Durbin’s Higher Ed Opportunity
Although long overdue, there is finally a debate in Congress, the White House and the news media over how the federal government should address rapidly increasing college tuition. President Obama has repeatedly attacked rapidly rising tuition in speeches. Peter Thiel controversially called higher education the biggest bubble since real estate circa 2008. And for the first time in a long time, the wisdom of the access-to-college-at-all-costs mantra is being questioned by more than just the fringe on both sides of the aisle. Senator Richard Durbin’s (D-IL) recent proposal turned some heads, but the consensus is that his proposal has little chance of passing — and is definitely a nonstarter in an election year.
Durbin suggests changing the so-called 90-10 rule -- wherein for-profit and career colleges must earn at least 10 percent of their revenue from sources other than federal student aid to be eligible to receive any federal aid -- in two key ways.
First, he proposes that the required revenue split be shifted to 85-15, which means that these colleges would have to earn more revenue through non-federal aid sources. (It was actually this way when the idea was first enacted into law, but was softened to 10 percent amid lobbying by career colleges.) And more important, he proposes that revenue earned from military benefits such as the Post-9/11 GI Bill be included in the 90 (or 85) percent, in recognition of the reality that military benefits are de facto federal aid.
Today’s 90-10 rule creates a powerful incentive for for-profit and career colleges to recruit aggressively anyone eligible for military benefits -- but not for the right reasons. Indeed, because military benefits count as part of the 10 percent of “non-federal money,” for every one military student a college signs up, it can acquire nine non-military students paying full tuition with federal loans.
Durbin’s proposal to include military benefits in the 90 percent has some common sense behind it; after all, these are federal funds. Although doing this would probably increase prices in the short-to-medium term as for-profit and career colleges raised tuition to be sure that 10 percent of aid was coming from non-federal sources, in the longer run properly accounting for federal costs will make the true cost of education more transparent and create more room for start-up higher education institutions that are lower in both price and cost to emerge.
Although it’s a shame on the one hand that this looks unlikely to pass, it may open an opportunity to improve the legislation both for the short and long term in some important ways.
In the short term, Durbin should modify the language of the proposed bill in a few ways. First, drop the idea of moving the policy to 85-15 in order to garner consensus and get the bill passed.
More importantly, he should change the bill to address people, not revenue. The difference is subtle, but critical. Instead of requiring 10 percent of revenue to come from non-federal dollars, require that at least 10 percent of students pay full tuition out of pocket. This is, in essence, how some of the regulations were written for the GI Bill shortly after World War II when there was considerable -- and justified -- fear that government dollars were going to flow toward unethical and poor-quality institutions. The idea behind this was simple. People with sufficient means to pay the tuition outright have the social capital to identify if the education is of high quality and if the value proposition is likely to have a positive return on investment, even if that return takes nearly a lifetime.
Many people correctly point out that 90-10 in its current form actually drives up tuition by incentivizing colleges to raise prices so that student loans and grants don’t quite cover the cost and they can receive 10 percent of revenue from non-federal aid sources.
By making 90-10 about people, not revenue, we give these schools a way out without raising prices: recruit students with the means to pay or lower prices enough so as to be priced attractively for many more individuals to be able to pay full tuition. Doing this would also make other proposals that might be logical under the current 90-10 construct — such as allowing institutions to limit the amount of federal loan dollars students can take out or to subsidize low-income students by paying the federal government back for excess federal aid received so that the college is in compliance with the 90-10 rule — largely irrelevant.
Thirdly, the 90-10 rule should apply to all colleges regardless of tax status, not just to for-profit and career schools. To our knowledge there are no nonprofit or public colleges that are close to 90-10, so it shouldn’t affect them considerably, but their inclusion gives an important nod to the role that for-profit companies can and should play in reducing costs and driving educational quality. Additionally, applying the rule uniformly addresses the perspective that heightened scrutiny reflects bias against for-profit actors in the education space and capitalism more generally.
Looking Longer Term
These quick fixes will eliminate the perverse incentives to recruit veterans regardless of program quality or fit, but they do not address the more persistent problem of massive annual tuition increases. Doing that requires a substantial realignment of federal financial aid with a longer-term view -- and it means moving beyond the clunky 90-10 rule entirely.
Given the amount of money the federal government provides to higher education, it’s perfectly reasonable for it to use those dollars to promote affordable, high-quality options.
We recommend establishing a new track for institutions to access federal loans and grants based on measures of quality and student satisfaction relative to total cost, not just tuition price. The better a school performs on this measure compared to its peers, the higher percentage of its educational operation it could finance with federal aid -- thereby eliminating the all-or-nothing access to federal dollars and encouraging students to make decisions based on quality and cost, which will drive innovation.
To create this metric -- an institution’s Quality-Value Index -- the government could add together four measures: job-or-school placement rate 90 or 120 days after graduation (assuming the student isn’t already in a job); graduates’ earnings change as a percentage based on students’ risk profile -- over some amount of time -- relative to the total revenue the institution received (regardless of source and including grants, subsidies, gifts, expenditures from endowments and so forth); alumni satisfaction; and loan repayment.
The devil is in the details, so implementation should take a few years. Nevertheless, changing the funding dynamic in this way would accomplish several things.
It would move the focus away from judging colleges and universities on inputs such as student-teacher ratios and arbitrary outputs such as degree attainment, to more tangible student-centered outcomes based around how well the experience improves students’ lives relative to the total price students and society pays.
It avoids controversial discrimination between for-profit and nonprofit providers.
And given that providers are motivated to follow dollars and innovate aggressively, innovation would focus on lowering costs, increasing speed of learning and aligning offerings with the evolving niches of employer needs -- not on aggressive recruiting.
Getting this right ultimately would accomplish goals on which everyone can agree: allowing many more students to receive a high-quality education without breaking their banks or the nation’s.
Gunnar Counselman is founder and CEO of Fidelis, a company that works with colleges and veterans organizations to help military employees make a transition to the work force. Michael B. Horn is the co-founder and executive director of the education practice of Innosight Institute, a nonprofit think tank devoted to applying the theories of disruptive innovation to problems in the social sector.
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