Rethinking How We Pay for College

A new financing framework is needed to meet the challenges that American higher education faces today.

How we pay for college in this country needs fixing. The problems with the current system include: exploding college costs; excessive reliance on student loans; chronic equity gaps; and heightened concerns about quality and relevance, including a proliferation of low quality programs. The key question is why each of these have become problems and what can we do about them.

It has become popular — especially but not exclusively on the left — to address these higher education challenges by proposing to make public colleges tuition free, cancel existing student debt, double the Pell Grant maximum award and/or create a new federal program to take state and local governments off the hook for increased funding. But each of these proposals would cost tens of billions of dollars over the $200 billion that the federal, state, and local governments already spend every year on higher education.

More importantly, because these big-ticket items would be layered on top of the existing system, they are unlikely to resolve the fundamental challenges that American higher education faces and will simply kick the problem down the road. For that matter, adopting any of these plans now could make matters worse as they will make it that much more difficult to achieve the reforms in the future that are needed to make the system work better.

How Did We Get Into This Mess?

How higher education is financed is a complicated question, but there is a relatively simple but compelling answer to the question of what went wrong: Federal and state policies provide a set of signals to institutions and students that lead to unintended and often adverse behaviors. These policies only exacerbate the natural inclinations of many faculty and institutional officials to enroll fewer students and to maximize resources per student. To wit:

• Federal and state policies in key ways encourage both public and private institutions to spend more and charge more than they otherwise might.
• Federal policies over time have contributed directly to the excessive and growing reliance on student loans to pay for college as they encourage or require students to borrow more to pay for their education.
• While the rhetoric of policymakers and institutional officials focuses on the need to reduce chronic inequities, many federal and state policies and funding decisions in reality have exacerbated equity gaps over time, and
• Efforts over decades to create more access to college may have contributed to lax efforts to maintain or improve quality of the education and training provided.

Advocates of the big ideas such as doubling Pell Grants seem not to recognize that many of the problems with how we pay for college today can be traced to federal and state decisions taken fifty years ago. To be sure, the policies that flowed from these decisions have had many positive effects, including sharply increased participation in higher education despite rapidly increasing prices and growing levels of degree attainment. But these policies, as described below, have also been key factors in the challenges that American higher education faces because they often do not reflect the realities of today.

At the federal level, policies first established in the Education Amendments of 1972 include relying on a system of vouchers in the form of Basic Grants (now Pell Grants) to help students pay for college. That key legislation also created Salle Mae which has helped spur the tremendous growth in loans over decades to allow students to pay spiraling costs. In addition, the 1972 legislation was the first time that students attending a wide variety of for-profit schools were able to fully participate in federal student aid programs.

One of the unanticipated and adverse effects of these policies was that vouchers like Pell Grants don’t work well when prices are unstable as the providers are the ones that primarily benefit from the expansion of vouchers. Moreover, political pressures have led to spreading Pell Grants more broadly up the income scale, thereby defusing efforts to target aid on those who need it the most. In addition, the federal focus on providing aid to students has occurred while at the same time not enough incentives were provided to institutions to recruit, enroll, and graduate low income and minority students.

With regard to student loans, the creators of Sallie Mae did not sufficiently anticipate it would become a behemoth that would contribute directly to the tremendous reliance on student loans to finance higher education in this country while not nearly been enough policies have been in place to limit the reliance on loans. And the creation of thousands of for-profit schools over the year has led to greatly diminished quality in large part because the federal government has failed to exercise sufficient due diligence in monitoring the activities of the many of those schools not providing adequate quality.

At the state level, two national commissions in the early-1970s argued that public sector tuition should rise from less than one-tenth to one-third of costs to reflect the increasing private benefit of students attending public higher education. The intent of this recommendation was a good and proper one — that public institutions should charge tuition that more accurately reflect the private benefits that accrue to students who attend them.

But the unintended effect of states increasing the share of costs borne by students is that public sector tuition has now become viewed more as a means of financing higher education rather than as measure of what many students could reasonably afford. The fact that students now bear one-half of the costs of higher education just reinforces this notion. The problem is that this philosophy encourages public colleges and universities to charge more and spend more rather than as a means to moderate charges and spending.

How Do We Get Out of This Mess?

Rather than spend large sums to reinforce current programs, a much more effective approach should be pursued that would produce policies which better reflect the realities of today and tomorrow. Moreover, this can be accomplished within what federal, state, and local governments already spend every year on higher education. But for this to happen we must be much smarter in how we spend that money.

The first necessary step in being smarter is to to rethink the philosophies that govern current federal and state policies that have been in place since the 1970s and revise them in the light of existing realities. This requires that we revise those federal policies that have had inadvertent and adverse effects on institutional and student behavior. For example, we must correct those policies that have contributed to the runup of tuition and other charges over time. Also, we must do much better at targeting subsidies on those students and institutions that need them the most.

By the same token, states should change their approach so that they structure their policies more to meet the needs of students rather than provide institutions with financial support. Being smarter also requires all policy makers to take greater recognition of demographic and economic realities rather than succumb to short-term political urges of rewarding their supporters sometimes more than their constituents. By the same token, the proper remedy is not to regulate institutions more but focus on giving them the proper signals and let them decide how to act within that framework.

Subsequent blogs will describe the specific policy reforms that will accomplish the objective of meeting current realities without spending more than what the federal, state, and local governments already spend on higher education.