Taming the 'Wild West'

Changes are needed in the federal student aid system to ensure that money flows to worthy colleges and students, Charles Reed and King Alexander argue.

March 17, 2011

In the past several decades, higher education funding has become excessively complex and fiscally inefficient. To make matters worse, as highlighted in a recent report from Postsecondary Education Opportunity, public higher education has seen a decline of 40 percent since 1980 in state tax appropriation effort when measured as a ratio of state personal income, resulting in an unremitting escalation in student fees and tuition.

At the same time, a poorly contrived federal funding scheme has given fiscal incentive for states to reduce government funding and shift the financial burden to students and parents. This misdirection has made Wall Street shareholders in publicly traded for-profit institutions and richly endowed private colleges and universities the beneficiaries of the system, rather than the intended students and parents. Perhaps it’s no surprise, then, that a recent issue of The Economist referred to the American system as the “Wild West” of higher education.

If we are going to make real progress toward President Obama’s educational goal of leading the world in college graduates by 2020, we will need systemic change in the way higher education is funded. Unfortunately, instead of discussing necessary systemic changes that could substantively benefit students and the institutions serving our neediest student populations, the U.S. Congress is debating how to reduce Pell Grants and eliminate the summer Pell Grant program that has been in place for only one year. (Some critics have even begun to claim that the Pell program has become too large to sustain.) Before adopting such reductions, three important factors need to be considered if we are to change direction for the betterment of the common good.

First, we cannot continue to assume that students and parents can make rational college choices in the higher education market place when they are overwhelmed by the media's siren song, which manifests itself in massive marketing efforts to lure students to educationally suspect colleges and universities. The theory of the inefficient market is nowhere better supported than in American higher education, where “imperfect information” is the norm and many institutions fight diligently, with lobbyists and vast media campaigns, to keep it this way.

Taking this one step further, we must recognize that the accreditation process in American higher education does not mitigate the “imperfect information,” but rather aids and abets the status quo. In fact, the stories have become commonplace about how many less than academically stellar private for-profit institutions have purchased accreditation by teaming up and buying struggling not-for-profit institutions. Unfortunately, many of these institutions are measured by standards that are only remotely related to a quality education and are making it increasingly difficult to distinguish some for-profit institutions from their not-for-profit partners.

Second, we must acknowledge that the for-profit institutions absorb a disproportionate amount of public funding. Currently, for-profit colleges and universities enroll approximately 12 percent of students in higher education while receiving nearly 25 percent, or nearly $9 billion, of all federal student aid grant funding. In addition, the for-profits benefit to the tune of about 24 percent of all federal student loan subsidies. This gives for-profit colleges and universities approximately $26.5 billion in both federal grant and loan funding annually. With accreditation in hand, for-profits have been able to seize on federal largess to fund up to 90 percent of their entrepreneurial educational enterprises.

Furthermore, in many cases, the remaining 10 percent of revenues originally intended to be generated from private sources, as required by federal law, is being aided from state government student aid grants and new GI Bill grant benefits -- benefits that inadvertently provide more funding to higher-priced institutions.

For example, in California, Cal Grant student aid awards to those enrolled at for-profit universities average $9,708 while Cal Grant awards to students attending California State University institutions average $4,884. It seems that, despite the rhetoric that for-profit institutions are successful due to the invisible hand of the market, these for-profit institutions are actually government-funded institutions -- not market-based.

To its credit, the U.S. Department of Education, with the assistance of some key U.S. senators and House members, has sought to introduce performance standards and other restrictive rules to insert some semblance of integrity into the federal funding process; however, this initiative has been soundly criticized by the new majority in the U.S. House of Representatives, thanks in part to the highly financed for-profit college and university lobby.

Sadly, most state governments have also abrogated their sovereign duty to ensure that public funds for higher education are not wasted by lining the pockets of Wall Street shareholders. One can readily gauge the failure of state governance in this arena by simply being a sentient traveler on America’s highways and observing the hundreds of green and white government-installed signs beckoning enrollment in for-profit education corporations. Unfortunately, no warning signs accompany such signage informing the student that a number of these institutions have been compelled to repay the federal government millions of dollars for various regulatory violations, including Pell Grant fraud.

Third, to ensure that Pell Grant awards are not reduced and the summer Pell program is saved, we must rethink the widespread “mission-blind” distribution of these federal funds. According to 2008 Education Trust data, the average enrollment of Pell Grant-eligible students at private research universities was only 12 percent, while the average for public research universities was only 19 percent. These averages are considerably lower than in years past and continue to decline.

This disturbing trend, accompanied by federal budgetary reductions on the horizon, indicates that maybe it is time to ask why publicly generated federal student aid funds flow to some universities that only manage to enroll 8 or 9 percent lower-income students despite having multibillion-dollar endowments. If existing federal student aid funds can be accompanied with new federal lower-income student thresholds, much like what exists under the Elementary and Secondary Education Act for Title I schools, then some additional funds could be made available to those students and institutions that are much more committed to college access.

Establishing a minimum threshold would also incentivize institutions to enroll more lower-income and underrepresented students, or -- in some cases where institutions do not meet the requirement -- force them to demonstrate that they are making progress toward the new funding goal. Without federal pressure or leverage designed to maximize overall public needs and benefits, many of our nation's top universities will continue to reduce their commitments to our neediest students.

Clearly if we are going to preserve what is most important in our federal funding of higher education, we must make difficult choices in the way that we spend billions in publicly generated support. Therefore, before cutting the total amount of federal funding for higher education, which we know will have a deleterious impact on students and the future economy of the nation, we should make sure that our tens of billions in publicly invested dollars are spent to produce the outcomes the public expects. By ensuring that public resources are spent on students and institutions providing the greatest public good, we can build a better, more efficient, and more effective federal funding system for higher education.

This will undoubtedly help us move closer to the President’s 2020 goal. It will also help our nation tame the “Wild West” of higher education to create a system that is more productive, meaningful, and fair.


Charles B. Reed is chancellor of the California State University System, and F. King Alexander is president of California State University at Long Beach.

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