To drive down college costs, the government needs to stop subsidizing colleges and hold them accountable for student debt.
The more that the government enables colleges with no-strings-attached funding, students will face ever-climbing tuition and fees, Paul H. Kupiec and Ryan Nabil argue for the American Enterprise Institute.
“A true fix must recognize the glaring similarities between the subprime-mortgage crisis and the student-loan crisis,” Kupiec and Nabil wrote. “Like the brokers who caused the subprime-mortgage crisis, colleges push naïve students to take on debt regardless of their ability to repay, because colleges bear no cost when graduates default. A true solution requires a new financing system where colleges retain ‘skin in the game.’”
Incentivize cost-cutting, in other words.
The Obama administration has postured on relieving the burden of high costs. They issued a “Student Aid Bill of Rights” and announced executive actions to reduce high payments.
“In the United States of America, no one should go broke because they chose to go to college,” Obama said in his 2010 State of the Union address.
And yet.
In the last decade, tuition prices have increased by 40 percent. College affordability has declined in 45 states. The six-year graduation rate for a four-year degree has only increased from 55 percent in 2002 to 59 percent in 2012. Student debt has surpassed $1.3 trillion. Universities are receiving much more revenue from tuitions and fees, but completion rates have hardly increased.
“Colleges are paid tuition regardless of whether their alumni succeed. They face little incentive to control costs when those costs can be passed on to students who fund them with government-guaranteed loans that are available regardless of the students’ ability to repay,” Kupiec and Nabil wrote.
The federal government, not colleges, lend students money to pay for tuition. Colleges can raise prices and expand services without cutting off the flow of money from current and future students.
To change that, Kupiec and Nabil propose direct lending from colleges, paid for from endowments or other sources, and has lower priority for repayment than other funding sources, such as federal student loans.
“With ‘skin in the game,’ colleges will face pressure to control unnecessary costs and limit student indebtedness. Colleges will redouble their efforts to ensure that students graduate with the skills necessary to succeed in the job market,” they write.
Higher education faces a cost issue similar to health care: third-party payments drive spending. Just as patients pay for insurance and insurance companies pay doctors, students borrow from the federal government to pay colleges. Students don’t bear the full cost until after graduation (or dropping out), and colleges face no consequences for loading down students with debt.
Even with the requirement that college bear some financial burden for enrolling students who require five or six figures of debt to earn a degree, limiting spending could prove difficult. For all the whinging about the high cost of college, much of it is driven by demand. Students want comfortable dorms. Alumni want competitive athletic teams. Faculty want bureaucrats to handle paperwork and administrative duties.
Were a college to curb its spending and focus on the basics of a college degree, it would see its students transfer. It’s a collective action problem. Until colleges are required to concern themselves with the financial outcomes of their graduates, proposals for more federal involvement, and more financial aid, won’t stymie high college bills.
