We Don’t Have to Break the Bank to Fix How We Pay for College

Smarter federal and state policies, not more money, is what American higher education needs to become better.

Many still regard America’s colleges and universities as the best in the world. But how we pay for college in this country is broken in some fundamental ways. College costs too much. Too many students borrow too much. We’ve made too little progress in making college more accessible to traditionally underserved populations. And too many courses aren’t worth what colleges charge for them and/or are not relevant to work place needs. These problems threaten American higher education’s traditional global hegemony.

On top of all that, there’s the COVID-19 pandemic and its impact on the America’s colleges and universities and the students who attend them.

All these problems are related. Responding to the COVID pandemic will require stabilizing institutional finances as well as allowing millions of adversely affected people to realize their full educational potential. Looking beyond the pandemic, the broader problem remains: How do we make higher education more affordable and equitable in the years ahead?

Concerns about how college in this country is financed have led to a series of big-ticket proposals, including: making public colleges tuition-free; cancelling large chunks of student loan debt; doubling the Pell Grant maximum award and/or creating a new federal program to shore up state and local funding.

The bad news is that any one of these proposals will cost tens of billions of dollars more each year than the $200 billion that the federal, state, and local governments already spend annually on higher education. Nor is it at all clear that any of these big-ticket proposals would solve the problems.

The good news, though, is that we can make college affordable for all and meet the various challenges without spending any more than what governments already spend for higher education. What is required, though, are much smarter policies that encourage or require institutions to be more efficient and that ensure greater equity in the allocation of government funds.

Why More Money Is Not the Answer

The arguments for each of the major initiatives now being proposed presume that government at all levels must spend much more to meet the challenges facing higher education. This presumption, however, is at odds with the facts.

A principal argument for making public colleges tuition-free is what has become a widespread belief that states have dis-invested in higher education for many decades. This belief also has led to proposals for a new federal program to augment state funding to drive down public tuitions. The COVID pandemic has increased calls for both of these proposals.

But the notion of state dis-investment is largely a myth. The robust growth in public higher education since the end of World War II would have been impossible without sustained high levels of state and local funding which peaked in real terms in 2007, just before the advent of the Great Recession. State and local funding per student peaked at the turn of the century.

Although state and local funding has not fully recovered from the Great Recession after adjusting for inflation, it did exceed $100 billion in 2019 for the first time. This was 20 percent greater in real terms than what was spent by states and localities on higher education twenty years ago and 80 percent higher than forty years ago. Funding per student has grown more slowly because overall enrollments have grown by two-thirds since 1980.

That’s not counting tuition. When tuition revenues net of student aid are included, total educational resources available to public institutions reached more than $160 billion in 2019, roughly $15,000 per full-time-equivalent student. These are among the highest spending levels for public higher education in the world.

At the federal level, the inability of Pell Grant awards to keep pace with the increasing cost of public higher education has been the main argument for doubling Pell Grant maximum award. Outstanding student loan debt — now $1.7 trillion and growing — is the primary motivation for the many proposals to cancel as much as $50 thousand in debt for each student borrower.

It is indeed true that the Pell maximum award has not kept pace with college costs. But lack of money is not the reason. After the Great Recession, Pell Grant funding more than doubled in real terms between 2008–09 and 2010–2011. And while Pell funding has fallen by 20 percent since then, it now is triple in real terms what it was thirty years ago.

So the drop in the award’s value is much more a function of the rapid growth in college charges than the lack of growth in funding of Pell Grants. And, because of the program’s design, funding increases bring in more recipients as well as increase maximum award. After the Great Recession, for example, the doubling in Pell Grant funding led to a 50 percent increase in the number of qualified recipients, thus limiting the growth in the maximum award.

Similarly, although spending on student loans and tuition tax credits is not as high now as a decade ago, both programs spend much more than they did two or three decades ago and benefit many more students. Conclusion: past increases in funding have not led to commensurate increases in the amount of loan or tax credit. Instead, the number of recipients or borrowers has grown faster than the amount of the tax credit or the amount borrowed.

Five Principles for Reform

If more money is not the answer to righting the system, what is needed? I believe that federal and state policymakers need to agree on the following important principles to facilitate an effective reform process.

1. Rethink the Traditional Roles of the States and Federal Government. States have traditionally focused more on providing financial support to public institutions than on helping the students who attend those institutions. By contrast, the primary federal role in higher education for the past half century has been to provide direct support to students though grants, loans, and work-study as well as tuition tax credits. Most of this aid comes through vouchers that provide aid to students often based on the cost of the institution they choose rather than funneling funds through the institutions.

This traditional division of responsibility should be rethought. States should make the needs of students a higher priority rather than a residual decision based on what’s left after the institutions have gotten their money. The federal reliance on vouchers to deliver aid is a good one in theory but the problem is that there are a number of unintended and often adverse effects. Chief among these are that vouchers don’t work well when prices are sharply rising, as the benefit goes more to the provider than the award recipient. Federal policies in the future should pay greater attention to providing proper signals to institutions to prevent any inadvertent and adverse effects on their behavior.

Realign Financial Incentives and Penalties. Imbedded in the current system are financial incentives and penalties that encourage institutions to do things that do not help meet the key objectives of efficiency, equity and effectiveness. For example, state policies that allocate funds to public institutions based on what they spend encourage institutions to spend more, not less per student. And contrary to the political rhetoric, equity considerations are often given short shrift in many state and federal policies. For reforms to be successful, these policies must be revised to produce better results.

Pay Greater Attention to Possible Supply Effects. Proponents of the various big-ticket ideas often don’t pay very much attention on possible effects on the supply of seats. For example, free tuition proponents argue that it will increase demand for public higher education. But their arguments ignore the fact that tuition is a major source of revenues and has a large impact on the supply of seats. As a result, the number of seats will likely shrink over time if governments don’t fully replace lost tuition revenues. This limitation on seats, in turn, would likely lead to less equity as lower-income students are frozen out of selective public institutions as their seats are taken by students from better-off families with better grades who are attracted by the lower prices.

Recognize the Value of Private Non-Profit Higher Education. Each of the big-ticket proposals focuses on achieving its goals through enhancement of public higher education, a bias towards the public sector which is traditional in government circles. This bias tends to undervalue the contribution of private, non-profit education in achieving needed reforms. But the fact is that private institutions are one of the great unique strengths of American higher education. One-fifth of all college students attend them and many of the key reform goals can be achieved at lower net public cost if the plans involve helping students attend private institutions providing a quality education.

Do Not Assume that One Size Fits All. Another tendency of many of the proposals now being discussed is that they would apply uniformly to groups of institutions, students or borrowers. For example, many of the proposals to cancel student debt would reduce the debt of all borrowers by the same amount. Or many free tuition proposals would charge no tuition to all students at certain types of institutions, no matter their family income.

This makes little sense. Older students are in a much different situation than traditional college age students. Students who reside on campus shouldn’t be treated the same as those living at home or enrolled in distance education programs. It makes more more sense to tailor policies with reforms that fit the needs of different students or borrowers so that they can benefit commensurately with their circumstances.

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Subsequent blogs will address how best to meet the following five challenges that American higher education faces within existing budgetary frameworks:

• The pandemic has knocked a hole in an already fragile financing system
• College prices and spending have been exploding for four decades
• There is an excessive reliance on loans to pay for their higher education
• Chronic equity gaps remain despite decades-long efforts to improve equity
• There is too little quality and labor force relevance at many institutions.