College costs will keep rising under Obama plan

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Article Highlights

  • Colleges’ exploitation of young Americans through rapidly rising and increasingly exorbitant fees is a national scandal that can no longer be ignored.

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  • Without any federal aid at all, cheap or free online courses are appearing all over.

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  • The idea simply raises incentives for future students to borrow more money, if they know their obligation to pay it back is capped.

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Colleges’ exploitation of young Americans through rapidly rising and increasingly exorbitant fees is a national scandal that can no longer be ignored. In his college tour this week, President Barack Obama is speaking at length about what he intends to do about it, after promising “tough love” on higher education for the last two years.

Some of what he proposes is good in principle; some is very bad.

He wants to expand access to information on colleges by having the Department of Education issue a ranking of institutions relating outcomes to costs. The government has the power, via the Internal Revenue Service, to get some interesting data on college graduates’ earnings, and providing that data to consumers would be useful. Even independent college rankings -- such as those published by U.S. News & World Report and Forbes (the latter compiled by my Center for College Affordability and Productivity) -- could be improved with more data.

Tying federal funding after 2018 to the new federal ratings, which in turn incorporate performance measures such as graduation rates, may be a step toward giving colleges incentives to take cost reduction seriously. But the potential for unintended and damaging consequences is high: If the key to federal funding is raising graduation rates, colleges may lower already abysmally low standards.

Similarly, the proposed funds for promoting educational innovation are, in principle, a good idea. But previous federal education spending in this area has had a pretty dismal result.

Easy Money

Without any federal aid at all, cheap or free online courses are appearing all over. The accrediting agencies will probably try to stall this innovation, because it isn’t controlled by their member universities. A better approach would be to reconsider federal sanctioning of assistance to unaccredited schools, for example.

The president’s proposal has one very bad idea: a forgiveness boon for those paying off loans right now. The proposal, limiting loan payments to 10 percent of income, potentially relieves millions of students from repaying part of their obligation. So why not major in fields the economy values least -- anthropology or drama instead of engineering or math -- if you don’t have to worry about earning enough to pay off your student loans over a certain period?

The idea simply raises incentives for future students to borrow more money, if they know their obligation to pay it back is capped. That, in turn, allows colleges to keep raising costs.

Obama proposes to ignore or worsen the root cause of much of the explosion in student costs: the federal financial assistance programs that encourage schools to raise costs and that haven’t achieved their goals of providing college access to low-income Americans.

Two recent studies highlight the problem. First, the National Center for Education Statistics released data suggesting that federal college financing is growing rapidly. Now 84 percent of full-time undergraduate students get some aid. Average grant assistance for dependent full-time undergraduate students (unmarried, younger than 24) was $10,600 in 2011-12, up 34 percent in just four years -- four times the inflation rate.

Middle-class kids who were previously denied Pell grant aid are now increasingly getting it: In 2011, 17.5 percent of dependent students from families with $60,000 to $80,000 in annual income received Pells, compared with a mere 1.6 percent just four years earlier. A number of federal aid programs -- for example, tuition tax credits and the PLUS loan program -- now disproportionately serve students from relatively affluent families. According to College Board data, total federal student financial assistance programs totaled $56.8 billion in 2001-2002, compared with $173.8 billion a decade later, an astonishing compounded annual rate of increase of 11.7 percent.

Increased Spending

A new study by Dennis Epple, Richard Romano, Sinan Sarpca and Holger Sieg for the National Bureau of Economic Research suggests that the impact of these aid programs is clearly different from what federal policy makers intended. “We show that private colleges game the federal financial aid system,” they conclude. Every dollar in new financial aid to students leads to about 40 cents less spent by the colleges on institutional financial aid -- so students benefit far less than federal policy makers intended.

In 1987, Secretary of Education William Bennett argued that more federal aid leads to higher tuitions, enabling schools to increase spending. This seems broadly consistent with the latest research results. The net attendance impact of these federal programs, according to the study for NBER, is “modest.” In short, these programs haven’t substantially spurred student access to colleges, all the while burdening taxpayers and student borrowers.

The ballooning federal aid increases schools’ spending. The researchers don’t analyze changes in university spending, but an examination of other evidence suggests that money isn’t going primarily into improving instruction. Colleges have gone on a building spree (financed in part by amassing large debt -- more than $220 billion at schools whose bonds are rated by Moody’s alone), and pay and perquisites for top university administrators has risen sharply.

Obama’s “tough love” on higher education should begin by reversing the financial aid explosion that has contributed to this spending binge and, more importantly, to the system that has produced a generation of young debtors with mediocre job prospects. The president is looking at the tip of the iceberg, not its bigger base.

(Richard Vedder directs the Center for College Affordability and Productivity, teaches economics at Ohio University, and is an adjunct scholar at the American Enterprise Institute.)

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