What State Legislatures Should Do Now

By Richard Vedder

I am attending the spring meeting in Hilton Head, South Carolina, of the American Legislative Exchange Council, a group of state legislators. I am about ready to speak to some of them (Saturday morning). I am going to recommend a few things they can do NOW to improve their colleges and universities in a manner that will cost virtually nothing.

1. Following up on the Spellings Commission, require all state schools within the state to administer a standardized test agreed to amongst the schools, such as the Collegiate Learning Assessment, a specially designed test made by ACT, the College Board, etc., and perhaps, also, the National Survey of Student Engagement. Give the test at the beginning of the freshman and the end of the senior year.

2. Report results of this test along with other data on a single web site for all state institutions. Other information to be incluuded would be 4,5,6 year graduation rates (retention rates), the gross tuition fee and the average amount of student discounting from scholarships, the campus crime rates for various categories of felonies; and, in an uniform fashion for each school, the percent of the total budget (less comercial enterprises such as hospitals or dorms) that goes for instruction, research, student services, administration, intercollegiate athletics, etc. Actually, I would encourage an even longer list than given above.

3. Separately, pass legislation that prohibits state university employees or the institutions from accepting any gift, including scholarship aid, or other monetary payment from any private lender to students of that institution. Prohibit institutional endorsement of private lenders in any form. Generally, divorce the act of educating from the act of financing that education.

4. Move away from a school-based to student-based funding of higher education; voucherize it, giving bigger vouchers to students who are poor and do well, smaller ones to the more affluent and who perform less.

For legislators wishing to promote such legislation, CCAP would be glad to help you. Give us a call at 202-376=7831. Talk to Bryan O'Keefe, who can then get you in contact with me.

Incentivizing Excellence

By Richard Vedder

Universities like to think they are superior to their K-12 brethren in the sense that success is generally rewarded by promotions, merit pay increases, nicer offices, etc. A good K-12 teacher is treated the same as a poor one in most of public education. That is different in higher ed. Consumers of higher ed have more choice, and have to pay something for the services consumed, imparting a bit of market discipline, unlike with our public school monopolies. In large part for these reasons, we have mediocre primary and secondary education by international standards, but a decent, respectable (some would say premier) higher education system. I wrote a longer piece on that a few years ago for the CATO Journal.

Yet university costs are rising and productivity is likely falling. One part of the solution is a measurement/reporting issue --finding new metrics to measure institutional performance, and then publicizing those measures to the public. That is at the heart of a current controversy over rule-making regarding accreditation organizations going on in Washington. This was a key issue before the Spellings Commission.

Yet the second part of the solution is seldom discussed --increasing the incentives for excellence in performance and ingenuity in cost reduction. Higher ed will not change if the staff refuses to cooperate, and the "rules of the game" with respect to promotion, tenure, salary increases, etc., needs to change. People need to be rewarded more on performance.

One metric is moderately easy to measure --research reputation. Partly for that reason, faculty advancement depends mainly on publications, never mind the fact that no one is doing cost-benefit analysis on the contributions of that research to society. Has the incremental publication brought about by the de-emphasis in teaching in modern times also brought about improvements in incomes, outputs, life expectancy, and human happiness? Do people migrate into areas of high research intensity because of the positive spillover effects of that research activity on the quality of life?

At the administrative level, do we reward deans who do more with less? (answer: rarely). Do we give bonuses to persons who develop on-line programs where student performance equals that of traditional methods -- but costs per student are lower? Do we reward presidents who keep tuition fees down? (answer --no; the big bucks are going to the presidents of institutions where costs are high and rising faster).

One way to reform is to increase the market share of for-profit institutions, where the financial incentives to be productive and efficient are great. But we need to also increase those incentives in not-for-profit institutions. Reducing rigidities like tenure is a helpful start, but we need to introduce markets more throughout university life. Departments should have to rent space from the central administration, perhaps, with rents varying with the demand for space --done correctly, this will increase capital utilization and dramatically lower new capital expenses. I could go on and on, but I have to go speak to a group of state legislators pondering public policy issues in the squalor of a luxury resort on Hilton Head Island.

Keeping Things in Perspective: The Student Loan Scandal

By Bryan O'Keefe

Few people have been more critical of the student loan industrial complex than this blog over the past 9 months or so. And we have been especially harsh on colleges and universities in light of the recent scandal over kickbacks and payments paid in order to be listed as a preferred provider of student loans. There is no doubt that the scandal is a major one and will have significant consequences for both the universities and private lenders for some time to come.

But my greatest fear was that the scandal would turn into a lot of finger-pointing and blame and would not become a siren call for more comprehensive higher ed reform. Unfortunately, that’s exactly what is happening. Consider the story in today’s New York Times which claims that Sen. Kennedy has now asked the Department of Education for the complete personnel files of 27 department employees.

I am not exactly sure what the Senator would do with these files, even if the Department handed them over (which I doubt they will). If he is looking for conflicts of interest – which are a serious matter – there must be less intrusive ways to accomplish that goal. As somebody who also follows labor and employment issues pretty closely, a request from another branch of government to view somebody’s personnel file is very personal and probably an invasion of privacy, especially when the people whose files would be pulled are probably from a different political party than the person asking for the information. It's requests like this that make people very reluctant to leave the private sector for government service.

Back to my original point – there is a tremendous need to get to the bottom of what exactly happened in this scandal. But at the same time, this should not delve into a Democrats v Republicans, Ed Department vs. Congress, who-is-to-blame type fight. We should use this scandal as an opportunity to come up with fresh ideas about how to reform the student aid system, not just another chance to have Congressional hearings and embarrass people politically. That goes for both sides of the political aisle.

Posner Beats Becker

By Richard Vedder

I am writing this from the home of the Pope Center and the John Locke Foundation in Raleigh, NC, where I spent a marvelous day conversing with a variety of business persons, faculty and, above all, students, mainly from North Carolina State University. Roy Cordato invited me, and our Pope Center colleague and friend George Leef was not only was gracious (as were others like Jane Shaw,Rick Stroup, Roy's wife Karen, and Dave Riggs), but also gave me a copy of the latest Becker-Posner blog. Gary Becker and Richard Posner are both great economists and first class minds. But I think Posner has it right and Becker is wrong in evaluating the returns to higher education.

Becker points out that the college-high school earnings differential has widened, and that college graduates benefit in other ways as well --they are healthier, more law-abiding, etc. He argues that even controlling for attributes of college kids(being brighter than average, for example), graduates of higher education institutions earn more and lead longer lives.

Posner is skeptical. Posner poses the possibility that higher ed may be a good private investment for most students, but evidence does not "suggest that it is either a particularly good social investment (it does improve matching of employees to employers, but at great cost) or that its value has much to do with the institution's education program." Later he opines, "I am skeptical that it should be a national priority...to increase the number of people who attend or graduate from college."

Amen. If Becker were right on the economics of higher education, one would expect spending on colleges by governments to positively impact growth rates. The work I am doing, now in conjunction with Tony Caporale and Whiz Kid Jonathan Leirer, convinces me that spending on higher ed by state governments has, at the margin, no positive growth effects whatsoever, and probably even negative ones. As to the other dimensions, do college graduates smoke less (and thus live longer) than non-college graduates because of what they learned in college, or because they are smarter and more disciplined? The evidence of Charles Murray on IQs and earnings, correcting for education, may be disconcerting to some, but it is real, and it needs to be considered.

If James Bryant Conant, former Harvard president, had gotten his way, we would today have perhaps five or at the very most 10 percent of the adult age population with college degrees. Would we be poorer, less healthy, etc.? Maybe, but to me the evidence is very far from clear. As Posner notes, many studies on these issues were based on K-12 results, and the marginal benefits of subsequent education may be quite different than that associated with basic literacy and numeric skills.

Why is it that more spending on higher education by state governments seems to have very little impact on the proportion of the population, 10 or 15 years later, who have B.A. degrees? Follow the money. I have, and the indications are that the marginal spending on higher education in recent times has had little positive impact.

By the way, if I were an employer, for jobs for which I want to hire bright persons but ones who will learn on the job most of the important work-related things, I would have as a job requirement a B.A. degree, or a letter of admissions acceptance from a US News and Report top 50 school, plus a high school transcript and ACT/SAT scores. I would offer the latter group a bit less than the B.A.s, since they are younger and arguably less mature, but I would save money and get bright kids cheaper than if I rigidly held to the B.A. requirement (in this, I agree with Financial Times columnist James Altucher).

Reforming Federal Student Loan Programs

By Richard Vedder

The federal student loan scandal has aroused anger on the part of everyone, excepting of course the universities themselves, who rarely can bring themselves to admit that they have done something wrong. We have a morally dubious cesspool of problems. I have a great solution to the federal student loan problem: get rid of them. The federal government should go to one single assistance program (other than the GI Bill): an expanded Pell Grant system that is administered as a voucher given to individual students, not to the institutions. Private loan companies then can make all the loans they want to students, and charge whatever interest rates they want -- without special government regulation or involvement. They should probably be forbidden from making those loans via student financial aid offices at colleges, since colleges use financial information routinely to modify their own scholarship decisions relative to students.

Make the vouchers a fixed amount for all, or make them progressive depending on student income, but do not vary the voucher with the school that the student attends. The government should help all students in need attend Basic Quality U, a good but not necessarily distinguished institution. It is not the federal government's job to send poor kids to expensive schools, many of them increasingly country club-like in their orientation. Poor kids who do extremely well at Average State U will receive fellowships and other aid for advanced degrees, increasingly the key to big time financial success.

If we gave 8 million of these vouchers out in amounts averaging $5,000, (vastly more than the number or size of Pell Grants given now), and allow them to go to families with, say, incomes of less than $75,000 a year (somewhat above the national median), we would be giving major help to poor and even many middle class Americans going to college. The $40 million cost would not break the federal government's budget if we eliminate other programs. Persons with incomes above that should be forced to pay for them on their own, or get scholarships based on academic excellence (I believe merit based scholarships are not heinous in principle). If families want their kids to go to Yuppie U, or if they want to maintain their present life style while sending their kid to college, then the kid (or parents, or both) can go to the bank and borrow, just as they might for a car.

I would allow colleges to give out their own institutional aid if they choose, but I would forbid them from asking students about their finances or other aid received. I would ABOLISH the FAFSA form in its current use, having a short form on family income (and not wealth) used by the federal government for determining the size of Pell vouchers, with it illegal for colleges to require that form in their own determination of financial aid. Student financial aid offices would become scholarship offices of modest size, perhaps even disappearing at some schools that give little or no institutional scholarship aid. Schools themselves could make loan programs using their endowment, or even equity-based programs where kids sold some of their human capital to the school (the amount of student repayment of funds becomes dependent on student vocational success). At Harvard, providing average loans or equity investments of $50,000 to 50,000 present or former students would absorb well under 10 percent of the institution's obscenely large endowment.

This system would solve all sorts of problems. The whole student loan scandal would eventually go away. Vouchers could be increased by the rate of inflation, ending the current inflationary spiral where colleges raise tuition fees a lot and student loans follow with ever larger loans. It would help put a break on increasing tuition charges. The disincentive effects on national saving of the current system (if you save for college, your college aid declines) would mostly be eliminated. Students would be empowered more in choosing schools, increasing price competition and attention paid to undergraduates. It is a marvelous idea, a way of moving away from the bureaucratization of higher ed and ending the increasing corruption.

Yet it does not have a snowball's chance in hell of succeeding. Why? Two reasons. Teddy Kennedy and George Miller (chairs of the congressional education committees) love government, and want governments providing aid --an extension of the welfare state they love so much. The same is true of many others in Congress. This problem canbe overcome, however, if the expanded Pell Grant program is large enough. A bigger issue is that student loan interests will drop literally tens of millions of dollars over Congressional offices to stop this -- they will engage in the subtle form of bribery that has so poisoned the public policy arena in America today.

The late great Milton Friedman proposed vouchers over 50 years ago, and they are starting to have some impact in K-12 education despite powerful union opposition. Perhaps if we stick to our principles we can effect change at the collegiate level in even fewer years -- although probably not overnight.

The Bob Vedsky Proposal for Contingent Faculty

By Richard Vedder

In my book Going Broke By Degree and elsewhere, I advocated that more services, including instruction, be provided to universities by private providers under short or intermediate term contracts. My friend Bob Zemsky of Penn (The Learning Alliance) has carried this idea one step further: why don't so-called "contingent faculty" do better than unionize --why don't they incorporate --and then sell their services collectively to universities? Universities can have a competitive bidding process with different instructional companies, perhaps owned and operated by contingent faculty themselves. They hire the firm, and thus do not have to worry about fringe benefits, legal issues relating to having employees on their payroll, etc. The owner-employees no longer have university bosses and control their own destiny. They save union dues, and are not mixed in the same union with others (full time tenured faculty) who may have competing economic interests.

The little corporations could be very small, say two or three friends selling their services to the Modern Language Department to teach beginning French or Spanish, or could be huge, selling services university-wide. In the long run, larger companies will try to buy up the smaller firms and try to achieve some economies of scales. How that would work out is unknown, because I am uncertain as to the scale economies realizable here, but I suspect they are sizable (e.g., developing a common curriculum usable on many campuses, offering common multi-campus exams, perhaps have some lectures provided at multiple campuses simultaneously using distance learning techniques).

At first, I thought Bob and I were the odd couple on the Spellings Commission, me the resident radical and Bob the ultimate Establishment cautionary voice (many of Bob's remarks started, "You got to be careful...." ) But I realized in the long run that we actually have in many ways very similar ways at looking at things, with a mutual appreciation of using market forces to break down inefficient bureaucratic ways of doing things.

To schools facing an unionization threat from contingent faculty: tell them, "incorporate yourselves and liberate yourselves from both us and the unions."

Unions and the Professoriate

By Richard Vedder

My sidekick Bryan O'Keefe and I attended most of the 34th annual meeting of the National Center for the Study of Collective Bargaining in Higher Education and the Professions, held the last couple of days in New York City. I was speaking about the Spellings Commission and its impact, but also attended a few sessions and Bryan picked up the slack by attending some that I missed.

The National Center is a group of union leaders and management people mostly specializing in human resource/collective bargaining issues, along with a few lawyers, private consulting firms, and the like. Richard Boris, the Director, told me before the meeting even began that there are now about 420,000 faculty and instructional support staff in American universities that are members of collective bargaining units (and many more are members of nonacademic support staff).

The theme of the meeting was the "struggle for resources: a joint management/labor challenge." I felt that I was in a different world -- on a different planet, really, from the one I usually inhabit. Boris opened the conference saying "We have been on a diet too long." Barbara Bowen, President of the Professional Staff Congress of the City University of New York (CCNY) added "There is no reason why higher education needs to be chronically under-funded." As the level of indignation kept rising, Bill Scheurman, President of the United University Professions of the State University of New York (SUNY) chimed in, calling for a need to engage in the "battle of ideas with extremist think tanks." (No doubt CCAP, among others).

Two things struck me the most. First, American academic unionism is terribly concentrated geographically -- half the union members are in either New York or California, states that together have well under 20 percent of the U.S. population. My guess is you can put all the academic unionists in North Carolina in a telephone booth. Second, the participants are living in another world – even their perceptions of what is reality are well off-base. The reality is that spending at American universities is not rising as rapidly as in the salad days of the 1950s or 1960s, but it is still growing. It is true that a smaller proportion of that spending is going to the professoriate. To the attendees of the National Center meeting, on average, the solution is to get the taxpayers to fund higher education more generously, rather than to reallocate university funds back to historic proportions with respect to spending on instruction.

To be sure, there were pockets of realism and analytical thinking. Dan Julius, the Provost at Benedictine University, called for more serious academic research on labor issues, suggesting good ideas for studies. For example, has the spread in the use of part-time non-tenured ("contingent") faculty led to reductions in academic or instructional quality? What is the relationship between academic quality and unionization? Good questions, deserving serious scrutiny. And Ernst Benjamin, who runs the American Association of University Professors (AAUP), saw a potential dilemma. In pushing hard for higher salaries and fringe benefits for mostly tenure track full time faculty, unions increase the incentives for institutions to hire more adjunct faculty with low pay and fringe benefits. He came close to suggesting that unions are promoting the demise of their own membership by driving universities to lower cost substitutes for their services. Just as the United Auto Workers helped mortally wound the American auto industry by being too successful in pursuing its objectives, so faculty unions face the same prospects, particularly as spending on higher education is squeezed at the state level by rising Medicaid costs.

I could see a scenario where colleges squeeze faculty costs down in order to become a bit more affordable, and that, in turn, pushes faculty at institutions previously immune from unionization to reconsider and demand collective bargaining. But I can also see a quite different scenario unfolding, with enrollments, etc., at union dominated schools falling, because of concerns over quality and price, relative to private institutions and even non-collegiate forms of skill certification. Time will tell.

Virginia Tech

By Richard Vedder

In the wake of the tragedy at Virginia Tech, what should we do as a policy response at the national level? Nothing. Instituting rashly new federal laws would not bring the victims at Virginia Tech back to life and probably would have little impact on the probability of future such happenings.

What should college presidents and other college leaders do? Pray -- that it does not happen on their campus.

The tragedy was huge, almost unthinkable, and is one of those occasional horrific mass murders which afflicts a society where some people have trouble understanding the difference between right and wrong.

Residential campuses are typically huge and spread out, with dozens if not hundreds of buildings. Providing tight security would be extremely expensive, and would detract from the freedom of expression that characterizes campus life and makes it so vibrant and joyous. Virginia Tech was not negligent in their protection of their students, or so it would seem to me at a distance.

To be sure, perhaps colleges should be more concerned about some students who have some probability of violent behavior based on profiling. But doing this can be very expensive and, of course, raise concerns from civil libertarians.

The publication of crime statistics, already mandated, is a good thing, as it helps informed parents in their attempts to minimize their children being put in harm's way. Virginia Tech is a distinguished and fine institution, with generally first rate students who are decent, honorable people who do not deserve to die so young or be so traumatized by senseless horror.

Having said that, however, it is easy to criticize President Steger and his staff after the fact. I think the decision he and his administrators made was not an unreasonable one, if in retrospect it was possibly very tragic (I don't know if notifying students earlier or even trying to cancel classes would have made a difference; a premeditated murderer may well have found a time and place to commit such a heinous crime). Removing President Steger will not bring persons back to life.

It is all so sad.

Student Loans: $25 Billion

By Bryan O'Keefe

In some non-scandalous student loan news, we see yesterday that the loan giant Sallie Mae is being bought out and will go private sometime in the near future (private in this sense means no longer being a public company; Sallie Mae already went private in another sense about ten years ago when it decided that it would no longer be controlled by the government). There are lots of interesting questions that this deal brings up, which I unfortunately do not have time to talk about now. Rich will be discussing some of these issues in the next couple of days. But for now, just consider this: the consortium of private equity firms/investment banks that are taking over Sallie Mae, are going to pay $25 billon dollars for the company -- that's truly a magnificent sum of money for a student loan company and gives you some indication as to how incredibly vast our student loan industry really is.

A New Student Loan Scandal

By Bryan O'Keefe

The latest salvo in the student loan scandal comes from yesterday’s Washington Post. The Post detailed how private student lenders are supposedly illegally accessing a government database on student borrowers and using the information obtained through the access to market their loan products to students. There seems to be some disagreement as to how prevalent the practice is – at one point the story says that security has been tightened, but it also claims that the information is still being accessed and that the department is considering shutting down access altogether.

This is one student loan scandal where the author has some personal experience. Just about every other day, I receive in the mail a new advertisement from Student Loan Company XYZ asking me to transfer all of my private loans to their service, that they offer the best interest rates, blah blah. What’s interesting is that the letters have continued pretty much non-stop even after I recently moved to a new address – while most of my other junk-mail has tapered off a bit.

Now, I have no evidence that private lenders have accessed my information in the Ed department database, but it wouldn’t surprise me. They are obviously getting addresses and loan information from some source and the Post’s story seems to make a strong case for the government database as being the culprit.

What’s befuddling to me is that if the government recognizes that this shouldn’t be going on, how hard is it to really stop it? For a department with such a large budget, you would think that they could easily design a database and ensure that only the right people have access to it. Perhaps that is asking too much of government, unfortunately.

This development is also bad news because it casts some doubts on other data collection ideas that would probably be of tremendous value. From the get-go, some folks have said that we should not gather more data on student performance in higher education because of privacy concerns. I thought that it wasn’t a false choice and that the government could collect more data but also make sure that it was used appropriately. But when you read the Washington Post story, you see that might not be the case, at least with our current security procedures.

Here's hoping that the Department of Education can find out a way to stop this invasion or privacy and better protect sensitive student data.

Academic Entrepreneurship In Action

By Richard Vedder

Charles Koch and the folks at the Koch Foundation are on a mission to make American universities do more to spread market based management, an excellent and noble mission. But, as we have been saying for the past year, part of the problem is that entrepreneurship has to begin at home --within the universities themselves. By and large, established institutions in the not-for-profit sector are slow to innovate, to take risks, and to respond to market forces. This has contributed importantly to rising costs and falling productivity.

There are, however, exceptions to this rule. Private enrollment is rising faster than public enrollment in U.S. higher education, and some of the so-called independent colleges are actually extremely dynamic and entrepreneurial. That was brought home again to me the past two days. Bob Maginn, CEO of Jenzabar, a private company that provides services to colleges and universities, hosted a President's Summit of a dozen or so presidents of institutions, mostly private and relatively small. I attended and made a presentation. By the way, while Jenzabar no doubt hopes to get good will and business from doing this, the Summit was in no way a blatant bribe like we have been hearing about recently in the student loan business, but a no nonsense meeting in a pleasant but not overly luxurious setting (admittedly in Palm Beach), and the college presidents paid their own way there.

Let me today talk of just one of the innovative colleges, Palm Beach Atlantic University. It is a school that during the day caters to a growing population of affluent kids living in the West Palm Beach area, and it gives them what they want --very nice facilities (fancy library, a new rec center under construction) --in a conservative, faith-based learning environment. All students must take a course in the free enterprise system, for example, a marked contrast to the vaguely anti-capitalist, anti-Christian "multi-cultural" emphasis often found on campuses. None of the faculty have tenure. From the 2000-01 to 2005-06 years, the budget over doubled, implying a more than 14 percent annual growth. Enrollment was up close to 40 percent.

Yet, as President David Clark tells me, this "Yuppie U" with rising test scores and increasingly affluent families in its daytime programs, also runs a distinctly different program at night --thereby using facilities more --reaching out to part-time working adult students of modest means. A satellite operation is growing in Orlando and more are planned. The lack of tenure allows the institution to expand in new and different directions from what its faculty, mostly long-term adjuncts, might choose on its own. Dr. Clark, I suspect, has a great deal more authority to move the school in new directions than the president of a typical Ivy League school has. Contributions from wealthy business persons are booming, including a big gift last year from the estate of a legendary General Electric executive, the late Lemuel Boulware (whose approach to labor relations was both innovative and controversial).

It is schools like Palm Beach Atlantic and the quite different but equally if not more innovative Cambridge College that are showing growth and change these days --not the Harvards, Berkeleys, or Williams. They are entrepreneurial and student-oriented, with high teaching loads and moderate ($10,000 to $20,000) tuition levels by private school standards. They do not face the resource rigidities of the traditional institutions, and thus are continuing to gain market share and prominence.

By giving students and their parents what they want, by sticking to the core mission of teaching mostly undergraduates, and by utilizing resources intensively and in a flexible way, Palm Beach Atlantic is one reason that American higher education is slowly but surely being privatized.

Finger Pointing

By Bryan O'Keefe

Time for another update on the student loan scandal. Now that the scandal is blowing up into quite possibly one of the biggest embarrassments for higher education in quite some time, the media is starting to point fingers at who is to blame – the colleges, the lenders, the Department of Education, all three?

The Wall Street Journal seems to shift the focus today onto the latter of that trinity, with a story detailing numerous connections between Department of Ed folks and the student loan industry. The story seems to imply that because some people from the Ed Department either previously or eventually worked for a private lender, there was relaxed oversight. Despite this insinuation, I didn’t think a lot of the specific examples were too damning. Yes, some people who used to work at the Department of Education received jobs at private student lenders after they left government service. Just as some people who used to work at the Department of Defense go and work for defense contractors, and so on and so forth. This same game of musical chairs between government service and the private sector happens literally every day in the nation’s capital (apologies in advance if I am ruining an idealistic notion of Washington that some readers might have). It’s entirely possible that maybe something more sinister was going on, but we need much stronger evidence to conclude the worst case scenarios.

I think that the broader problem – and the real way to avoid more scandals of this type – is what Rich wrote about earlier this week – decoupling the connection between higher education itself and its funding. There is an embedded connection between the two and until that is changed, it will be impossible to really get to the heart of the issue.

Unfortunately, very little that I have read so far touches on this. We are becoming consumed now with trying to “blame” somebody and while there is probably some role for that, we also need to start looking forward and figuring out how to fundamentally change the way that things are done. Perhaps, in an ironic way, this scandal even opens the doors to other private sector companies that might have a fresh perspective on how to both provide loans to students and avoid ethical problems between universities and the lenders themselves. Out of this rubble, maybe a new model can emerge.

The more likely result however is that there will be a renewed call for more government regulation and greater private sector “oversight” from agencies like the Department of Education. This will not accomplish anything substantial. I suppose that's the status quo in Washington, DC.

The School of the Future? Acton Business School

By Richard Vedder

I have long admired Jeff Sanderfer, the highly successful Texas entrepreneur who is fed up with the poor quality of business schools in the U.S. He has tried to get me to help him study some higher ed issues in the past, but lamentably other commitments have forced me to decline, and I feel somewhat sad about that. However, I heard him give a great speech a couple of days ago to a group of academics (the Association for Private Enterprise Education) in that great citadel of learning, Cancun, Mexico (us marginalized academics sometimes engage in rent-seeking behavior about which the public knows little).

After teaching at the University of Texas at Austin for a number of years, Jeff started his own business school, the Acton School of Business, offering a one year M.B.A. program. It is innovative in many ways.

The students work intensely, putting in 100 hour weeks (6 a.m. to midnight is a typical week day schedule) for a full year, condensing a two year M.B.A. into one. Each student must pay the first semester tuition of $17,500 up front, and they lose it all if they drop out early. If, however, they get through the first semester okay, they get the second semester's tuition paid for by Jeff or one of his friends (e.g., Charles Koch, T. Boone Pickens). If the student completes the second semester (and the degree), she gets the original $17,500 back --an incentive system to work hard and complete the degree. It sounds like most of the learning revolves around case studies, mostly ones prepared at Harvard Business School.

The students and the faculty all sign contracts, not only with the institution but with one another, outlining what they agree to do. Professors are mostly entrepreneurs, not academics, and are paid $5,000 a course --but up to a $30,000 bonus if they do well on student evaluations. The professor with the worst evaluations annually is dropped from the faculty --no tenure here. Instructors cannot game student evaluations by giving high grades --there are limits placed on "A"s, and all students are also ranked relative to other students (e.g., 10 out of 31, etc.). That is an idea that needs expanding, and I plan on using it in my classes this fall. If I could find a way to have myself ranked relative to others, I would do that too. When I become a below average teacher in the eyes of the students, I should either quit (the humane solution) or be shot (the inhumane one).

Jeff believes accreditation is merely a cost-rising barrier to entry that has nothing to do with the quality of education, and he has apparently no interest in securing AACSB (the business school accrediting agency) accreditation. Good for him. Students have a financial objective, but Jeff says his school also stresses moral and ethical implications of business behavior, which, to put it mildly, is much needed in a society that reeks of moral relativism.

The higher education world needs more Jeff Sanderfers--people who passionately want to improve the quality of higher education at an affordable price, introducing stronger incentives for excellence on the part of students and faculty alike. Jeff is expanding his model to other cooperating schools, and much of what he is doing has applications for other disciplines, including the traditional liberal arts. Adam Smith said professors were much better when they were directly paid by students, and the Sanderfer faculty pay plan is a step back to improving teaching and putting students front and center again in American higher education. To be sure, there may be flaws in the plan -- but my guess is the finished product at the Acton school compares favorably with most conventional, and more expensive, MBA programs.

Expecting More

By Bryan O'Keefe

The scandal surrounding financial aid administrators and the student lenders themselves continues to make headlines in the media. Just when we think the final damaging news has been discovered, more damning revelations are found. As I am sure many of you already saw, the NY Attorney General’s office has now unearthed evidence that some administrators were being paid directly as “consultants” to the lenders, and one person even had part of her graduate school education paid for by a student loan company. A financial aid administrator at an online university also became embroiled in the hoopla this week with evidence coming out that he too accepted payments as a consultant for the student lender in question.

What I think is unfortunate from this whole mess is that private student lenders and, with the latest round of news, an online university, behaved so badly. People who have followed CCAP for awhile know that we have advocated for some alternative higher education models which, if correctly implemented, could lower costs. For example, We have supported the expansion of more private lending in higher education, with the premise that if we can finance million dollar homes, yachts, cars, and everything else on the planet through private loans, why not higher education too? It’s an idea that still needs to be studied more, but we thought it was an interesting proposition none the less. The same goes with online courses and universities. There is no illusion that students who want to go to Harvard are suddenly going to enroll in the University of Phoenix, but for non-traditional students, low-income students, etc. online classes might make great financial sense.

But what’s critical is that both private lenders and online universities have to gain the public’s trust and have unquestionable integrity. The process can’t seem rigged in any way, shape, or form. And unfortunately if you read all of the news stories, it seems like the process was, in fact, being rigged, or, at, the very least, the process was not entirely transparent. Columbia, the University of Texas, and the other schools implicated might take a PR hit, but they will survive. Thousands and thousands of students will still submit applications. That’s because they have a historic track record as being good universities and one bad episode – albeit on a major scale – will not suddenly change all of that.

But private lenders and online universities are the new kids on the block and have to be held to different standards. I would even venture to guess that this scandal is the first time that some people have even heard of the student lending company involved – and any parent or student would be justified in not wanting to do business with them.

There is a very good chance that the Democrats in Congress could use this episode as ammunition for even greater regulations on the private student lending industry – and as evidence that government loans are the only way to go. That would be bad public policy, but private student lenders would only have themselves to blame.

Textbooks 101

By Bryan O'Keefe

The Boston Globe has an interesting story this morning about Harvard Deans asking faculty members to help reduce student expenditures on textbooks. The story claims that the Deans have asked professors to put more classroom materials online and to also decide earlier if they plan to use textbooks in subsequent semesters.

The whole issue of college textbooks is a double-edged sword. On the one hand, I don’t always have a lot of sympathy for students who complain about the high costs of textbooks. I remember back in my undergrad days, I would hear people moan and groan and then run into them a couple nights later at a local watering hole, spending lots of money on things other than their Chemistry textbook. In some ways, textbook expenditures are just like anything purchase – you prioritize and budget accordingly. Some students unfortunately just choose to spend their money elsewhere.

But students are not completely to blame. I remember a few professors assigning books simply because they or another faculty member they were friends with wrote the textbook. Occasionally, the book would not even be used in class, which was positively outrageous. Any book that a professor asks a student to buy should at least be incorporated in some way into the class, or the professor should make it clear on day one that buying that textbook is really optional.

I have also heard from some professors on this issue and I understand their viewpoint too – namely that with the internet and Amazon.com, they simply do not get the type of royalties they used to. As a result, there is even greater pressure to come up with a new edition of a textbook in order to make money.

I think the easiest solution for all three groups is for college administrators to watch professors very carefully. If the professors really are using the textbooks and the material can not be found online, then the students should just buy the darn thing. But if professors are clearly abusing the textbook buying process, they should be held accountable too. I suppose that the new Harvard policy is a step in that direction, but it would be much better if the University and Deans looked at things on a more individual basis.

Better yet, why doesn’t an enterprising Harvard undergrad conduct surveys of students and figure out which professors really use their textbooks and which don’t? The results of the survey could be posted on a website, which would surely bring in advertising revenue once people started clicking on it to figure out if they really need to buy that new textbook. There has to be a goldmine for this type of information. Here’s hoping that somebody runs with this idea!

Root of All Evil

By Richard Vedder

The papers are full of stories the past couple of days about the growing student financial aid scandal in American higher education. Financial aid officers at some schools (including ones as prestigious as Columbia) have had large stock investments in companies that are on the "preferred list" for student loans. Students are encouraged to borrow from companies in which the person doing the encouraging has a direct financial interest, or at least that is what New York Attorney General Andrew Cuomo and others say is happening. If true, this is truly a scandal of monumental importance, particularly if more than a few isolated cases are involved.

It is not surprising. We have a system almost designed to promote corruption. Kickbacks to schools are of a highly dubious ethical nature, while stock options and other devices to reward individuals are, if not outwardly criminal, at least very unethical. Greed trumps integrity, as it so often does in an era where all values are relative, where many think there are no moral absolutes, where most colleges cannot even agree on what good citizens should know in common about life and our world -- if anything.

The problem would not exist if there were not an unholy alliance between the provision of higher education and its funding. These are distinctly different functions, and should be provided by separate individuals. In the 1930s we separated investment banking from commercial banking because of possible conflicts of interest (however, this legislation has been largely reversed in the past decade or so), and maybe in the 2000s we should separate the provision of higher education from its funding, at least for institutions receiving government monies (nearly all of them).

It is my hunch that colleges use inside information to tailor their own financial aid to fit their institutional objectives, not the best interests of individual students. The colleges know that Student A has a $3000 Pell Grant, a $5000 Stafford Loan, a $1000 scholarship from a small local foundation, etc., and it tailors the price it charges the student (the rebate from sticker price) to meet this inside information. Thus the positive impact of the Pell Grant on the student's access may be completely offset by a $3000 reduction in institutional financial support. The student is no better off than she would have been without the Pell Grant, and the school uses the $3000 it saved from insider information to reward someone else, perhaps a rich kid who is also smart, but for whom public policy would not approve favoring with financial aid. Before this scandal erupted big, I argued for moving towards separating the financing functions from the educational ones. I have argued for the federal government getting out of the loan business, and for universities getting out of the business of loan provision completely, excepting institutional loans financed out of school endowments.

This scandal could have a positive or a negative conclusion, depending on what is done. If Congress passes heavy handed regulation that merely raises the costs of doing business, it will be a failure. However, there are some sensible things that can be done. Short term, it seems to me that financial aid officials should not have investments in financial service companies if the institution serves in an active role of a financial intermediary, bringing together students with lenders. Pell Grants should be given directly by the government to students in the form of vouchers usable at any accredited institution, with zero institutional involvement. No "preferred lender" lists should be made available to students, as that implies some form of institutional endorsement. Longer term, we should probably promote complete separation of the provision of academic services from the funding of them, except for the use of institutional funds themselves. Universities should be prohibited from asking students about non-institutional grants and loans provided. I suspect that institutions use their inside information to raise, not lower, the net tuition charge paid by students.

Gated University Communities

By Richard Vedder

Tom Mortenson provides some of the greatest data on higher education issues, and in the March issue of Postsecondary Education Opportunity, he shows that there are vast numbers of prestigious four year institutions that are vastly underrepresented with respect to low income students, as measured by the proportion of students receiving Pell Grants. He aptly calls them "gated communities of higher education."

What is particularly interesting is that there are many flagship state universities where the proportion of those receiving Pells is less than one-half the national average of 36.8 percent. That is true in the Northeast (Connecticut, Vermont, New Hampshire), the South (Virginia, North Carolina, Georgia), the Midwest (Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Ohio, Wisconsin), and the Far West (Alaska, Colorado, Nevada). The University of Virginia, for example has a lower proportion of Pell grant recipients (7.9 percent) than does Harvard, Yale or Princeton, the epitome of elitist private education. Similarly its cross state rival, the College of Wiliam and Mary, has a lower proportion than, say, Northwestern, the University of Pennsylvania or Duke.

The original motivation behind most state universities was a desire to provide low cost education for the masses. Yet the flagship universities are very often almost contemptuous of this mission. While Marie Antoinette may have said to the French peasants who could not afford bread, "let them eat cake," today's state university president confronted with the fact that few poor go to his or her school say "let them go to a community college."

The question is, then: why do we use state government funds to support universities? Is it exclusively to fund research missions? Are universities subsidized because they are vehicles for economic development? If so, the evidence is that the subsidies are mis-directed, because the preponderance of evidence I have observed shows that we must reject the notion that "more higher education spending promotes economic growth."

Why not just privatize the schools? The mission the institutions want to pursue is widely at variance from the notion that they open doors for economic opportunity for students otherwise unable to afford them.

Having said all of that, I believe a truly private school, one not taking federal assistance, should have the right to take any student they want, on any criterion. And that may mean they wish to discriminate on the basis of money -- those who can afford sky high tuition rates get in, those who cannot, do not get admitted. There may be room for Yuppie University, catering to the rich. But if the general taxpaying public directly or indirectly is asked to subsidize the enterprise, the American equalitarian tradition casts some suspicion on the legitimacy of the policies prevailing at many of our great public universities. Gated communities are okay, just don't ask me to help pay for them with my taxes.

US News and World Report Rankings Strike Again

By Bryan O’Keefe

The Wall Street Journal ran a very interesting piece (subscription required) yesterday on the rise of applications and lower admission rates at America’s colleges and universities. This means that more and more students are applying to colleges while at the same time fewer and fewer colleges – especially of the highly selective variety – are actually accepting students.

The story mentions a couple different reasons for this dynamic, including more students graduating from high school, more foreign students applying to American universities, and greater acceptance of the “common application” which allows students to apply to many colleges all at once, instead of filling out individual applications for each place.

There is no doubt that all of these are factors in this equation, but one piece that they did not discuss is, again, the role of the US News and World Report rankings. I have no firm evidence on this point, but I strongly suspect that the rankings are also playing some role in driving this admissions bonanza.

That’s because part of the rankings are based on the number of applications that a school receives and either admits or rejects (with the more selective schools almost always getting the higher rankings). So, pretty much every school and admissions office has an incentive to tell prospective students to go ahead and apply, even if their scores aren’t particularly strong. The school really doesn’t lose out – when you are rejecting tens of thousands of applications anyway, what’s a couple hundred more on the pile? It’s especially easy to do this if the applicant’s scores are very low because it will be an easy decision to send them the rejection letter.

I don’t think there are any real negative effects from this, per se. I suppose that some high school students probably get their hopes up and think that Yale or Harvard or wherever is interested in them when, in reality, they aren’t. That’s a sad story, but it’s also partially the student’s own fault. Instead of listening to every admissions department about how wonderful they are and how they would fit right in on campus XYZ, students should be realistic, carefully research their options, and base their applications for the most part on whether or not their scores really meet the admissions criteria set forth by the school. That strategy might take some humble pie, but will ultimately lead to less disappointment in the end. It’s probably best to take what the actual school tells you with a grain of salt.

Key to Reform: "I" Words Not "A" Words

By Richard Vedder

At meetings of higher education leaders, much talk occurs about the three "A"s: accessibility, affordability, and accountability. These topics are all important, but true reform requires more emphasis on three "I" words:

* Incentives
* Integrity
* Interrogation

Incentives
As someone said at the so-called higher education summit a couple of weeks ago, "no reform is going to happen without the faculty's support." And, basically, there are few if any incentives for faculty to change their ways. Why teach in new ways that are uncomfortable and potentially could reduce faculty jobs? Why conduct research on promising teaching practices, when salary increases are largely publication-driven? Why cut administrative staff when the current bloated bureaucracy reduces the work load on some high level decision-makers, isolate the leaders from some thorny problems, and increases the administrator's sense of power? Why teach more hours per week when teaching is not valued much? Why spend time with undergraduate students, when only graduate students and fellow faculty can help get more research published to advance one's career? Why teach (and utilize buildings) in the summer, when that is when faculty and staff like to work short days and take long vacations? Why teach at 8:00 a.m. in the morning or on Fridays, when I like to sleep in and take long weekends?

Faculty and staff have to be given incentives to change. If innovation A will save the institution X number of dollars, perhaps 0.4 X (40 percent of the savings) need to be devoted to providing incentives for faculty and staff to actively work to implement the innovation. Incentives could take several forms, including salary increments.

Integrity

Providers of funds to universities, both public and private, are often becoming more skeptical about what colleges tell them. Money too often gets misused, as the huge confrontation over the Robertson gift at Princeton suggests. Universities bury embarrassing news, such as rising attrition rates, and even campus crimes. If universities showed extremely high level of honesty and integrity, people would believe and support them more.

Interrogation

Education is about asking and answering questions. An active, lively mind is an inquisitive and imaginative (other "I" words) one. Those in university governance and providers of funds need to ask universities more questions, probe more about how resources are really being used. Have incremental funds supported more teaching or rather narrow research interests of faculty? Have new funds meant generous salary increases to faculty and staff more than new positions, more scholarship aid to students, etc.? Trustees and others need, on average, to question academic leaders more, and usually need their own "eyes and ears" within the university community to report to them on what is going on campus.