Another College Aid Boondoggle?

President Bush just signed into law the College Cost Reduction and Access Act, passed by both houses of Congress on September 7. CCRAA – think of a crow signaling to his buddies that dinner is served – comes with the tag line, “The largest investment in higher education since the GI Bill – at no new cost to taxpayers.” The legislation certainly rearranges student financial aid in the United States.
The basic idea is that some of the funds that used to be spent subsidizing private lenders to make loans to college students will now be spent to increase the size of Pell Grants, cut the interest rates students pay on federally subsidized loans, and – in principle – reduce the federal deficit. CCRAA is also stuffed with other morsels. Eligibility for Pell Grants will expand. Students who commit themselves to becoming teachers in “high-poverty communities” will get extra assistance. College graduates who pursue careers in public service will have their loans forgiven after ten years. Historically Black Colleges and Universities, Hispanic-Serving Institutions, Tribal Colleges, Alaska Native and Native Hawaiian Institutions, and the brand new categories, “Predominantly Black Institutions” and “Institutions Serving Asian American and Pacific Islander and Native American Students” will divvy up a $510 million windfall over five years. And a multi-partner scheme will provide “matching challenge grants aimed at increasing the number of first generation and low-income college students.”

What does all this mean? In part it means that the private lenders paid dearly for their transgressions. The still-unfolding student loan scandal that began in January with New York Attorney General Andrew Cuomo’s investigation into Sallie Mae, and that I wrote about here, put the (mostly Republican) defenders of “free market” mechanisms for distributing federal student aid in an untenable position. The “free market” in this case was never anything close to lean and efficient. To the contrary, it was (and still is) inefficient and frequently corrupt, dominated by players who found it easy to bribe college officials, wring favors from politicians by means of campaign contributions, bilk the Department of Education, and live off generous subsidies.


The link between CCRAA and the student loan scandal was underscored on September 4, when Senator Kennedy issued a report detailing the lenders’ misbehavior. The report observed, “As this evidence makes clear, many [Federal Family Education Loans] lenders engage in marketing practices that violate both the spirit and the letter of the inducement prohibition of the Higher Education Act.” Two days later, on September 6, President Bush announced he was withdrawing his threatened veto of CCRAA and would sign it.
The banks and other lenders caught up in this scandal received a warning shot in December 2005, when the then-Republican Congress lopped $12.7 billion from federally-backed student loan programs. Under that legislation, private lenders had to turn over to the federal government the funds they had extracted from students by charging them higher interest rates than the rates the government guaranteed. (That’s right: the lenders were paid by the government to offer one rate; charged a higher rate; and pocketed the difference.) Congress also tried to close off other hemorrhages of public funds to private lenders, including a provision that allowed lenders to collect a 9.5 percent bounty when they rolled student loans into certain kinds of bonds. Several of the lenders had figured out how to game the system, by rolling the same loans into new bonds again and again.

The student loan industry seemed to learn nothing from that episode and continued on its path of working the system as best it could. But the blossoming scandal this year, with its wave of resignations by campus financial aid officials, its consent agreements by lenders promising to keep their hands out of the cookie jar, and headline reports of lax enforcement by the Department of Education, meant that lender barons were due for some pain.

CCRAA provides it. Their subsidies were cut by .55 percent; the loan origination fees they pay to the government to get in on the game double to 1 percent; and they can now recover from the government only 95 cents on the dollar for defaulted loans, instead of 97 cents. There are other cuts as well, but the details are probably not of much interest to anyone other than an employee of a lender or a guarantee agency. Nelnet, one of the worst of the bad actors in this drama, is laying off 400 workers and closing five of its offices. The consortium of banks and private-equity firms that were putting up $25 billion to take over Sallie Mae have backed out. They want to renegotiate the price in light of what they expect will be CCRAA’s squeeze on the lender’s profitability.

So is it time to celebrate justice in the form of victory over fat-cats in the financial aid biz? Not so fast. The Chronicle of Higher Education, on whom I have relied for these numbers, quotes Senator Judd Gregg (NH-R) to the effect that the bill “will spend 29 times as much as it would save.” Senator Gregg – the one hero of this story – says Democrats loaded up the bill with entitlements and used budgetary gimmickry to hide the costs.

That rings true, but it is hard to see that the Republicans have anyone to blame but themselves. The GOP has been carrying water for the for-profit student loan industry for a very long time. The New York Times also offered a bit of context when it broke this part of the story in May: “Nelnet was the nation’s most generous corporate donor to the National Republican Congressional Committee in 2006. And its top three executives were the largest individual donors to the committee as well.”

In other words, Republican over-fondness for the for-profit student loan industry opened the door for Democratic profligacy with CCRAA.
As far as I can tell, no one is claiming that CCRAA will improve higher education. Making it more affordable and increasing access, of course, makes sense only if you assume that a college education is a rock-solid good thing. We don’t pass multi-billion dollar bills to make binge-drinking more affordable or to increase access to jumping-off points from the Brooklyn Bridge. Our colleges and universities, however, fall somewhere between sure-bets and abysmal options. The undergraduate education they provide often fails to provide much in the way of substantive knowledge, intellectual skill, or personal development. Classrooms are rife with ideological boosterism. Grades are inflated, free expression curtailed, etc. When the public thinks about the possibility of crashing into these reefs, however, we apparently make a quick adjustment and think that we, as individuals, are smart enough to navigate around them. Meanwhile, every few years we pass the equivalent of a Submerged Reef Preservation and Enhancement Bill, which aims to give our universities a little more money to fete President Ahmadinejad or whatever.

Should we care? There is no significant political constituency in the United States in favor of limiting the growth of higher education or scrutinizing the ever-expanding federal expenditures in this area. I have been writing on this topic off and on for about a decade and have looked relentlessly for a pulse. But the patient – public financial prudence in support of colleges and universities – is stone cold dead.
But just for old times’ sake, the argument is this: increased federal spending on student loans and grants seldom provides much relief for students. It does indeed provide a short term analgesic, like calamine lotion on a case of poison ivy. If my Pell Grant was $4,500 this year and goes up to $4,700 next year, I’ll feel a little relief. But if my tuition next year goes up $100, I’ll feel somewhat less relief. And if it goes up $200, no relief at all.

No doubt somewhere in the United States there are college administrators who look on the increase in Pell Grants (which rise to a maximum of $5,400 by 1012 in the current legislation) as purely an opportunity to help more students afford to attend college. And no doubt somewhere in the United States there are college administrators immune to the thought that, as the Federal government lowers interest rates, families will be able to “afford” higher tuitions.

But the reality is that as fast as the Federal government can put money on the table to make college more affordable, colleges and universities can scoop that money off the table just as fast, in the form of higher tuition and fees. They can. They do. And they do it just slowly enough not to embarrass the politicians who want to boast to their constituents that, by passing one more “college affordability” bill, they have made a major stride toward making life easier for tuition-paying families and have open more avenues to higher education for those in financial straits.

Very few people like to entertain this unpleasant thought. Whenever I raise it, I get email and letters from people who think I would prefer to shut the doors of higher education on those who are striving to improve themselves. I don’t at all want to shut those doors. I’d prefer they were wide open. But I’d also prefer that we find some way to break the cycle whereby higher education captures more and more public funds and yet remains mysteriously always at the limit of what families can afford.

This topic sits right next door to another unpopular one: the idea that maybe we have made a little too much of a fetish of a college education. The rush among politicians to keep “college cost reduction and access” in the forefront is driven by their accurate understanding that a college degree is seen as a necessary prerequisite to a prosperous life. There is indeed a statistically significant link, but when opportunity costs (what you don’t earn and the work experience you don’t acquire while in college) and debt service are factored in, the picture is much less decisively in favor of the college degree. My conclusion: those young men and women should go to college who have the genuine ambitions and talents to make good use of a college curriculum. Others should think very carefully about the college option, rather than assume it is the only path for an interesting or a successful life. The costs of college, of course, go way beyond the hefty price of tuition. They include, in many cases, a coarsening of taste, exposure to sophisticated salesmen of a bleak and often anti-American view of the world, and immersion in the make-believe ideologies of campus life.

But realistically, there is no chance in the foreseeable future for proposals for the federal government to spend less lavishly on student financial aid or for Americans in significant number to reconsider their belief that a college education is worth its high costs. Please pardon the intrusion of these unwelcome thoughts.
What then shall we make of “the largest investment in higher education since the GI Bill – at no cost to taxpayers?” I take it as a place-holder until the next time Congress gets around to making college affordable and more accessible. We won’t have to wait long. The advocates for the next increase were at work last week. On Friday, the Chronicle of Higher Education reported, various college presidents were complaining that the Pell Grant increases are too small. And as I write, the Chronicle of Higher Education is contemplating the mysterious way of the world under the headline, “Many Public College Have Raised Tuition Despite Big Increases in State Support.” Key sentence in Lauren Smith’s article: “Ironically, tuition spiked in some states as a direct result of policies intended to provide students with tuition relief.”

Every college and university that raises tuition in the midst of increases in federal or state aid (or both) has a good explanation for jacking up the rates. For state universities It often takes the form of claiming that the state cut public support in the past and the universities need to make up lost ground. In Virginia, according to the Chronicle of Higher Education, public four-year colleges raised tuition an average of 6.8 percent after the state increased funding by 5.3 percent. The University of Virginia’s vice president for management and budget, Colette Sheehy, explained, “they haven’t given us back what we lost,” in an earlier round of budget cuts.

Think about that a moment. Ms. Sheehy implies that when the state government cuts spending on higher education, the university doesn’t scale itself back in any long-term way to its actual resources. Instead it regards the cut in public funds as a sum to be made up by future increases in state aid and tuition. Ms. Sheehy’s justification for tuition increases is only one of many. The University of Hawaii got a 12.2 percent increase from the state and promptly walloped students with a 20 percent tuition increase. Why? It needs to bring its tuition “up the level of peer institutions.” Oh. In Georgia, the state increased funding for public colleges by 10.5 percent – and tuitions went up “as much as 15.5 percent at public universities.” Why? The state guaranteed students their tuition wouldn’t increase over four years so, “We had to put enough of a bump in that tuition so that we could cover costs estimated over a four-year period.” My apologies to Ms. Smith for my mining so much of her article, but these little gems are irresistible. Good work, Ms. Smith.

Let’s move from these fruitful trees back to the forest. Higher education will never lack reasons for wanting more money. Just as public colleges and universities soak up state funds and still increase tuitions, all colleges and universities, public and private that take federal funds will continue to increase their prices – tuition, fees, etc. – despite the enormous generosity of the College Cost Reduction and Access Act to students. College “affordability” in our current system is an ever-receding horizon. But as we sail toward it, if you listen closely, you can hear the clinking of champagne classes in the First Class section, where college administrators are clacking their beaks and toasting CCRAA.

Peter Wood

Peter Wood is president of the National Association of Scholars and author of “1620: A Critical Response to the 1619 Project.”

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