Tag Archives: subsidies

Student Voices
The Candidates Flunk Education Policy

Yesterday Time Magazine published articles by President Obama and Governor Romney on their higher education policies. Both paint a rosy view of a college degree but offer few specifics on how to best facilitate it. Obama speaks highly of his college days, acknowledging that “Michelle and I are who we are only because of the chances our education gave us.” Similarly, Romney lauded America’s universities for “promoting inquiry, inspiring creativity, and ultimately preparing our citizens for success.” They both seem to believe that if we could hand out enough degrees to enough people at a low enough cost, our country would be in great shape.

Missing, of course, is the much greater importance of individual student effort, ambition, drive, and keen insight, all of which play an exponentially larger role personal success than does the possession of a diploma. Increasing college education access is not a panacea for all societal harms. Colleges provide specialized training and education for a select group of the population, and that’s okay. Sending everyone to college deprives opportunities for trade schools and other forms of education, and given that we have 115,000 college-degreed janitors, it’s probably safe to say that we already have plenty of people going to college.

Both candidates wish to lower the cost of education, though by different methods. Obama promises to increase federal student aid, proudly proclaiming that “we stopped student-loan interest rates from doubling” and “gave nearly 4 million more young people scholarships to help them afford their degree.” This ignores the strong evidence of the Bennett Hypothesis, which indicates that increasing federal aid actually drives up the cost of college by incentivizing colleges to charge higher tuition in a quest to capture that federal money.

Romney’s plan, to his credit, follows the logic of the Bennett Hypothesis; in the Time piece he writes that “endless government support only fuels skyrocketing tuition.” But unfortunately Romney’s proposed solution is wishy-washy. He prefers private loans to government-subsidized student loans but gives no specifics on how to scale back government involvement. And while he hopes to tackle the drop-out problem, he offers nothing but a promise to give potential drop-outs more “support.”

Most disappointing in both pieces is the politicization of education. Obama ends his piece with a plea for political support. “I’m not only asking for your help. I’m asking for your vote,” he instructs his readers. Even Romney’s piece, while steering clear of obvious references to election day, interrupts his policy explanation to complain that President Obama reneged on his higher education promises.

If we want real higher ed reform that scales back government subsidies and encourages alternative forms of education instead of funneling everyone through universities, we’ll have to look elsewhere.


Rachelle DeJong is a senior at The King’s College.

Let the Free Market Set College Tuition

When President
Obama talked about unaffordable college tuition, he failed to point out that
federal subsidies are responsible for much of the unaffordability. In his State
of the Union message, he said, “If you can’t stop tuition from going up, the
funding you get from taxpayers will go down.” However, since tuition is
dependent on federal aid, it cannot remain stable or go down unless federal aid
is reduced.

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Why Tuition Goes Up Every Year

Middlebury College is expected to announce a plan to hold the annual rise of tuition to one percentage point above the inflation rate. This announcement will likely be greeted with praise. But why? Costs may be held down in comparison with other colleges, but the bedrock assumption here is a familiar one: tuition must go up each year; it’s just a matter of how much. In hard times, other businesses cut costs and live within their means. Colleges and universities don’t? And now we hear more calls for government to do something about it.
Like most economists, I do not like attempts of politicians and government bureaucrats to interfere in decisions of buyers and sellers by limiting changes in market-determined prices –minimum wage laws, rent controls and other intrusions into market processes inevitably lead to unintended consequences: higher unemployment, less housing and housing of poorer quality, etc. Thus I start out predisposed to oppose tuition fee caps such as introduced in many states. But my opposition to these caps has been reduced by the fact that higher education markets are hardly free of interferences to begin with, and government has contributed to tuition price explosion through its numerous ways of increasing the demand and reducing the supply for higher education services. Tuition caps at least temporarily force some universities to slow down a bit their inexorable tendency to increase spending, much of it on things at best tangentially related to the true mission of universities—disseminating and creating knowledge (e.g., the number of sustainability coordinators, public relations specialists, associate provosts for international affairs, etc. has grown dramatically in recent years).
Even these legally imposed temporary restraints on university desires to raise prices are often thwarted by various strategies – requiring kids to eat and sleep in university facilities and then raising room and board rates dramatically, or creating new fees (technology fees, lab fees, recreational center fees, parking fees, even charging more to buy soft drinks out of campus machines, etc.) But a recent article on “Inside Higher Education” suggests that tuition caps themselves are at best temporary—-after periods of capping tuition, deals are cut to end the cap, and then fees tend to explode, reaching levels equal to what they would have been had there never been a tuition freeze. It is almost as if tuition fees are going to rise 3 percentage points more than the inflation rate, and nothing can change that. Call it the natural rate of higher education inflation.

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The Failure Of For-Profit Schools

Why do our for-profit colleges seem so disappointing? Why are they plagued by high levels of student debt, high loan-default percentages, dismal graduation rates, and third-rate reputations that lead some employers to reject their graduates automatically? Sure, back in the old days there were plenty of commercial schools whose sole raison d’etre was apparently to separate students from their money: those correspondence law schools that advertised on matchbooks and the art academies that would accept you if you could doodle a stick figure onto a restaurant napkin. But today the situation seems exponentially worse. Commercial colleges, which enroll 2 million out of America’s 17 million college students, now seem to be not so much diploma mills as non-diploma mills, where the vast majority of enrollees pay tuition bills comparable to those at four-year public universities but never manage to graduate. Katherine Gibbs, for example, limped along for decades trying to offer alternate career training after the market for private secretaries dried up during the 1970s, then permanently shut its doors in 2009 amid complaints to state regulatory agencies about unqualified faculty members, shoddy and inadequate course offerings, and four-year schools unwilling to accept Gibbs transfer credits. The chain’s redoubtable foundress must be turning over in her grave.
What happened? How did a for-profit college model morph into today’s basement-reputation for-profit model, exemplified by Saturday Night Live’s fictional “University of Westfield,” where the students mainly learn how to fudge the fact that their degree are from the University of Westfield? I blame the corrupting influence of federal money, the easily available Pell grants and guaranteed loans that began to flow with the passage of the Higher Education Act of 1965. Easy federal money has contributed to a vast growth in enrollments at both non-profit and commercial institutions, a ballooning of tuition costs, and, in the for-profit sector, a focus not on the academic outcomes that might build a school’s reputation as a selling point but upon getting as many bodies as possible into their classrooms.
Let’s take the enormous—and vastly profitable–University of Phoenix, with its nearly 400,000 students in 39 states as well as online. Phoenix is regarded as one of the more reputable commercial schools, and it has gained respect over the last two years for issuing fairly candid reports about its strengths and shortcomings. Still, Phoenix and its parent company, Apollo Group, have had their troubles during the last decade—and recently entered into a $78.5 million settlement regarding allegations that Phoenix illegally paid cash bonuses and other gifts to recruiters based on the number of young people they signed up for classes. Phoenix derives an ever-increasing amount—more than three quarters during its 2008 fiscal year, according to a March article in Business Week–of its $3 billion-plus annual revenue from federal student aid. Ii’s the biggest recipient of Pell grants in the nation. Yet Phoenix’s graduation rates seem abysmal. According to the U.S. Education Department, only 4 percent of Phoenix’s students who entered four-year-programs as freshmen graduated within six years, compared with 55 percent of students at non-profit four-year schools. And an executive-search company specializing in financial services told Business Week that a Phoenix degree didn’t “add any value” to a graduate’s resume.

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Waste And Folly In Student Loans

Shortly after his inauguration in January President Obama announced a proposal to get rid of a 44-year-old program known as the Federal Family Education Loan (FFEL) program. In the FFEL system, the federal government guarantees loans to students from private banks and similar institutions under a variety of programs (the best known is the so-called “Stafford” loan) to help pay for the students’ education, whether at the undergraduate or postgraduate level. The idea behind FFEL, part of a massive piece of 1965 legislation designed to make higher education more attainable and affordable to larger numbers of Americans, is to encourage private lenders to extend credit for college to a cohort of society that would otherwise not qualify for loans that these days can total tens of thousands of dollars a year. In return for guaranteeing student loans against their borrowers’ default, the U.S. Education Department charges the lenders modest fees and sets maximum allowable interest rates.
Under Obama’s plan all students needing higher-education loans would instead obtain them through the William D. Ford Federal Direct Student Loan Program (Direct Loan for short), a Clinton administration creation of 1993 in which the U.S. Education Department itself lends money for post-secondary education. The only role that private banks and other institutions such as Sallie Mae (the formerly government-backed but, since 2004, completely private entity that currently originates about a fourth of all FFEL loans) would continue to play in student lending would be to service some of the loans under contract with the department.
The administration argues that eliminating private financial institutions as middlemen (until the administration embarked on its anti-bank stance Sallie Mae and other private entities accounted for 80 percent of the $92 billion federally subsidized loan market, and it continues to issue about 58 percent of those loans), would save the government $87 billion over the next 10 years in default payouts and interest subsidies to institutions that lend to students who demonstrate financial need. (For subsidized loans, the government pays the interest until the student leaves school; for unsubsidized loans, the interest accumulates, but the student is not obliged to make payments before leaving school, and there is also a variety of repayment and forgiveness plans geared to income levels after graduation.) Under Obama’s proposal the government would use part of the anticipated savings to put another $40 million into beefing up funding for Pell grants, yet another federal aid program for college students launched in 1973 and named (in 1980) after the recently deceased Democratic Sen. Claiborne Pell of Rhode Island. Under the Pell program, which costs the government $18 billion annually, about 7 million low-income college students (the ceiling family income is $40,000) receive outright grants from the government (the current annual maximum is $5,350), to help pay for their college educations.

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The Money Problem at U Cal

As a regent of the University of California (UC), I voted against “fee” increases proposed by the administration as often as I voted for them, but with each vote I realized that UC was slowly moving toward the day when basic decisions would have to be made about how the university is financed, who can attend it, and what the public should expect from the institution. Well, that day has come; and the public can either dodge the issues or face them and try to craft a new relationship with UC.
Several days ago, the regents voted to increase fees by a whopping 32% – that’s right, 32% – starting in the fall of 2010. Notwithstanding the predictable assertions about “quality” being threatened and the prospect of a “faculty exodus,” with a loud voice, I would have voted against this increase. Not because the university isn’t justified in raising fees to some extent, but because the economy is in the tank, many students’ parents are unemployed and no business in its right mind raises its prices 32% under such a set of circumstances.
The operative word above is “business.” The University of California IS a business that likes to operate as if it were merely a public service enterprise. It doing so, it gets to have the best of both worlds. As a business, UC chooses to compete with other businesses for talent – and seeks to compensate them accordingly. As a public service enterprise, the university expects to be subsidized heavily by the taxpayers – when we can afford it – and to have all of the protections and perquisites of a public corporation.

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Be Careful What You Wish For

President Obama’s call for an increase in college graduation rates and the establishment of a $2.5 billion college completion fund begins to address a vexing issue for those of us employed in higher education, namely, how do we make the United States more economically competitive in a world that demands a well-trained, college-educated workforce? The president’s call is welcome. Graduation rates need to increase, especially among under-represented groups and first-generation college students. If we want more Americans to become more competitive in a smaller and smaller “world village,” we must pay attention not only to those who traditionally pursue higher education, but also to those who do not have such a tradition. No doubt, “a high tide lifts all boats.”
However, this insistence on increasing the numbers of college graduates appears to overshadow a more overarching but simpler objective of higher education—to educate rather than graduate students. Consider two statements common in higher education, both of which I have heard in conversation, one with a student, the other with a faculty member (thankfully, not at my current institution, which clearly does focus on educating rather than graduating students).
The first conversation was with a paralegal student I advised when I was an academic dean at a two-year for-profit institution in the western U.S. The conversation went something like:

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Obama’s Loan Plan – Scary Stuff

Like Caesar’s Gaul, President Obama’s plan for higher education is divided into three parts:

1) Every American should have postsecondary educational training, and within a few years we should again lead the world in the proportion of young graduates with bachelor’s degrees;

2) Federal financial assistance to pay for college should become an entitlement like Social Security or Medicare, available to all in need;

3) The private provision of loans to students should end and the Federal Government should become the provider of student loans.

The American higher education establishment has mostly endorsed this sweeping proposal. As is so often the case, they are wrong. On every count, this proposal is an Obamination – a perverse set of policies that will raise costs to taxpayers and, surprisingly, also to many college students and families.

Continue reading Obama’s Loan Plan – Scary Stuff