States University. Bob Shireman was U.S. deputy under secretary of education in 2009 and 2010, and now heads California Competes, a nonprofit group. Ariel Sokol, the moderator, is a financial analyst. The full version of this exchange can be found here.
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.