It’s that time of year again: Graduating high school students, consumed by “senioritis,” are making that all-important decision of which college or university they will attend. And their parents, consumed by anxiety, are aghast at the ever-growing cost of higher education.
College tuition alone has shot up by more than 500 percent since 1985—more than health care, gasoline, and food prices. Student loan debt now totals more than $1.4 trillion and surpasses all other forms of consumer debt. The College Board reports that tuition and fees for the 2016-2017 school year averaged $9,650 for in-state residents and $24,930 for out-of-state residents attending public four-year institutions, and $33,480 at private four-year colleges—plus nearly $11,000 in room and board. The average 2016 undergraduate left school $37,172 in arrears.
These numbers are staggering, and they’re behind New York governor Andrew Cuomo’s and Vermont senator Bernie Sanders’s support for tuition-free public education. On the surface, it’s a sympathetic viewpoint. But as any economist will tell you, there’s no such thing as a free lunch. Well-intentioned though such proposals may be, we all know what paves the road to hell.
The concept of the feds stepping in to help make college more affordable for the average American is nothing new, but research shows that this very intervention is one of the driving forces behind the student debt mess.
In a July 2015 report, the Federal Reserve Bank of New York observed a direct correlation between student borrowing and tuition levels, noting that “higher tuition costs raise loan demand, but loan supply . . . [relaxes] students’ funding constraints.” The Fed spoke of a “pass-through effect on tuition,” whereby for every dollar received in subsidized federal loans, tuition rises 65 cents. They report similar findings for Pell Grants (55 cents) and unsubsidized loans (30 cents).
As the Fed study indicates, student debt isn’t rising simply because college is too expensive. Rather, school is too expensive because of rising student loans and grants. Research by economist Richard Vedder, director of the Center for College Affordability and Productivity, bolsters this argument. He found that “when someone other than the user is paying the bills, those bills tend to explode since the buyer is not sensitive to price.” In other words, the expansion of student loans and other third-party payments for college leads to higher prices by insulating students from the actual cost of tuition. This vicious cycle leaves many low-income students (who are supposed to benefit the most from financial aid) priced out of attending college.
For one, Congress could consolidate its student loan offerings into two, simplified programs, one for students and one primarily for parents. A new Student Loan Program could be phased in over three years and replace the federal Perkins, Direct Subsidized, and Direct Unsubsidized Loans. Students would be eligible for up to $7,500 annually, and up to $10,000 in additional monies for those who demonstrate particular need. A reimagined PLUS Loan Program would offer parents with dependent children and graduate students up to $3,000, with an additional $3,000 based on need.
The new loan program would be coupled with an income-based repayment plan. Moreover, student loans should be less difficult to discharge in bankruptcy (it’s almost impossible to do so now). As the AccessLex Institute proposes, “education loans [should] be considered on equal terms with other unsecured debt in a bankruptcy proceeding if the loan in question has been in repayment for at least seven years (exclusive of deferments or mandatory forbearances).” Higher ed institutions, though, should have some skin in the game in the case of bankruptcy discharge. The school would continue to get its money up front for each loan disbursed, but it would become, in effect, a co-signer of the loan. Were a student to default, the school should be liable for 5 percent of losses on the value of the loan.
Congress could also replace the Pell Grant with a voucher that subsidizes students, not institutions. As currently structured, Pell Grants flow directly to colleges without ever passing through students’ hands. This shields schools from price-conscious students, resulting in higher prices. By transforming the Pell Grant into a Pell Stipend, which would offer a set amount for eligible students each term, money would go directly to students to cover the costs of higher education. This would force institutions of higher learning to become sensitive to the costs they impose on students—especially the most disadvantaged.
There’s one other key step that is essential to reducing college costs through increased competition: accreditation reform. Accreditation determines eligibility for federal funding, including loans and grants, through one of six accrediting agencies of which select higher-ed institutions are “members.” Former Colorado senator Hank Brown, a past president of two major Colorado universities, concluded in an American Enterprise Institute study that these membership organizations are “regional monopolies that control access to federal funding for virtually every type of college and university in their geographic area. . . . [T]he colleges and universities they oversee fund the accrediting body through dues and fees.”
More disturbingly, Brown reported that most of the accreditation work is done by “hundreds of volunteer faculty and staff from the very institutions being accredited”—making it difficult, if not impossible, for new institutions to get the accreditations they need to compete. The playing field needs to be leveled.
Solving this challenge may lie in the 2015 Higher Education Innovation Act proposed by Senators Rubio and Michael Bennet. This bill proposed keeping the old accreditation process but would have created a second, data-driven means to access federal student aid. Participating institutions would have to “demonstrate high student outcomes, including student learning completion, and return on investment.” By creating two accreditation pathways to access federal student aid, Congress would inject healthy competition into the higher education marketplace and empower students to more easily make educational decisions for themselves.
The fact remains that the nation’s higher education system today is a complex and expensive mess that needs meaningful change. The financial aid system must be fundamentally revamped and accreditation reformed to open new doors to choice and opportunity for students. Both measures should use natural market forces to bring down costs and boost quality—all while minimizing the federal government’s role in the higher education system. ¨
source–weekly std, jimmy senenberger, richard vedder,