Magazine | October 28, 2013, Issue

The School of Hard Knocks

Obama’s proposals won’t reduce tuition, but markets will

Speaking in Buffalo on August 22, President Obama vowed that the rapid rise in higher-education costs had to stop, and that he would exercise tough love with colleges to help make it happen, including rating the colleges and withholding money from them if they raised fees too much. His speech was filled with strong rhetoric but short on details.

When the smoke clears, I suspect the president will get his wish — a significant slowdown of the rise in tuition fees — but not because of his speech or his actions, although he will no doubt be quick to take credit. In fact, the federal government is a large part of the problem of rising fees. Yet markets work. To be sure, when market signals are distorted by government taxes, subsidies, or regulations, or by an artificial lack of competition, markets function more slowly and less efficiently. Nonetheless, there are powerful forces at work that are at last overcoming the distortions caused by our huge and dysfunctional federal student-financial-aid programs and state-government higher-education subsidies.

Before elaborating on the market solution, why do I think the Obama remarks are unlikely to have much impact before he leaves office? First, recall that the president said a year and a half ago, in his 2012 State of the Union address, “Let me put colleges . . . on notice: If you can’t stop tuition from going up, the funding you get from taxpayers is going down.” Fees have continued upward — as have total taxpayer subsidies.

Second, there is the matter of timing. While in other areas the president has not hesitated to issue executive orders that appear to violate constitutional requirements for legislative action, doing so here would potentially lead to a constitutional standoff in which the president’s usual allies, the higher-education community, would become his enemy.

There probably is bipartisan support to “do something” about the tuition problem, but it will take time for Obama to win congressional support for any system that ranks colleges and ties funding to the rankings. It would take more time to actually compile the rankings (my Center for College Affordability and Productivity calculates rankings for Forbes, and it takes us a few months each year, but it is unlikely that the bureaucratic Department of Education could do it in less than two years). In short, there is little prospect that the feds could implement anything along the lines the president was talking about before the 2016–17 academic year. By then, the problem may already be considerably reduced for other reasons (see below).

Beyond the question of presidential effectiveness, however, there is something terribly presumptuous and worrisome about Obama’s rhetoric: He is appointing himself the price czar for colleges and universities. What happened to state-level administration and control of public higher education? That’s an important question, because the unique strength of America’s universities is that they are not centrally controlled — and for that reason are impressively diverse.

In the Northeast, tuition fees are high and public universities less dominant, while in other parts of the country, state universities tend to be stronger, with lower fees. We have a robust not-for-profit private sector, and even an important for-profit sector, despite the efforts of the Obama administration to weaken it. We have hundreds if not thousands of governing boards running our universities, which have considerable divergence in curricula, great intellectual, ethnic, and religious diversity, and wide variations in campus culture, academic rigor, and other characteristics.

This adds to competition and enhances student choice relative to European-style systems, in which the ministry of education tightly controls all schools. But Obama is trying to assume European-style powers in education, including authority over private schools, which are heavily dependent on student financial aid. The federal student-financial-assistance program gives him a fair amount of potential clout, which is one of many reasons we need to reform and downsize (or eliminate) that program.

Besides rating colleges and adjusting financial aid, there were two ideas in the president’s speech, one good and one bad. The good idea is to encourage schools to be more transparent and provide consumers with better information. While I, like many Americans, have little admiration for the IRS, it does have fabulous data that would be of great interest to education consumers: the earnings of college graduates. It has the capacity — with the cooperation of the colleges, which could be made mandatory — to make public the average earnings of, say, the class of 2010 at Slippery Rock University. What is that cohort earning today — not only the graduates, but also those who dropped out? The data could even be broken down by areas of study or majors.

#page#The very bad idea that the president promoted was to further limit and excuse the repayment of student-loan debt. He wants to limit loan repayments to 10 percent of income, presumably with some limit on the number of years during which the government would try to collect the loan. In short, he is advocating partial loan forgiveness. He is encouraging students to borrow more, knowing that there is a good chance they won’t have to repay it all. That strategy would increase an already huge problem that ballooning student loans have caused in raising tuition levels: The easier it is for students to get tuition money, the more colleges will charge.

And the problem goes even deeper. Despite policies designed to do the opposite, Obama’s partial-loan-forgiveness proposal would punish those who study science, technology, engineering, and mathematics, who typically have high earnings, while favoring majors in, say, anthropology or ethnic studies, who earn much less. Moreover, a policy already in place that forgives a portion of student loans for those holding “public service” jobs suggests that people who work for nonprofit organizations are morally superior to, or deliver greater value than, those in the selfish for-profit part of the economy (which pays almost all of the government’s bills).

Yet none of these programs and policies are necessary. If the president and his education bureaucrats would just relax and do nothing (hard as that would be for them), markets would come to their rescue, because for decades there has been a huge disconnect between the number of college graduates and the number of new jobs available in the managerial, technical, and professional fields, which college graduates traditionally fill.

This is only partially a consequence of the slow job growth caused by policy ineptitude, investor and consumer fear, and the massive expansion of the welfare state. It also reflects the triumph of the “college for all” mentality, which gives the impression that anyone who doesn’t go to college must not be smart enough, and that those without a good post-secondary education are condemned to a life of poverty and social inferiority. These attitudes have been financially supported by long-term double-digit annual growth in the federal student-financial-assistance programs.

As a consequence of this labor-market/ college-graduate imbalance, we now have well over 100,000 janitors, and a million retail sales clerks, with bachelor’s degrees or more. The costs of college are rising as job opportunities at the margin are worsening, which means that many college kids are ending up not only wage-poor but deeply in debt. As a consequence, younger Americans and their parents are starting to say no to college and to the “college for all” policies of bureaucrats, do-good foundations, and politicos.

How do we know this? For one thing, last year’s enrollments were down about 500,000 from the previous year, a very meaningful drop. And a good deal of anecdotal evidence suggests that another decline may be happening this year. Two years in a row of enrollment decline is a very rare occurrence in modern higher education.

To varying degrees, colleges are dependent on tuition fees to operate. As enrollments fall, college income falls. Raising fees aggressively to compensate is not an option, as consumers are becoming more price-sensitive. In stealthy fashion, many colleges are starting to lower net tuition fees by giving larger “scholarships” (tuition discounts). And some moderately prestigious specialized programs, such as law schools, are cutting enrollments as demand for their services plummets.

Necessity is the mother of invention, or so Plato allegedly proclaimed. Colleges are being forced to do the unthinkable — reduce redundant staff, ask professors to teach more, and in general learn to live within their shrinking means. The “tough love” that Obama proposes may come not from him, but instead from the action of millions of consumers who choose to forgo the collegiate experience.

– Mr. Vedder directs the Center for College Affordability and Productivity, teaches economics at Ohio University, and is an adjunct scholar at the American Enterprise Institute.

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