Tag: student aid

Yes, Aid Fuels Tuition Inflation

At this point, I think I’ve said all I need to about the doubling of interest rates on subsidized federal student loans. Basically, the doubling won’t have a big impact one way or another, but putting a little more payment burden on the students consuming higher education is probably a good thing. Why? Because cheap aid encourages students to demand stuff they otherwise wouldn’t, and enables colleges to raise their prices at excessive rates.

That said, since the nation will likely be talking about student aid for a while longer, now is probably a good time to reprint – and expand – the list of empirical studies that have, in one way or another, found that schools in large part capture aid money rather than becoming more affordable. The list probably isn’t exhaustive, and there are many limitations that make it impossible to prove that aid fuels inflation, but combined with the logic that you’ll willingly pay more if you have someone else’s money, these studies show that there is very good reason to conclude that aid is counterproductive:

John D. Singell, Jr., and Joe A. Stone, “For Whom the Pell Tolls: The Response of University Tuition to Federal Grants-in-Aid,” Economics of Education Review 26, no. 3 (2006): 285-95.

Bridget Terry Long, “How Do Financial Aid Policies Affect Colleges? The Institutional Impact of Georgia Hope Scholarships,” Journal of Human Resources 30, no. 4 (2004): 1045-66.

Bradley A. Curs and Luciana Dar, “Do Institutions Respond Assymetrically to Changes in State Need- and Merit-Based Aid? ” Working Paper, November 1, 2010.

Rebecca J. Acosta, “How Do Colleges Respond to Changes in Federal Student Aid,” Working Paper, October 2001.

Michael Rizzo and Ronald G. Ehrenberg, “Resident and Nonresident Tuition and Enrollment at Flagship State Universities,” in College Choices: The Economics of Where to Go, When to Go, and How to Pay for It, edited by Caroline M. Hoxby, (Chicago, IL: University of Chicago Press, 2004).

Nicholas Turner, “Who Benefits from Student Aid? The Economic Incidence of Tax-Based Federal Student Aid,Economics of Education Review 31, no. 4 (2012): 463-81.

Stephanie Riegg Cellini and Claudia Goldin, “Does Federal Student Aid Raise Tuition? New Evidence on For-Profit Colleges,” NBER Working Paper No. 17827, February 2012.

Lesley J. Turner, “The Incidence of Student Financial Aid: Evidence from the Pell Grant Program,” Columbia University, April 2012.

 

 

Committee Issues Excuse to Keep Doing Wrong Thing

Today, the Democratic staff of Congress’s Joint Economic Committee released a report which seems mainly to be an excuse to keep doing the wrong things.

The basic tenets of the report certainly feel sensible: People with more education tend to have greater skills and earn more, but the ever-inflating price of college saddles people pursuing education with bigger and bigger debts. The solutions? Keep subsidized federal loan rates frozen at 3.4 percent, greatly expand loan forgiveness, and convert private loans into federal loans. Basically, more cheap aid—exactly the wrong thing.

The fundamental problem with the report is the fundamental problem with federal aid in microcosm: It ignores the crippling, self-defeating, unintended consequences of aid. You know: The downsides of federal “help.”

First and foremost, federal aid furnishes jet fuel for tuition inflation, both by allowing people to demand more than they otherwise would, and by enabling schools to raise prices knowing students will be able to pay them. It also encourages millions of people to enroll in college who, for many reasons, have little prospect of finishing. That’s why roughly one out of every two people who enter a postsecondary program don’t finish. Finally, it powers over-credentialing, with about a third of people with bachelor’s degrees in jobs not requiring them, and many jobs that require the degree likely doing so for basic signaling reasons—e.g., the person has some basic stick-to-it-iveness—rather than indicating that they possess useful skills or abilities they obtained in college.

A reasonable reading of the data forces one to conclude that Washington should markedly reduce its presence in college—indeed, get out altogether—rather than perpetuate bad policy. Which is likely why policymakers seem to assiduously avoid reasonable readings—or any readings at all—of important data.

Cross-posted at seethruedu.com

It’s Obvious Student Aid Is Driven by Politics. But Not This Obvious

Federal aid for college students, it’s really no secret, is driven by what works politically, not what’s best for students. While logic and evidence strongly suggest that aid mainly enables colleges to raise their prices at breakneck speeds, politicians talk nonstop about aid making college “affordable.” Financial reality simply does not trump appearing to “care.” But on Friday, the Obama administration appears poised to take aid exploitation to a new level.

Tomorrow, the President will host what sounds like will be a textbook, campaign-style event featuring lots of no doubt somber – but oh-so-grateful-to-the-President – looking college students. With the photo-op thus set up, Mr. Obama will demand that Congress do something to stop the impending doubling of interest rates on subsidized federal loans from 3.4 percent to 6.8 percent.

But the GOP-led House has done something, and it is largely along the lines of what the President has called for. Last week, the House passed legislation that would peg student loan interest rates to 10-year Treasury bills, and would even cap rates at 8.5 percent or 10.5 percent, depending on the type of loan. It’s not exactly what the President wants – rates will vary over the life of the loan rather than being set at the origination rate, and the add-on to T-bill rates is higher – but the plans are still pretty close.

At this point, you’d think the President would be negotiating, not grandstanding. But then you wouldn’t understand federal student aid (or, really, almost anything government does). It is first and foremost about politicians – who are normal, self-interested people – getting what they need: political support, not sane college prices. And you get a lot of that support by appearing to want to “help people” more than the other guys.

If ever there will be a blatant, inescapable demonstration of what really drives federal aid policy, it will be the event we are likely to witness tomorrow. Let’s hope the public will get the right message: Politicians aren’t primarily driven by a desire to make college affordable. They’re driven by a desire for political gain. And that’s why we need them to get out of the student aid business.

Don’t Bother, HEA Ostriches

If this is how reauthorization of the Higher Education Act is going to go, Congress shouldn’t even bother. If, as the tone seemed to be set in House and Senate hearings yesterday, Congress won’t seriously consider even the possibility that federal student aid helps to fuel tuition inflation – much less make policy based on the massive logic and evidence backing that concern – then they might as well just quit on the HEA. And if they will accept the swiss cheese explanation that cuts in state funding drive inflation – despite its inability to explain inflation in private institutions, and public schools raising tuition about two dollars for every dollar in lost funding – then they simply aren’t serious about dealing with the crippling unintended consequences of federal “help.”

In the face of ballooning student debt and long-skyrocketing college prices, we don’t need Congressional ostriches jamming their heads in the sand anymore, pretending that their generosity with other people’s money is the solution, not the problem. Either deal with reality, or don’t bother with the HEA.

Cross-posted at seethruedu.com

You’re Destroying the Whole Tower, Stop Blaming It on the Basement

Yesterday Sen. Tom Harkin (D-IA), Chairman of the Senate Health, Education, Labor, and Pensions Committee, released his magnum opus on for-profit colleges, the culmination of two years of excoriating, browbeating, shaming, and generally demagoguing that fast-growing but relatively small sector of American higher education. His report is everything you’d expect from a crusade characterized by an almost complete unwillingness to address the central role of the federal government in creating pervasive rot not just in for-profit higher education, but the entire Ivory Tower.

The for-profit college sector is certainly raking in lots of cash and producing very little for it, with big revenues but very low completion rates. It’s probably not as bad as Harkin would have us believe—I’ve chronicled much of the exaggeration and misrepresentation that has punctuated his attack—but there’s little question that lots of students drag heaps of taxpayer dough into for-profit schools and get little of value for it.

The thing is, that happens across higher education, including the profit-taking.

As I’ve cited ad nauseum, completion rates throughout higher education are abominable. Looking at first-time, full-time students—an imperfect sample, yes, but the best we’ve got—the top completion rate is for bachelor’s students at private not-for-profit schools. But that’s only 65.4 percent completing within six years. The worst is at public two-year institutions—community colleges—which see only 20.4 percent finish their programs within 150 percent of normal time. That’s just one-in-five!

Surprisingly, Harkin’s report mentions the atrocious completion rates at community colleges. But only very briefly, and mainly to assert that “the cost of for-profit programs makes those programs more risky for students and Federal taxpayers.” That proviso is technically correct, but as misleading as much of the behavior for which Harkin condemns for-profit schools. Community colleges are cheaper to students in large part because they get direct taxpayer subsidies, and while those don’t come mainly from Washington they do come from taxpayers, just at the state and local level. In the 2009-10 school year, state and local appropriations to community colleges totaled $5,412 per pupil. Meanwhile, public four-year schools—with six-year graduation rates of just 56 percent—received almost $8,000 per student in federal, state, and local appropriations. And, of course, all “not-for-profit” schools get favored tax status, paying no taxes on most of their revenue and benefiting from tax deductible largess of donors.

But don’t think those schools aren’t profiting. Harkin’s report blows off the possibility that putatively not-for-profit schools make profits simply by stating that “by definition” such schools “do not retain any revenue as profit.” But as Vance Fried illustrated in his 2011 policy analysis, most public and not-for-profit private colleges make thousands of dollars per-undergraduate beyond the cost of educating them. They just use the money to reward the people in the school, or to pay for things that often make the school more bloated, instead of distributing the profits to investors.

Putting the for-profit sector in the context of all of higher education, it’s clear the witch hunt has been on. But there’s also been major scapegoating: by enabling students to pay for school with other people’s money, and with almost no regard for their ability to do college work, it is federal student aid that largely causes the rot in higher ed, quashing both school and student incentives to economize, and student incentives to think critically about consuming higher ed. By demonizing institutions that dare admittedly make profits, politicians like Sen. Harkin shift the blame from where it belongs—themselves—to those who do what the politicians want: ”educate” people regardless of their ability. It’s exactly like housing: the politicians demand that everyone be able to buy a home, condemn anyone who might fail to furnish the uncreditworthy with mortgages, then blame the lenders when things go horribly wrong. They seem to want the votes—their profits—but no blame when things go south.

Sen. Harkin, the fault for what ails not just for-profit higher education, but the entire Ivory Tower, sits largely with you and your colleagues. Please quit shifting blame and do what must be done: phase out student aid and make all schools earn their money.

A Quick College Policy Primer

As the story of Julia—America’s favorite two-dimensional, life-long ward of the state—makes clear, higher education is likely to figure prominently in the upcoming presidential campaign. In addition, as the student loan interest uproar has progressed, I’ve realized that a lot of well-meaning people have little or no clue about higher ed reality. As a result, I’ve put together a few links to some foundational information for reporters, policymakers, and the public to get some much-needed perspective on higher ed. The list isn’t exhaustive, but it gets at the really big issues:

Let Taxpayers Eat Ramen: We hear a lot about supposedly starving students, but almost nothing about the living, breathing people who are supplying all the public funds for higher ed. The Cato report How Much Ivory Does This Tower Need? What We Spend on, and Get from, Higher Education calculates the total burden for those forgotten folks, and how it has changed over the past few decades. And the result is, well, ”Let the taxpayers eat Ramen!”

For-Profit Colleges Are Bad, All Others Are Saints:  If politicos ever decide to go after colleges and universities, it’s usually only those that are openly and officially for-profit. You know, because seeking profit is inherently evil and exploitative. But here’s the thing: As revealed in Federal Higher Education Policy and the Profitable Nonprofits, most of the ivy-clad institutions that wouldn’t stoop to something as squalid as profit-making are actually making big bucks off of undergrads. They just use the booty to reward the people already in the schools rather than investors. Turns out you don’t trade in your self-interest when you take on a career of the mind.

Heartless State Legislatures Are the Problem: Maybe taxpayers are providing more student aid, but they wouldn’t have to if state legislators would stop cutting subsidies to public postsecondary institutions. Or maybe not:  As itemized in my two posts here—one of which includes some back-of-the-online-spreadsheet estimates for every state—it’s not true that state and local governments have been slashing overall aid to public colleges. It’s a teensy bit closer to true on a per-pupil basis, but public institutions have generally raised tuition revenue well in excess of subsidy losses.

Student Aid: The Reverse Chinese Finger Trap: With a Chinese finger trap, the harder you pull, the tougher it is to escape. For college affordability, the harder we pump in student aid, the tougher it is to escape ridiculous college prices. Basically—though many in higher ed will swear it doesn’t happen—colleges raise their prices to capture aid, rendering the aid largely self-defeating. The “how” and “why” of this is explained in the Cato analysis Making College More Expensive: The Unintended Consequences of Federal Tuition Aid, and I pinpoint some of the empirical research—as well as furnish a brief explanation of the limits of such research—here.

Hopefully, these links will be of value as some try to establish Eden for Julia. Because, for the rest of us, doing so will likely require a move decidedly to the east.

As You’ll See, Student Loans Hurt Us All

Suddenly, student loans are nearing the top of the nation’s public policy debate. Indeed, President Obama is expected to make a big speech about them on Wednesday. Why the sudden ascendance? Probably because the burden of student loans is one of the few things OWSers are clearly angry about, and that has raised questions ranging from whether such loans should be dischargable in bankruptcy, to whether they help fuel the Saturn V rocket of college price inflation. And last Sunday GOP presidential contender Ron Paul jumped into the fray, suggesting we eliminate the federal student loan program entirely.

Paul is right about phasing out federal student loans. Unfortunately, that’s likely the last thing President Obama will propose.

The first reaction to hearing such a proposal is that it’s Grinch-level heartlessness, stealing a better future from low-income kids. That is almost certainly what the president would say, and such a reaction would likely poll well. That’s why he’s expected to propose lowering interest rates, easing repayment, and other borrower-friendly measures. But as I lay out in a Cato Policy Analysis to be released imminently, by most indications federal student aid and other taxpayer-fueled subsidies aren’t good for anyone. (Well, anyone not employed by a college or university, the ultimate receiving end of all the forced largesse). By artificially—and hugely—boosting consumption, they ultimately lead to massive tuition inflation, encourage millions of unprepared people to take on studies they never finish, and pour H2O into already watered-down degrees. In other words, student aid—including federal lending—is likely a net loss to both students and society.

But I’ve already said too much. If you want to get a lot more on this—and more on the many unintended evils of federal college policies—stand by for the release of my study. And if you’re in DC, come to Capitol Hill Thursday for a briefing on the subject with me and Rep. Virginia Foxx (R-NC). It should give OWSers, libertarians, conservatives, liberals, and anyone else lots to think about.

Pages