The Missing Piece of the Obama Higher Education Initiative

Clare McCann of the New America Foundation details the flaw at the heart of President Obama’s new higher education proposal:

President Obama’s new higher education proposal, just announced in a speech at SUNY-Buffalo this morning, would require the Department of Education to develop college ratings that highlight schools’ value by the 2014-15 school year. Once the ratings are developed, the plan is to then tie federal dollars to performance. Though students could continue to choose whichever college they want, federal dollars, at least, would be funneled toward the highest-value programs (and presumably, funneled away from the lowest-value programs). A ratings system along the proposed dimensions of access, affordability, and outcomes would provide students and families much deeper and better information about the quality and cost of their prospective colleges than they have now.

But there’s an elephant in the room the plan doesn’t address: we don’t know the answers to the questions necessary to rate institutions. And we can’t find out, thanks to “one of the worst laws in the modern history of higher education,” passed by Congress five years ago.

That’s because knowing the answers to questions like, “How do Pell Grant students fare at X institution?” or, “Do students who graduate from Y college earn enough after graduation to pay back their loans?” requires student-level data. But in 2008, Congress passed a little-noted provision of the Higher Education Opportunity Act that prohibits the Department of Education from collecting such student unit records.

The case for a student unit record system is rock-solid: as long as taxpayers finance higher education, they have a right to know about how their tax dollars translate into concrete educational and labor market outcomes. There are legitimate privacy concerns — data anonymization is, as we’ve discussed, challenging. There are commonsense steps the federal government can take to protect privacy, but even the best data anonymization techniques are far from fool-proof. Even so, the benefits that would flow from increased accountability outweigh the potential costs. McCann continues:

The Department issues more than $150 billion in student aid to schools ever year – largely with few strings attached. Holding colleges accountable to actual outcomes, the kind that can’t be easily gamed, and providing that information back to students and families could mean fewer students left with huge piles of debt and virtually worthless degrees, as well as fewer taxpayer dollars wasted on low-quality degrees.

One objection is that actually funnelling resources to the highest-value programs is too paternalistic, as all we really need to do is publish a reliable public index to guide students and parents. I disagree, i.e., I think some degree of paternalism is appropriate, but I’d be very content if all we did was create a reliable public index. Yet building a reliable public index is the most politically challenging piece of the puzzle, as incumbent higher education institutions vigorously oppose data transparency.

In fairness, the Obama administration might recognize that if the president takes a strong stand on a controversial issue, he could polarize the issue. This is why we need congressional leadership, and specifically Republican congressional leadership, on this issue.

On a related note, Matt Yglesias of Slate characterizes the Republican view of higher education as follows:

Their view is that if subsidizing student loans is wasteful, the way to address that is to reduce subsidies for student loans. Republicans favor rules to restrict eligibility for public money in cases (like drug testing for SNAP benefits) when the restriction can be structured in a way that reduces aggregate spending. But a rule that tries to ensure that a fixed pool of money should be spent wisely rather than foolishly doesn’t appeal to the right.

In part that’s because the right has somewhat oddly committed itself to the “public choice” view that it’s impossible for public sector agencies to be effectively managed. But in part I’d say it’s because they would genuinely prefer to see tax dollars wasted than well spent. The big problem with Social Security, from a conservative viewpoint, is that a program of simple cash transfers is so clearly free of waste that it’s very politically challenging to cut it. The way federal higher education subsidies are currently structured allows conservatives to advance the (empirically false but not totally insane) argument that these subsidies are useless and only fuel tuition hikes. If policymakers were to succeed in reforming higher education finance so as to make it unambiguously beneficial, then the case for spending more money on subsidies would be extremely compelling and the public sector would grow.

To take an analogy outside the education space, liberals often argue that the government should spend more on transportation infrastructure. The best counterargument to this is that America has the highest cost structure for civil engineering projects in the world so spending more would lead to tons of waste. If some future reformers were to step up and bring U.S. costs down to French or Spanish levels, then suddenly the number of projects that pass cost-benefit scrutiny would soar and the public appetite for new infrastructure investments would soar with it. If you’re committed to keeping the government small, your best bet is to opportunistically align with rent-seeking elements and try to ensure that when public money is spent it’s spent wastefully. [Emphasis added]

(a) Though I don’t doubt that some Republicans take the view Matt describes, this view is far from universal. Many conservatives see the simplicity of Social Security as its greatest advantage, as they are skeptical that government can do high-touch, labor-intensive work well. 

(b) The empirical research Matt cites to establish that subsidies are not useless and don’t just fuel tuition hikes — this is a carefully constructed claim, by the way, as one could believe that some subsidies can be useful and they do things other than fuel tuition hikes — is from Benjamin Castleman and Bridget Terry Long:

Gaps in average college success among students of differing backgrounds have persisted in the United States for decades. One of the primary ways governments have attempted to ameliorate such gaps is by providing need-based grants, but little evidence exists on the impacts of such aid on longer-term outcomes such as college persistence and degree completion. We examine the effects of the Florida Student Access Grant (FSAG) using a regression-discontinuity strategy and exploiting the cut-off used to determine eligibility. We find grant eligibility had a positive effect on attendance, particularly at public four-year institutions. We also extend the literature by investigating the impact of aid on college success and find that eligibility for FSAG increased early persistence and the cumulative number of college-level credits students earned in their first four years. Most importantly, we find that FSAG increased the likelihood of bachelor’s degree receipt within six years at a public college or university by 4.6 percentage points, which translates into a 22 percent increase among students near the eligibility cut-off. The results are robust to sensitivity analyses.

As we’ve discussed, however, not all federal higher education subsidies are created equal. Andrew Gillen has offered a more nuanced thesis:

1. All Aid is Not Created Equal 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.

2. Selectivity, Tuition Caps, and Price Discrimination are Important For policymakers, the first lesson is that capping tuition at public universities will encourage those universities to become more selective. This may be a good thing in some respects, but it does have drawbacks as well. The second lesson for policymakers concerns private universities. Price discrimination allows these colleges to raise tuition in response to aid at an individual level (this is just the Bennett Hypothesis at an individual level). But in order for colleges to price discriminate, they must know each student’s ability to pay. This means that providing colleges with students’ financial background will lead to more aid being captured. Bizarrely, the government currently provides colleges with this information, thus encouraging and facilitating price discrimination. Ending the counterproductive practice of providing colleges with information on the financial background of students and parents would curtail price discrimination, which would increase the effectiveness of aid in improving college affordability.

3. Don’t Ignore the Dynamic Story [A]s college D spends more money, college E needs to spend more to avoid falling behind. If it wants to attract the best professors, it needs to increase pay, lower teaching loads, and build state of the art labs when college D does. And if it wants to recruit good students, it has to offer the same amenities that college D does. Thus, the same things that lead to higher future costs at college D lead to higher future costs at college E.

The upshot is that the case for financial aid restricted to low income students is stronger than the case for tax-based aid for higher education. 

(c) I think Matt makes a good point on infrastructure. If government were dramatically more efficient, Americans probably would demand more of it. I don’t personally see this as a case against making government more efficient, as a more efficient government would (I suspect) have other characteristics as well — public employees would have less power relative to taxpayers and the consumers of public services in this more efficient public sector world, and so they’d have less ability to tailor the structure of public institutions to their interests rather than the interests of the wider public. We’re not there, and I don’t think we’ll get there as long as public employees have expansive collective bargaining rights and/or concentrated political power. 

P.S. Richard Vedder highlights an important aspect of the Obama higher education proposal that I failed to address above:

The president’s proposal has one very bad idea: a forgiveness boon for those paying off loans right now. The proposal, limiting loan payments to 10 percent of income, potentially relieves millions of students from repaying part of their obligation. So why not major in fields the economy values least — anthropology or drama instead of engineering or math — if you don’t have to worry about earning enough to pay off your student loans over a certain period?

The idea simply raises incentives for future students to borrow more money, if they know their obligation to pay it back is capped. That, in turn, allows colleges to keep raising costs.

As Stephen Crawford and Robert Sheets observe in a recent paper on federal student loan policy, Australia avoids this problem dividing academic programs into four different bands with different loan limits, and the loan limits are tied to expected labor market outcomes.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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