This is an edited transcript of comments delivered by Mr. Kelly at the 2015 Lynde and Harry Bradley Foundation Symposium on “The Future of Higher Education” June 3 in Washington D.C.The event was co-sponsored by the Ethics and Public Policy Center and National Affairs. You can read the full transcript of the symposium here.
Three trends are complicating reform of higher education.
First, tuition has been trouncing family incomes and has grown faster than just about every other good or service in the economy as well.
Second, the wages recent college graduates earn have been flat or declining for quite a while. This is important because it means that people are paying more for a degree that in absolute terms is actually not worth as much as it used to be. It is worse for people who have some college and no degree. They earn even less. They look a lot like high school graduates these days.
The problem is we have a lot of dropouts, as anybody who has looked at graduation rates can attest. So if you started at a two-year public, just 40% of students finish with some kind of credential — associate’s degree, bachelor’s degree, certificate – within six years. This is for the 2008 cohort, the most recent data available. It is from the National Student Clearinghouse.
It is not much better at four-year publics. It is higher, but we still have a little less than 40% of people who are not finishing or credentialed within six years and again, taking on debt.
You add up trend one and trend two and you have a lot of struggling borrowers. These are numbers from the Consumer Financial Protection Bureau in 2013. They looked at who was actively repaying their loans when payment was due. And essentially, what happens is people who are in school or in the grace period don’t have to repay. But if we include them all on the denominator then actually the rate of default or forbearance looks better than it actually is. But if you look — I mean, 40% of people were not actively repaying down their loans in this latest cohort.
We have trend one, we have trend two, and we usually stop there. And we start asking, is college worth it? And then based on the cost and returns many people have concluded no, it is no longer worth it. It is too expensive and you don’t get much for it.
But this is where the third trend comes in–that high-school graduates have had it even worse than college graduates have. Their job prospects have dimmed considerably since the 1970s, in large part due to hollowing out of middle-skill jobs and manufacturing.
The wage premium attached to college is down, but the wage premium between earnings of a college graduate and the earnings of a high-school graduate have actually increased over time. The same is true for associate’s degrees.
This sets up what I call the college conundrum: that some education after high school — associate’s degrees, certificates, technical training, some kind of education post-high school — has become more important to economic mobility, but it is also more expensive than ever before, and it is also riskier than before because it is both more expensive, and completion rates have actually declined over time.
This creates what I call the Enterprise Rent-A-Car problem. If you’ve watched college sports on TV, you’ve seen the commercials. Enterprise prides itself on hiring college graduates. And during college games, they profile former athletes who work and run their rental-car counters. So some of us see that, and I myself say, gosh, four years of college to run a rental car counter? College isn’t worth it any more, is it?
But for some parents, particularly in middle-income and working-class families, it is a much more terrifying proposition: my kids can’t even work at Enterprise Rent-A-Car if they don’t go to college.
And so harping on the fact that too many kids are going to college, I think, is tone-deaf. Tone-deaf to the anxieties of the middle class. And this is why it is a defining middle-class issue. People feel trapped. They can’t afford to go to college and they can’t afford not to; the cost of both have increased.
How did we get here? I’ll march through four problems quickly. The first is that we have a third-party-payer system and easy credit.
So federal aid, student aid programs started out with a noble purpose. There were poor people who could benefit from higher education but couldn’t get access to it because they faced financial barriers. It was targeted, it was need based.
This has now turned into a large entitlement for anybody with a high school diploma and, in fact, for parents of anybody who attends college. In the 1970’s we made upper- and middle-class and then eventually upper-income families eligible for federal loans. They used to be need-based then we sort of opened the floodgates in the late 70s. That is why you see that increase in tuition among private colleges in the early 80s.
In the 1980s, we opened up the loan program to parents. In the 1990s, we made that parent-loan program; we took away the annual limits on how much you could borrow. Now you can get unlimited borrowing up to the cost of attendance. As long as you have a kid in college, you can borrow money to defray the costs.
In the 1990s, we created a host of tax benefits that disproportionately benefit upper-income families. And then in the 2000s we created a federal graduate student-loan program that allows, again, graduate students to borrow up to the cost of attendance unlimited amounts. If you continue to enroll in graduate school, you can borrow as much as you want.
As somebody who took eight years to finish my Ph.D., I know that the incentive is not there to really finish your studies as quickly if you have access to these credit programs.
I think it is really important, though, to distinguish here for the purposes of thinking about tuition inflation and the perverse incentives between programs here. So I think it is important to focus in particular on the loan program. And within the loan programs on the parent-plus and grad-plus programs which have unlimited borrowing up to the cost of attendance.
Stafford loans for dependent students: you can only borrow up to $31,000 over the course of your career, which is a substantial sum of money.
So we spent a lot, particularly over the past decade or so. The Obama administration has both increased the size of the Pell Grant program, spent a lot more on it, and increased the size of federal tax benefits. And people are borrowing a lot more.
A lot of this has to do with the bump in enrollment. More people are going to college. But we are also spending more per person in federal aid.
Here is what we have to show for it over that decade: the net price of attendance for middle-income families has gone up considerably. This is the net price as a percentage of your income. So if you are a middle-income family with a son or daughter attending a private four-year college, you’re paying nearly 40% of your income after taking account of grants and scholarships; public doesn’t look much better.
What is the theory of action here? As far as I can tell, it is subsidize, watch tuition rise and subsidize some more. It’s like trying to bail out a boat with a Dixie cup. So pouring money into a system with misaligned incentives is not going to change the incentives.
Problem number two: we have inadequate quality assurance. There is almost no underwriting on federal loans. You get the same terms whether you are going to Harvard, Joe’s Barber College, or Jay’s Technical School. So lots of federal money flows to bad colleges.
This is from a study that I did where I looked at where student-loan dollars for undergrads went according to the school’s graduation rate. So 37% of our loan disbursements go to places that have graduation rates under 40%.
The regulatory triad, which is the three-pronged approach to regulating higher-ed — that is the federal government, accreditation agencies, and state governments –, is an ineffective gatekeeper when it comes to eligibility for federal aid. It also has a bunch of other problems.
The main rule that the federal government has to hold schools accountable is called the Cohort Default Rate. It says that if more than 40% of your students default on their loans within three years after they stop attending, whether they graduate or not, then you are kicked out of the program.
I said this to an audience of finance people in New York and they like could not contain their laughter. A 40% default rate on a financial product is unheard of. But as long as you are below the threshold and as long as people don’t default within that three-year window you are held harmless. So just eight institutions were subject to sanction in 2011. We don’t know whether they were actually sanctioned. It is really hard to find any kind of information on that.
Accreditation plays a role here—this is essentially a process of peer review. It is built on a conflict of interest. Faculty from the neighboring college down the street come and review your programs and say hey, you look a lot like us and this looks great, you know, you are approved. Terrific. So no surprise, the GAO did a study of this, they found that only eight percent of schools were sanctioned and just one percent lost their accreditation.
We know there are a lot of bad colleges. We know that there are more than one percent. Bad colleges maintain access to federal aid.
Problem number three, we have imperfect consumer information. In the Atlantic, a friend and colleague of mine said, wouldn’t it be great if we had a nutrition-facts approach to college? It would just warn you, if you are going to take on a lot of debt, you are not going to earn anything, and you are not going to graduate, just be careful.
So limited ability to judge cost and quality blunts market discipline. People can’t effectively vote with their feet. Colleges can promise you all sort of things. You have no way to validate whether their promises are accurate and you continue to invest in bad programs.
Problem four–a big one–is that the existing system creates barriers to entry, not allowing competitors in to offer a better product at a lower price.
So right now, thanks to advances in technology, colleges are moving from a logic of scarcity to one of abundance. In the past it made sense to bundle things together, because smart people were scarce and books were scarce and talented students were scarce, so we brought them all together in one place on one campus. And we rationed access to that; we couldn’t have everybody coming in.
But thanks to advances in technology, Proctor U will allow you to take an exam from your own house. It will monitor whether you are cheating or not. It will make sure you are not sort of looking up the answers on the internet. Mozilla Open Badges, anybody can go on there and create an open badge with assessments attached to it that says you have completed this task and here are the skills they proved in completing it; EdX and Udacity, two of the massive open online course providers; and then General Assembly, which is not online at all, it is an in-person immersive set of courses on web development and different kinds of professions. All these things are operating on the periphery. But guess what, the accreditation system keeps new entrants out, acts as a moat; it just says, nope, sorry, you are not coming in here. You don’t look like a college. You haven’t attracted enough students for us to approve you. You don’t award degrees. If you don’t award degrees you can’t get degrees or certificates, can’t be accredited.
So what happens is accredited schools can get access to federal aid, these guys can’t, so if you are a student and you are choosing between paying out of pocket for something versus paying nothing, getting a free education at the community college down the street, you are often going to choose the free option.
Faced with these problems, what has been the progressive response? It has been more of the same tired answer. Now we’ve moved on to expanding income base for payment programs and loan forgiveness. This is one of my favorites; this is one of those companies that advertises that you pay them and they help you access federal programs that you are entitled to anyway.
But this is what’s happened. So income-base for payments says if you qualify to pay your loan payments to your income, you are going to pay 10% of your income and then after 20 years we are going to forgive your loans. If you go into the public sector, we will forgive your loans after ten years. And public sector by the way includes non-profits like my own and others; so very loose definition of public-sector forgiveness.
The best part is this: guess who is eligible for loan forgiveness and income- based payment–graduate students who have access to unlimited borrowing. So graduate-school tuition goes through the roof. And, as taxpayers, we start paying for all that loan forgiveness.
Loan refinancing, Elizabeth Warren’s proposal, would allow everybody to refinance at lower rates—a massive, inefficient program that would not target the money to the borrowers who need help the most.
There has been a repeated call for increased state spending, also progressive responses to regulate more. The Obama administration spent a long time trying to regulate colleges more heavily with gainful employment first of all for the for-profit colleges and college ratings.
And now people hear about the free-college proposal and they say oh, that is free college and what does that have to do with regulation? Well if you read it carefully and you read the ideas carefully you see this is a move away from a market where people can take their voucher to any provider they want, public, private, for-profit and a move to direct federal control, direct federal funding of institutions. Conservative reformers need to resist this wholeheartedly.
So what can we do? So four solutions I’ll zip through them quickly.
We need to give colleges a great stake in student success. We do this by giving colleges skin in the game.
Colleges essentially originate loans. You can’t get a student loan unless you are affiliated with a college and you enroll there, but they bear none of the risk if you fail. Only if you get near that threshold do you bear any of that risk.
This proposal would put colleges on the hook for a share of the loans their students aren’t repaying. They’d have to think twice about enrolling people they know that are not going to be successful. They have to think about offering a lot of programs that are not going to lead to good jobs. It sets a basic standard, but colleges have the flexibility to make it. It is not a top-down regulatory approach that says you have to do the following things to improve. It says we are going to hold you to this standard and you are going to have to get there.
We need power consumers with better data on costs, outcome and value. Those are public goods in my opinion. They help the market work. They help serve taxpayer interests and family interests. So in my opinion the feds are sui generis in their ability to collect these data. States could try, but in terms of return on investment and how do people fare in the labor market. States can collect some of it. And some of them are doing it. But they can’t follow people across state lines. So it’s an inefficient approach.
And you can prevent misuse by legislating prohibitions. And I think the key here is to collect these data, open it up to a set of third parties that can make lots of customized rankings and ratings, actually measure what colleges do, not just the selectivity of their admissions process. That is how we rank colleges now. We say, oh, how good were the undergraduates that you brought in? How good are your inputs?
Three, we need to lower barriers to entry. We have an opportunity to redefine what education looks like, who can offer it. We’ve done this a lot in the past. We created land-grant colleges, community colleges, research universities. We’ve been through rounds of reinvention and the problem right now is we are just showing a tremendous lack of imagination as a policymaking community.
My idea is to create a parallel path. Think about the charter school movement. Charter school policy allows new entrants into the markets to offer the same product. The horse trade would apply there too; organizations that want access to this new pathway would get more flexibility about how they offer education in return for transparency and accountability.
And then last, we need to create space for private financing. The idea that we’ve proposed before is what is called an income-share agreement where investors would front the money for education in return for a fixed percentage of somebody’s future income over a fixed period of time.
What does that do? Well, it aligns the incentives of the lenders or the funders with the incentive of the students. The funders only reap a return if the students are successful. So the funders are going to help people navigate toward programs that are likely to lead to a positive return on investment and so on.
But critically, we need to resolve important regulatory and legal questions around the enforceability of these contracts and where would it be, which institution would regulate at the federal level so there is a federal role here for policymakers. So those are four big ideas. I look forward to discussing them.
Andrew Kelly is a resident scholar in education policy studies and the director of the Center on Higher Education Reform at the American Enterprise Institute (AEI).