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Tuition will keep increasing as long as Washington bases loans on college costs

Obama College Costs
The first plank of President Obama's plan involves creating a ranking system that will assess colleges on their accessibility to disadvantaged students, affordability, and student outcomes. (AP/Jacquelyn Martin)

A recent announcement by the U.S. Department of Education that a majority of undergraduates now receive federal financial aid is hardly surprising. Its related announcement that the percentage of students taking out direct federal loans has grown rapidly, even less so.

Total student debt nearly doubled from 2007 to 2012 and now exceeds $1 trillion. Moreover, as recent reports have illustrated, this generation of college students now believes that assuming large student debt loads is simply part of the undergraduate experience. In 2011, students owed an average of $26,500.

The predictability of students' increased dependence on federal aid does not make it any less worrisome. Delinquencies and defaults on student loan debt are steadily increasing, and students can face lowered credit scores, wage garnishments, and high fees from the federal government if they fail to repay in a timely fashion.

With the uncertainties of today's job market, these trends will likely persist unless the government takes steps to address the cause of growing student debt: the unstoppable rise of college tuition.

This week, President Obama outlined a plan to do just that. Though some of his proposals are productive, his plan is sorely lacking overall. The first plank of his plan involves creating a ranking system that will assess colleges on their accessibility to disadvantaged students, affordability, and student outcomes.

By 2018, students choosing to attend higher-ranking schools will receive more generous Pell grants and cheaper student loans. It is certainly important for the federal government to move toward a loan system that accounts for differences in quality; indeed, schools should not receive taxpayer dollars if the education they provide is worthless.

However, this system wouldn't really punish poorly-performing schools -- it would only reward better ones. It appears that students choosing to attend lower-ranked schools will still be guaranteed federal financial aid, meaning that the federal government will continue to subsidize underperforming institutions.

For this incentive to be effective, the education department would need to offer drastically lower Pell grant awards and significantly more expensive student loans for students attending these subpar schools.

Moreover, it's unclear how the president's plan would curb the cost of college. One of the major reasons tuition grows unabated is that the student loan program disburses funds based on the cost of the specific college a student attends.

In other words, the more individual colleges raise tuition, the more funding the government makes available to their students. So colleges are shielded from the negative consequences of raising tuition. Obama's proposal would not fix this distorted incentive.

In fact, not only would it allow lower-tier colleges to continue increasing costs without consequence, but would embolden better schools to do so on a greater scale and would necessitate more borrowing.

As I've argued in a report for the Manhattan Institute, a better way to fix the student loan system would be to delink loan awards from the cost of attending individual colleges. The federal government should calculate the average cost of tuition in every higher-education sector -- including community colleges, for-profit colleges, and public and private non-profit colleges -- and subtract this figure from a student's financial need, thereby determining the maximum aid a student can obtain in each sector.

This would remove the guarantee for colleges that the federal government will accept any price increase when determining aid.

So far, neither Obama nor congressional Republicans have demonstrated that they understand what needs to be done. Until they do, colleges will continue to prosper while their students suffer.

Judah Bellin is an assistant editor at the Manhattan Institute, where he researches higher education policy and edits Minding the Campus, the Institute's higher-education website.