The federal government spends a substantial amount on higher education student aid. As of fiscal year 2013, the federal government provided $35.9 billion in grant aid, which doesn’t need to paid back to taxpayers, virtually all of which flows to students from low-income families. The Pell Grant program is the largest and best known of the federal grant aid programs, though there are a number of other grant aid programs as well. Though grant aid programs aren’t perfect, they do have a very attractive feature: because only low-income households are eligible for Pell Grants, these grants shift out the demand curve only for eligible students rather than for all students. Programs that benefit all students, including students from middle- and high-income households, shift out the demand curve for all students.
Rather remarkably, the federal government spends almost as much to subsidize higher education expenditures by middle- and high-income households through the tax code ($32.6 billion). And then there are subsidized federal student loans, which cost $106.4 billion. Unlike grant aid or tax subsidies, there is an expectation that student loans will at some point be paid back, though of course that doesn’t always happen; moreover, a substantial amount of student loan debt is borne by students who’ve never completed a degree.
By shifting the demand curve, tax subsidies for tuition expenditures actually encourage colleges and universities to charge higher tuition, as Andrew Gillen argues in his paper on what he calls the Bennett Hypothesis 2.0:
For policy makers, the key point is that financial aid that is restricted to low income students is much less likely to be captured by colleges, and will therefore be more likely to succeed in making college more affordable and therefore accessible (for low income students). In contrast, universally available programs are more likely to simply fuel tuition increases and therefore more likely to fail to make college more affordable.
So we know that we spent a lot of money to help students finance higher education. Why do we spend the money? One straightforward reason is that higher education represents an investment in human capital that not only raises lifetime wages (something you’d expect students to be willing to pay for) but that generates spillover benefits captured by the wider community. Having a higher concentration of well-educated people will benefit the U.S. economy in various ways, and if we can help finance higher education for people who wouldn’t be able to finance it otherwise, we can raise labor quality and (perhaps) facilitate the kind of innovation that contributes to productivity growth.
But if this is our mental model, it seems fairly clear that we don’t want to subsidize higher education in a way that merely results in tuition increases, so we’d want to rethink education tax credits and subsidized federal loans that flow to people who are already in a good position to finance their higher education. Instead, we ought to focus higher education subsidies on people who genuinely would not be able to afford a high-quality college education in the absence of subsidies. Figuring out who belongs in this bucket is easier said than done, but it’s a good starting point.
There is another piece to the puzzle, however. If we believe that there is a case for using taxpayer subsidies to help young people afford a high-quality college education, we presumably want to know that the young people in question are actually getting a meaningful education — that they are completing degrees at a bare minimum, but also that they have decent labor market outcomes to show for the time and effort and money they’ve put in, and the money that taxpayers have put in as well.
And it turns out that Congress has made it illegal for the federal government to provide students, parents, and policymakers with meaningful, reliable data on, for example, the number of Pell Grant beneficiaries who graduate within six years from a given school, or how many of them are employed within a year (or two or five) of completing a degree. That is, Congress allows higher education institutions to receive vast amounts of taxpayer money, yet Congress has chosen to shield higher education institutions from accountability. If your guess is that self-dealing higher education institutions used their political influence to stymie serious accountability efforts, you win the door prize. Amy Laitinen and Claire McCann tell the whole sordid story in their new paper, “College Blackout: How the Higher Education Lobby Fought to Keep Students in the Dark.”
The basic story laid out by Laitinen and McCann is simple: the federal government requires that colleges and universities collect and report data on a wide range of outcomes, yet Congress forbids the government from linking this data and presenting it in an accessible way. Interestingly, state governments are not prevented from doing so, but the higher education market is a national one, and so state-level systems are intrinsically limited in their ability to provide useful information. Moreover, state-level systems tend to be less sophisticated, and so they pose greater privacy risks, particularly when policymakers attempt to knit together different state-level systems. Laitinen and McCann sketch how a federal student unit record system would work:
A federal student unit record system would make use of many existing data points to paint a more accurate picture of how well institutions are serving students. Under such a system, colleges would upload a standardized version of the student-level records they already maintain on enrollment, financial aid, and more to the Department of Education. The Department would compile the data, as many states already do for their public institutions, aligning students who moved in and out of multiple institutions, and connecting the data to other existing information. For example, educational data could be connected to earnings data from the Social Security Administration and de-identified to provide files to the Department of Education, aggregated by program or institution, that exclude students’ names, Social Security numbers, and other identifying information. Information on colleges and programs would then be reported publicly—in the aggregate, so information on particular students’ performances would not be made public.
A student unit record system would account for many more types of students in the federal government’s student outcomes metrics. It would significantly reduce the burden of paperwork placed on institutions by allowing them to upload the individual-level data they already collect, rather than requiring them to fill out numerous and constantly-changing surveys. It would permit institutions and policymakers to examine the results of their budgeting and policy and design better reform strategies. Most importantly, it would enable students, families, colleges and universities, and policymakers to ask and answer fundamental questions about college value.
The beauty of such a system is that by offering students and parents reliable data on educational and labor market outcomes, it would have a powerful impact on higher education institutions. The U.S. News & World Report guide to colleges is notoriously limited in its ability to offer useful information, e.g., it doesn’t offer any information on labor market outcomes. Yet the metrics that U.S. News does use have influenced higher education administrators to, among other things, invest in attracting more applicants so that they can become more selective. If students knew which colleges have the highest four-year completions rates and the highest employment rates for graduates, they’d have a valuable tool for choosing which school to attend — and they’d pressure lagging schools to embrace the best practices of schools that are achieving the most impressive outcomes.
In systematic fashion, Laitinen and McCann address the most common objections to a student unit record system. First, the patchwork of student record systems we have now actually poses more serious privacy problems than a federal system, as the federal government has long collected student data and it has safeguards and stiff penalties in place for privacy breaches. Students who file the Free Application for Federal Student Aid (FAFSA) already agree to disclose private information to determine eligibility for grants and loans, and it seems reasonable to expect that most students and parents would accept some sacrifice of privacy in exchange for gaining access to crucial consumer information.
A number of lawmakers, including Senators Ron Wyden (D-OR) and Marco Rubio (R-FL), have called for overturning the ban on a federal student unit record system, recognizing its central importance to protecting the interests of students preparing to make a substantial investment of time and effort in their futures, and also the interests of taxpayers who are funneling vast sums into higher education. The only higher education institutions that have reason to fear transparency are those that have been wasting taxpayer dollars, and more importantly those that have been wasting the potential of students by enrolling large numbers of ill-prepared students, loading them up with debt, or collecting the grant aid meant to better their lives, and failing to educate them for a changing labor market. And I’m pretty sure I’m not the only one who believes that failing higher education institutions need to shape up or go out of business.