How federal aid pushes up tuition

When financial aid flows to affluent students, college raise tuition to capture the dollars, writes Andrew Gillen of the Center for College Affordability and Productivity. However, aid to low-income students, such as Pell Grants, is unlikely to push up tuition, he writes in an Inside Higher Ed essay.

Aid restricted to low-income families allows students who were previously priced out of higher education to attend, without giving colleges the ability to raise tuition without again pricing these students out of higher education. That is not the case with aid given to relatively affluent students who will attend college regardless of price.

Not all colleges will raise tuition, when aid rises, he adds. Instead, “many colleges will instead grow their applicant pool, allowing them to become more selective” and move up in college rankings.

“Don’t leave money sitting on the table” was the ethos, when he attended meetings with university administrators to discuss tuition, writes Peter Wood in a Minding the Campus discussion.

The metaphoric table in question was the one on which the government had laid out a sumptuous banquet of increases of financial aid. Our job was to figure out how to consume as much of it as possible in tuition increases. . . . A substantial portion of the money we captured would be reallocated as “tuition discounts” or “institutional aid.”

. . . And we did all this in the pursuit of educational excellence. It was a large private university in the shadow of world-ranked neighbors and it was attempting to pull itself up in the world of prestige and influence by its bootstraps. There were townhouses that needed buying; laboratories that needed building; faculty stars that needed hiring; classrooms and residence halls that needed refurbishing; symphonies that needed performing; grotesque modern sculptures that needed displaying; and administrators that needed chauffeuring.

Herbert London adds a quote from Derek Bok, a former Harvard president:  “Universities share one characteristic with compulsive gamblers and exiled royalty: there is never enough money to satisfy their desires.”

The federal government should provide college aid only to low-income students with performance criteria to weed out mediocre students, proposes Richard Vedder, Gillen’s colleague at CCAP.

Make the college absorb some of the risk for loan defaults — a lesson we should have learned from the financial crisis. Give Pell Grants as vouchers directly to students, not schools. Reinstate private lending options. Unveil new human capital contract approaches that reduce debt reliance. Downsize and reinvent federal programs and allow market discipline to operate more.

With no federal aid, for-profits charge less

For-profit colleges whose students aren’t eligible for federal student aid charge much less than eligible for-profits for similar programs, concludes a National Bureau of Economic Research working paper by Stephanie Riegg Cellini, an assistant professor of public policy and economics at George Washington University, and Claudia Goldin, a professor of economics at Harvard. Aid-eligible for-profits charge 75 percent more in tuition, roughly equal to students’ financial aid. That supports the “Bennett hypothesis” that colleges raise tuition to maximize aid, the authors wrote.

The tuition difference “seems to match, pretty well, the size of a Pell Grant,” Cellini told Inside Higher Ed.

The U.S. Department of Education estimates that 1.8 million students, 10.7 percent of the total, attend for-profit colleges. That leaves out  670,00 students at schools that don’t receive aid, the study found.  Some 61 percent of for-profit institutions don’t participate in federal aid programs. Most are small.

The non-aid-eligible colleges are typically independent operations that skew heavily toward health profession, culinary and transportation programs. Cosmetology schools are the largest group. “There are a lot of students at these institutions and we just don’t know that much about them,” Cellini said.

To participate in federal aid programs, colleges must be accredited, which can be costly.

Online education will lead to the creation of more low-cost for-profit colleges that don’t rely on federal aid, predicts Michael Clifford, a for-profit education investor, in an Inside Higher Ed discussion. “I believe that we will soon see an ‘all you can eat’ online regionally accredited model based on a monthly subscription fee of perhaps $99 per month to serve as a self-paced, self-motivated accredited degree program.”

The Atlantic looks at the Bennett hypothesis, which was meant to apply to public and nonprofit colleges and universities.

Employers see higher ed as costly, stodgy

The nation’s higher education system is costly, unaccountable and unwilling to change, say business leaders interviewed for Hiring and Higher Education, a report by Public Agenda for the Committee for Economic Development (CED).

“There are growing and grave concerns about the system’s ability to remain a leader and produce the workforce our future economy demands,” said Steve Farkas, lead author of the Public Agenda report. “Business leaders told us that, if higher education fails to control costs and hold itself accountable for results, our colleges and universities will become less relevant, and our economy will suffer greatly.”

However, the business leaders praised community colleges as no-frills institutions that are able to adapt to new challenges and work with employers on job training.

The widely shared perception is that higher education is highly resistant to change, and that innovation and adaptability are hardly the forte of colleges and the administrators who run them. Some executives talked about experiences they had trying to work with their local colleges only to run up against a “can’t-do” system tied up by committees, paperwork requirements and institutional prerogatives.

“The colleges, as creative as they may be, lack innovation,” said one executive. “They’ve set up a certain structure, tenured staff, and because of that they’re opposed to change.”

Despite the high unemployment rate, it’s difficult to find skilled workers in some fields, the executives said.

Obama: Raise tuition, lose federal aid

College affordability was the theme of President Obama’s speech at the University of Michigan yesterday. He called for spending more on Perkins loans and work-study programs — going from $3 billion now to $10 billion  – but only at colleges and universities that provide “value.” Students at colleges that raise tuition could lose access to loans and work-study jobs.

In addition, the president’s plan (pdf) includes a $1 billion “Race to the Top for college affordability” and a $55 million “First in the World” competition to encourage productivity innovations, reports the Washington Post.

Higher education — including community colleges and lifelong learning for workers — is “an economic imperative,” Obama said. While he proposed increasing tuition tax credits and keeping interest rates low on student loans, he said that’s not enough. “Look, we can’t just keep on subsidizing skyrocketing tuition.”

So from now on, I’m telling Congress we should steer federal campus-based aid to those colleges that keep tuition affordable, provide good value, serve their students well.  (Applause.)  . . . If you can’t stop tuition from going up, then the funding you get from taxpayers each year will go down.

If “provide good value” and “serve their students well” means anything, it means the federal government will monitor graduation rates and employment outcomes, as well as tuition, for the entire higher education sector. Currently, “gainful employment” rules, which monitor former students’ earnings and ability to pay back loans, cover only for-profit colleges and community college vocational programs.

Following the speech, Molly Corbett Broad, president of the American Council on Education, issued a statement saying there’s concern that the proposal would “move decision-making in higher education from college campuses to Washington, D.C.”

Sen. Lamar Alexander, R-Tenn., a former education secretary, said the autonomy of U.S. higher education is what makes it the best in the world, and he’s questioned whether Obama can enforce any plan that shifts federal aid away from colleges and universities without hurting students.

“It’s hard to do without hurting students, and it’s not appropriate to do,” Alexander said. “The federal government has no business doing this.”

President Obama also touted college “report cards” showing college costs and how well graduates do in the job market.

The U.S. Education Department and the Consumer Financial Protection Bureau are working on Know Before You Owe, a financial aid shopping sheet that will let future students estimate their debt, monthly payment and likely ability to repay loans. Parents and students also have requested a breakdown of college costs and information on repayment rates for graduates at each college.

Repayment study left out blacks

A U.S. Education Department analysis on the relationship between race and repayment of student loans left out black students, skewing results used to justify the gainful employment rule, reports Inside Higher Ed.

For-profit colleges, which enroll many minority, low-income and older students, argue the high-risk demographics explain their students’ higher default rates on student loans. Not so, said the department in June, concluding that only 1 percent of the variance in repayment rates could be explained by the racial composition of enrollment. Sorry, never mind.

But by failing to count black students, the study understated the impact of race: the actual variance at for-profits is 20 percent over all, and 31 percent for four-year institutions, the department said in the December filing.

Eduardo Ochoa, the department’s assistant secretary for postsecondary education, said “accurate figures would have had no impact on the final regulations.”

Interesting.

The Association of Private Sector Colleges and Universities, the for-profit trade group challenging the gainful employment rules, charges the new figures show that “schools that enroll a higher percentage of minority students are more likely to fail the department’s repayment test.”

President Obama talked about defunding colleges that raise tuition in his State of the Union speech, writes Andrew Kelly on the Enterprise Blog.  That means shifting “some Federal aid away from colleges that don’t keep net tuition down and provide good value,”  according to a White House blueprint (pdf). Deciding whether a college is providing value for the money will require collecting gainful employment data on all higher education sectors, writes Kelly.

Rethinking federal student aid

Let’s Rethink Federal Student Aid, writes Jeff Selingo in a Chronicle of Higher Education commentary.

The higher-ed establishment in Washington spends most of its time trying to protect the status quo on student-aid programs, all the while arguing for more money to help pay higher tuition prices. But if we’re headed for an age of at least some austerity in the federal government, then the higher-ed associations are going to need a new playbook.

Selingo throws out some ideas, starting with allowing colleges to limit loan eligibility so students don’t borrow well more than the cost of tuition, live off the extra cash and find themselves unable to repay their loans. That’s more of an issue at low-cost colleges and universities.

He also suggests linking aid to measures of student success, such as graduation rates.

Nearly 60 percent of high-school graduates from the bottom income quartile entered college in 2009, but only 7.3 degrees went to students from the lowest quartile. In part, that’s because low-income students tend to choose colleges with a low sticker price — such as community colleges — and low graduation rates.

Needy students and their parents don’t realize the net price of colleges is much lower than the sticker price, says Andrew P. Kelly, a research fellow at the American Enterprise Institute.

If low-income families knew more about the net price of a college, Kelly maintains they would be better able to balance cost with the likelihood of success. Rather than just go to the cheapest college, they might pick a slightly more expensive one with a higher graduation rate.

In addition, Selingo writes, “colleges that fail to graduate a reasonable number of low-income students, whether those on Pell Grants or with sizable loan burdens, should be banned from the federal student-aid programs.”

That could hit community colleges hard:  Pell Grant recipients’ graduation rates are low.

Federal aid fuels exploding college costs

Education Secretary Arne Duncan’s approach to controlling college costs is dead wrong, writes Neal McCluskey, associate director of the Cato Institute’s Center for Educational Freedom.  More federal aid will fuel exploding college costs, argues McCluskey, author of How Much Ivory Does This Tower Need? What We Spend on, and Get from, Higher Education.

To a system blackout-drunk on taxpayer money, the Obama administration would deliver even more booze while only whispering about tough love.

Speaking at a Nov. 29 Las Vegas gathering of financial-aid administrators, Duncan addressed exploding college costs, a problem highlighted by Occupy Wall Street protesters angry over rising student debt. He lauded loan forgiveness and repayment reduction, and exhorted colleges to do, well, something to become more efficient.

The education secretary inflated the benefits of a college degree — it’s not really $1 million over a working life — and ignored the reason colleges keep raising tuition, McCluskey writes.

Between 1985 and 2010, inflation-adjusted federal student aid rose from about $30 billion to about $140 billion, a 367 percent leap. Pell Grants alone ballooned from $8.1 billion in 1985 to $41.7 billion in 2011.

Add various tax credits and deductions to that, and it’s no wonder college prices have inflated even faster than health care: Government has ensured that ever-higher bills can be paid.

Declining state support for higher education isn’t the reason tuition keeps going up, argues McCluskey. Private colleges are charging more and more too.

President Obama wants to lead the world in college graduates by 2020.  That means raising graduation rates for the many students who start college and never finish, often because they’re not prepared for college-level work.

Duncan says the administration will “challenge” schools to improve their graduation rates. Great.

Colleges’ most likely response will be to run warm bodies through to graduation, while giving them few if any college-level skills. Indeed, we’ve been seeing this for years, with literacy for degree-holders dropping and earnings for people with only a bachelor’s degree falling, too.

The only way to make college much cheaper or more effective is “taking the jet fuel — federal student aid — out of college pricing, and being frank about the real value of higher education,” McCluskey writes.

He provides links here to research on the effect of aid on college prices.

Virginia Postrel has more in a Bloomberg View column, including a warning:

A good chunk of the educated public has decided that college educators are decadent and lazy. Many are positively lusting to see higher education get its Detroit-style comeuppance.

This attitude is unfortunate and often unfair, but it’s the direct result of decades of federal policies. Any strategy to reduce college costs needs to look beyond traditional subsidies to remove some of the insulation that stifles innovation and feeds public resentment.

I keep expecting the non-elite private colleges to collapse as students and parents realize that it’s just not worth the money compared to a state university or a community college. If we do see cost controls, they’ll come in the private sector.

Federal policy pushes up college prices

College tuition is soaring in response to federal policies on student aid and university research funding, argues Arthur M. Hauptman, a higher education financing analyst, in an essay in Inside Higher Ed. Jawboning won’t help, he writes. Neither will top-down regulation.

Pell Grants aren’t a major push factor for college prices, Hauptman believes. But rising spending for Pell may be the reason colleges are shifting their own aid away from the poor and toward middle-class students.

The rise in student loans correlates strongly with the rise in tuition.

Currently, colleges can just maintain or raise their prices and shift the cost-sharing to loans for a broad range of their students. This needs to change. One way to accomplish this would be to require that needy students not receive all their aid in the form of loans.  In effect, this would mean that institutions must offer discounts to their needy students who borrow, thereby reducing their debts.

In addition, students shouldn’t be allowed to borrow excessively for living expenses.

Now, community college students who face $2,000 or $3,000 in tuition and fees are eligible to borrow $10,000 or more to cover their total expenses. This applies at all institutions for students who live at home or off campus. This provision should be changed so that reasonable limits are placed on how much these students can borrow. Ditto for students living in dorms or on meal plans – they should not be allowed to borrow excessively large sums for this form of consumption. Such a change would likely have the beneficial effect of reducing how much institutions charge for these non-education services.

Students can’t use federal grants to pay for remedial courses, pushing them to borrow, Hauptman writes. He suggests students be able to take tuition-free remedial courses offered by providers who’d be paid by the government based on their success at raising student competencies. Colleges would have to compete with private companies for the remedial ed business.

Federal student loan subsidies should be eliminated or limited to Pell Grant recipients, he recommends. “This may seem harsh medicine, but the benefit is very expensive, not well-targeted to those most in need, and serves as an incentive for students to borrow more than they otherwise would.”

Linking loan repayments to post-college income makes sense, Hauptman writes, but it will serve “as a further encouragement to institutions to keep their prices high and let the loan system deal with the consequences.”

Obama puts college costs on agenda

Rising college costs was on the agenda this week, when President Obama and Education Secretary Arne Duncan met with college leaders at the White House. Most were chancellors of large state university systems, but Thomas Snyder of Ivy Tech Community College was invited along with the presidents of the three nonprofits, the all-online Western Governors University, Carnegie Mellon and Berea College.

New financial aid policies to encourage completion were discussed, said Jamie P. Merisotis, president of the Lumina Foundation, who also testified before Rep. Virginia Foxx’s committee on streamlining college costs.

. . . there seemed to be some consensus at the White House meeting that the federal government should develop policies on financial aid, its biggest tool, to spur a higher graduation rates, whether by limiting the number of semesters for which students could receive aid, requiring them to attend full-time, or doling out aid bit by bit to discourage students from dropping out mid-semester, or other approaches.

Requiring full-time attendance to qualify for Pell Grants would have a huge impact on community college students.

College leaders also talked about the importance of linking colleges with K-12 education and the potential for technology to cut costs.

“If we’re going to address the 37 million adults with some college and no degree, we can’t just tweak the existing model,” said Robert W. Mendenhall of Western Governors University, an online nonprofit university. “Mostly in higher education, technology is an add-on cost that doesn’t change the model at all. We need to fundamentally change the faculty role, and use technology to do the teaching.”

Larry D. Shinn, the president of Berea College, did not disagree. “We’re structured in a 19th-century model, but I think we all know now that blended learning, combining technology and classroom learning, can let us educate for less cost,” he said. “The question is how we get there from here.”

“Technology can help us educate more students faster and better.”said Jared L. Cohon, the president of Carnegie Mellon, which has developed online classes used at other universities.

No for-profit colleges made the guest list.

Open-access universities and community colleges have the most experience in controlling costs, writes Jonathan Gibralter, president of Frostburg State in Maryland.

President Obama plans to continue to talk about the problem of college affordability, which was spotlighted by the Occupy protests.

Can college costs be controlled?

Despite the recession, college costs keep rising: Last year, tuition and fees increased by 8.7 percent at community colleges, 8.3 percent at public universities,  4.5 percent at private nonprofits and 3.2 percent at for-profit schools.

College leaders must “think more creatively and with much greater urgency” about controlling costs and reducing students’ debt loads, said Education Secretary Arne Duncan Tuesday at a conference of financial aid administrators in Las Vegas.

“Three in four Americans now say that college is too expensive for most people to afford,” Mr. Duncan said. “That belief is even stronger among young adults — three-fourths of whom believe that graduates today have more debt than they can manage.”

A college degree is an increasingly important investment, said Duncan, claiming that a four-year graduate will earn $1 million more over 40 years than a high school graduate. (That’s an inflated estimate, argues Richard Vedder.)

Exhortation won’t solve the debt problem, Patrick M. Callan, president of the Higher Education Policy Institute, told the New York Times.

“We’ve put huge amounts into Pell grants under Clinton, Bush and Obama, but the money that went to financial aid has been absorbed by tuition increases. And with all that we’ve invested, we have a less affordable system than we had a decade ago. We’re on a national treadmill.”

Duncan promoted the administration’s plans to link federal loans and grants to colleges’ success at graduating Pell recipients, increasing overall completion rates and closing achievement gaps.  He also promised grants “to support programs that use innovation to accelerate learning and hold down tuition.”

Edububble is skeptical:

The Feds can write as many checks as they want, but the college industrial complex will take all of the money and still demand more from the students. The only solution is for professors to teach more and for colleges to quit spending so much money on new buildings. Oh, and quit paying so much for administration. But no one wants to hear those ideas.

The next day, the House Education & Workforce Committee held a hearing on “Keeping College within Reach.

“This troubling trend of higher prices has several causes, including weak local economies, increased spending on student services and academic support, and state budget crises,” said Rep. Virginia Foxx, who chairs the committee.

“. . . as our nation struggles with trillion dollar budget deficits and unprecedented national debt, continuing to increase federal subsidies to supplement the growing cost of college is simply unsustainable … colleges and universities must do their part to streamline costs and lessen the burden for students whenever possible.”

Jane V. Wellman, executive director of the Delta Cost Project, said tuition is rising “much faster than spending or costs” to replace state and local revenues and to cover costlier employee benefits. “Pretty much all of the new money coming in from tuition increases [is] going out the door to pay for the growing costs of health care,” she said.