Fixing How We Pay for College: First, We Need to Change the Policy Signals

We don’t need to spend more money to reduce college costs and student debt while increasing access, quality, and relevance of higher education.

I can think of lots of critical services in this country that could use more government support to make them work better. Health care, childcare, and public transportation come quickly to mind. Higher education does not.

America’s colleges and universities already spend twice as much per student as the average of all developed countries. As a share of GDP, the U.S. devotes more resources to higher education than any other country. Federal, state, and local governments spend more than $200 billion a year to support higher education (not counting many more billions in one-off COVID relief funding).

All this spending is a major reason American higher education has long had a stellar reputation around the globe. Many of our colleges and universities continue to be regarded as the best in the world on a wide variety of metrics.

Given this reputation, it may seem counterintuitive to say that how we pay for college in this country is flawed in some fundamental ways. But the fact is that too many colleges cost too much. Too many students must borrow too much. Too many expensive courses and programs aren’t worth what they cost and/or are irrelevant to meeting workplace needs. And we have a long way to go to make college more accessible for traditionally underserved populations such as low income and minority students. All these challenges contribute to the erosion of American higher education’s traditional global leadership.

The Unwisdom of Spending a Lot More on Higher Education

Despite all the money already spent on higher education, proposals to spend much more have tended to dominate the public debate. These include: making some or all public colleges tuition-free; cancelling chunks of student loan debt; doubling the maximum Pell Grant; or creating a federal program to take state and local governments off the hook for increased funding.

Each one of these ideas would cost tens of billions of additional dollars yet none of them would effectively address the rising cost of college. Indeed, rather than encouraging schools to control costs, each idea would give them more money to spend. As a result, it is very possible that any of these ideas if adopted would make things worse, not better. For example, cancelling large chunks of student debt now could encourage even more borrowing in the future if new borrowers believe their debts will be cancelled as well.

More importantly, because these big-ticket items would be layered on top of the existing system, they are unlikely to resolve the fundamental challenges of reducing institutional spending, tuition and student debt while at the same time increasing access, quality, and relevance. Instead, they are likely to simply kick these problems down the road.

That’s the bad news. The good news is that there are ways to deal with these challenges that wouldn’t require any more taxpayer money than is currently being spent. But these solutions will require rethinking the basic principles that have governed public policies for higher education for many decades and replacing them with ideas that better fit the modern era.

One Big Problem: Misdirected Policy Signals

Let’s start by recognizing one key reason how we got into this fix: Federal and state policies too often send signals to institutions and students that lead to unintended and adverse behaviors. These policies only exacerbate the natural inclinations of many faculty and institutional officials to maximize resources per student by raising funds while limiting enrollments.

• Federal and state policies in key ways encourage institutions to spend more and charge more than they otherwise might. For example, most states provide more funds to institutions that spend more per student. And many argue, including me, that federal student aid programs, especially loans, have been a key factor in the runup of tuitions over time.
• There is little doubt that various federal policies have contributed directly to the excessive and growing reliance on student loans by encouraging or requiring students to borrow large sums to pay for their education.
• While the rhetoric typically focuses on the need for greater equity, federal and state policies in reality often exacerbate equity gaps. State funding subsidies favor institutions with more well-to-do students and federal aid benefits tend to leak up the income scale to gain greater political support.
• Efforts to create more access to college may have contributed to lax efforts to maintain or improve quality and relevance of the education and training provided. One example of access triumphing over quality is that students taking remedial courses must pay regular tuition and often must borrow while there is little chance of them completing college.

The Need to Rethink Federal and State Roles in Higher Education

For more than half a century, state and federal policies for higher education have been based on contrasting set of principles. The essential state role is to finance the operations of public institutions and in this view tuition should be increased over time as a share of costs to reflect the private benefits of public higher education. But one result of this philosophy is that the financial needs of state residents too often have become a secondary policy concern.

By contrast, since the passage of the Education Amendments of 1972, the federal role in higher education has focused on providing vouchers in the form of grants and loans to let students vote with their feet to choose which institution they attend. If anything, in the decades since, the federal emphasis on helping students has only increased.

These policies grew out of good-faith efforts to strengthen higher education in this country. But too often they have inadvertently created signals that run counter to meeting key policy goals. State policies lead many institutions to charge more so that they can spend more. And while the federal focus on helping students is sound and reasonable, it has not fully succeeded largely because of the adverse signals it provides to institutions. In effect, federal aid has often become a license for colleges to raise prices. And as prices rose, so did the pressure on students or their parents to borrow more to pay them.

To fix how we pay for college, we must rethink these underlying principles to change the signals. This would require states to focus more on ensuring a full set of affordable opportunities for their residents rather than propping up institutions. That includes basing tuition on the average family’s ability to pay and then ensuring enough aid is available to help students whose families lack the resources to pay that tuition. And federal policymakers need to focus more on removing counter-productive signals that encourage institutions to charge more and students to borrow more.

Meeting the Financial Challenges Facing America’s College and Universities

Future blogs will lay out a plan for changing these policy signals to meet the following four challenges that American higher education faces:

- Bending Back the College Cost Curve

- Reducing Student Debt Burdens Responsibly Now and in the Future

- Building More Equity into Higher Education Funding

- Improving the Quality and Relevance of Higher Education

The specifics of meeting these four essential challenges will provide a plan for fixing how we pay for college in this country without spending more public dollars than federal, state, and local governments already spend. I am convinced this is the best path forward for addressing this key national issue.