Chart of the Week: Grants and Loans by Class Level

For today's Chart of the Week, we take a look at undergraduate grant aid and loans (for 2008) by undergraduate class level, as reported in the Dept. of Ed's Data Analysis System. As this chart shows, the average freshman and sophomore receive the lowest amount of grant aid but also take out, on average, smaller loans than upperclassmen. While juniors and fourth year seniors receive the most generous grant aid, fifth year seniors have the greatest disparity between the grant aid they receive and the loans they take out, suggesting that fifth year seniors rely more heavily upon loans for financing college than other undergraduate students.

Student Loans, Redux

by Jonathan Robe

The other day Sandy Baum and Michael McPherson, over at the Chronicle's "Innovations" blog, had this to say:

Students have little understanding of the difference between subsidized and unsubsidized loans (or, unfortunately, of the difference between federal and private loans). What they do understand is their payments once they leave school.

This quote isn't wholly dissimilar to a point I attempted to make around three weeks ago when I was bemoaning the classification of student loans as a type of "financial aid"(though Edububble does a better job than I at articulating it). Here's what I said then:

it is the Department of Education itself which classifies student loans, along with grants and work-study, as “aid.” But there is a fundamental distinction between grants (which don’t have to be repaid) and loans (which do, with interest). Of course, because some of the loans are subsidized by taxpayers (by delayed repayment, below-market interest rates, etc.), classifying these loans as “aid” is not a complete lie. It is, however, deeply misleading to students by giving them an incorrect picture of the true cost of their college education... the ED isn’t doing that much to help by continuing the mis-characterization of the nature of student loans.

Baum and McPherson seem to provide a corroboration to my point that the federal financial aid system is something of a mess, both confounding students with its complexity as well as fostering an atmosphere where students are misled about the true costs their education incurs. Of course, part of the challenge we face isn't only correctly identifying the problem with the current financial aid structure; we must articulate the right solutions as well. I am skeptical that pumping more subsidies (even if they are supposedly better targeted) is the proper course to take. Rather, we need more fundamental reform in higher ed where both schools and students are more sensitive and responsive to true costs. That is, I think, the key to ensuring that college is affordable.

Who's Really Lying to Students?

By Jonathan Robe

Over the past year, for-profit colleges have come under heavy fire, with many within higher education circles and the government criticizing them for a number of things related to the quality of education the for-profits offer to their students. Some, including the GAO, have even gone so far as to accuse the for-profits of lies, deception, and even outright fraud (if you want to see more examples, go here and here and here and here). These accusations, despite the heated rhetoric, are not necessarily wholly without merit. Have for-profit colleges encouraged students to enroll who are ill-prepared both for collegiate study and good employment? Undoubtedly. Have there been instances of misleading advertising by for-profits? Yes. Do for-profits rely too heavily on federal aid dollars for their revenues? Perhaps. But does all of this mean that the entire for-profit sector is dubious? Certainly not, as this recent CCAP report details.

The problem with this focus on for-profits is not that there are no flaws within the for-profit sector. Rather, the problem is that most, if not all, of the charges leveled at for-profits can also be leveled at almost any institution of higher education in the United States today, a point that was driven home in a recent panel discussion at the Heritage Foundation in which CCAP’s Richard Vedder participated. The reality is that, whether the school in question is Corinthian Colleges, the University of Texas at El Paso, the University of Michigan, or Cornell University, students are overburdened with debt, many graduates face poor employment prospects (not all of which are due to the sour economic climate), schools rely heavily on government payments, and accountability is lacking in terms of what students really learn while in college. Many schools perpetuate what Chad Adleman calls "The Old College Lie" by enrolling students known to be ill-prepared for college.

However, even recognizing the wide-spread nature of educational malfeasance misses what may be the most important point: namely, the federal government’s complicity in misleading students by understating the costs and exaggerating the benefits of higher education. After all, it is the Department of Education itself which classifies student loans, along with grants and work-study, as “aid.” But there is a fundamental distinction between grants (which don’t have to be repaid) and loans (which do, with interest). Of course, because some of the loans are subsidized by taxpayers (by delayed repayment, below-market interest rates, etc.), classifying these loans as “aid” is not a complete lie. It is, however, deeply misleading to students by giving them an incorrect picture of the true cost of their college education.

Let me use a little anecdote to illustrate this problem. One of my college friends several years ago told me how he used excess financial aid in his student account to pay for a summer trip to Europe. It wasn’t until sometime later that it dawned on me, then a naïve sophomore, that what he called “aid” was really excess student loans. This same friend graduated a year or so later and promptly got a position working at McDonald's and, for obvious reasons, began to worry about his financial outlook. He has since moved on, though the current reality of his debt burden is far from fictitious.

Now I’m not claiming that my friend is not responsible for making poor financial decisions, nor am I claiming that his experience is necessarily typical for all students, nor that taking student loans out by anyone is unjustified. Instead, I use this anecdote to illustrate how our common practice to categorize student loans as aid can lead students financially astray. I therefore partially sympathize with students who, after several years in school, come to the sudden realization of how much debt they truly have. While in many (perhaps all) cases they really should have known what they were getting into in the first place, the ED isn’t doing that much to help by continuing the mis-characterization of the nature of student loans. It’s almost like a used car salesman selling cars by convincing his customers that if they take out loans to pay for their cars, they are lowering the cost of the purchases. Of course buyers in this instance will have distorted views of the true costs, just like students who view loans as just another form of aid.

In the final analysis, the ED itself may not be misleading students, but it sure is aiding and abetting those who do. Students confused about the nature of financial aid are particularly susceptible to claims by higher education advocacy groups that, by taking out loans, students can reduce the net price they pay for college. It’s also the schools themselves who, as Edububble noted, manipulate the debt statistics by redistributing loan burdens from students to parents, with the result that the debt doesn’t show up as “student” loans. If we are ever to see real reductions in college costs, the government and colleges have to upfront and honest with students about the full extent of college costs and that, at the end of the day, somebody has to pay the whole bill.

Student Loan Defaults: The Blame Game

by Daniel L. Bennett

The big news in higher ed thus far this week has been the ED's release of the latest data on federal student loan default rates. No big surprise that default rates are up all across the board, given that college tuition continues to soar while the state of the economy has made it more difficult to find good-paying jobs for fresh grads. Here are the figures:

the FY 2008 national cohort default rate is 7.0 percent, up from the FY 2007 rate of 6.7 percent. The default rates increased from 5.9 to 6 percent for public institutions, from 3.7 to 4 percent for private institutions, and from 11 to 11.6 percent for for-profit schools.

ED Secretary Arne Duncan took the opportunity to single out and harangue the for-profit sector:

This is a disservice to students and taxpayers

rapid growth of enrollment, debt load, and default rates at for-profit schools in recent years prompted the Obama Administration to embark on a year-long negotiation with the higher education community to develop a set of proposals that strengthen the integrity of the federal student aid programs and ensure that taxpayer funds are used appropriately

Duncan's words are actually reflective of the entire higher education system and the government's misguided entrance into the student loan business. After all, default rates continue to rise among all college students as we pour more money into student loans for all, which has become a de facto entitlement.

My colleague Andrew Gillen predicted awhile back that we are experiencing the inflation of a tuition bubble as a result of generous federal aid programs. This is not unlike the housing bubble that recently popped and sent our economy into a tailspin. Rather than singling out the sector which enrolls only 10% of all students for being a a disservice to students and taxpayers, we should be questioning the federal government's takeover of the student loan business as a disservice to the entire public and a source of economic rent-seeking for universities of all stripes.

But then again, as my colleague Richard Vedder described, we do have an Administration that:

has taken control of iconic private automobile and financial-service companies, has viciously attacked Wall Street greed, has tried to manipulate more than ever the private use of money and credit, is favoring a huge increase in taxes on capital gains

Trapped in Debt

by John Glaser

Cryn Johannsen has posted some frightening student loan testimonials on her blog, Education Matters. The testimonials are excerpts from her new paper, The Plight of Current Borrowers: An Appeal For Immediate Relief. Here is one story of how one woman tried to utilize higher education to improve her life situation, but got buried in a mountain of debt that has caused a lot of pain and heartache, in addition to that caused by health problems:

Today I am 46 years old...I had no idea what I was getting myself into when I took out student loans to finish my BA

I went on to get my Master’s in Counseling Psychology, which was paid for by my employer, Thank God. I found to my dismay that I just couldn't make enough money on a salary of $25,000 as a counselor to make the loan payments and take care of everyday life. My cancer in 1986 left me thousands in debt. In 1991, I ended up filing a chapter 13 for my medical bills. Subsequently, a woman at Wachovia Bank noted this, and accidentally put my loans in default instead of deferment.

My life became a nightmare for the next seven years. This was before the regular use of computers. I was on the phone for hours on hold, but I couldn't get anyone to talk to me. Creditors treated me like a leper. I was actually told by a well meaning person that "your loans have been bought and sold so many times, they are probably in a shoe box in someone’s closet."

Finally in 1995, after getting nowhere, I contacted the US Dept. of Education. I literally sent them a shoebox full of notes about my conversations and letters I wrote trying to ask for help. They eventually tracked them down and subtracted the penalties, but not the interest, so my $25,000 turned into $45,000.

I tried to make the payments on a counselor's salary, even on an income contingent plan or any plan I could find, but it was too much money on $28,500 per year. I made payments whenever I could afford to but they never seemed to count because they were never enough to cover even the interest. My payments were more than my rent! I have deferred and been in forbearance so many times it's not even funny.

I had to declare bankruptcy again in 2000 due to lack of finances and everyday living, and ongoing medical issues with my cancerous nodules on my thyroid which prevented me from working for 7 months in 1999 – (once) again, deferment, hardship forbearance, more compiling of interest.

I wanted to go into the NHSC (National Health Service Corps) which is a program for health professionals to go into public service into rural, urban (low income areas), or prisons to work for a period of time in exchange for loan forgiveness. I had a license in Michigan, but they changed their policy and you had to already have your national independent license.

I couldn't afford to stop working to get my PhD, so after 10 years of getting nowhere and the threat of default, I went back to school at age 41 in 2004 and got my MSW so I could be in the NHSC. This was not something I wanted to do, but I wanted to get my loans repayment [sic] and I already had devoted my life to public service, it seemed the logical thing to do. Another Masters would increase my loans, but I could pay it back through this program.

I have new student loans and consolidated them. Now, my loans have ballooned to $160,000. I can't afford even to make the smallest payment because I wasn't making enough on a social worker’s salary. The whole thing is insane.

I put off and sacrificed most things people my age have; a family, vacations, stocks, savings, investments, retirement and most of all children; because I had to pay my loans. My friends have watched me save and scrimp and never get anywhere.

There were times I had to decide whether or not to buy food or pay my loans. Pay the heat or pay the loans. Get my medication or pay my loans. Eat rice and live in the dark . . . I can never get good credit rates because this $160,000 shows up on my credit.

I have been made to feel like dead beat. I have felt very ashamed. I feel as though I can never get ahead. It would be nice once in my life to have some nice things, or not always having to worry about defaulting and having my social work license taken away, and then I can't work. I still have nightmares about this.

I'm sure there are many more stories like this one floating around out there. Stories of real people who buy into the dream of higher education providing them with pecuniary returns, only to be sadly disappointed. This case reveals that there are in fact diminishing returns to higher education.

Blaming Former Presidents

by Daniel L. Bennett

The Obama Administration likes to blame former President Bush for the growing national deficit, although the new administration has certainly not shown any restraint in combating this problem. Well, I've got some blame to place on former presidents myself - rapid tuition inflation over the past several decades can and should be attributed to former presidents, beginning with Jimmy Carter. In 1978, the Carter Administration passed the Middle Income Student Assistance Act (MISSA), which extended federal guaranteed loans to all students, regardless of financial need or income. Before this, federal loans were restricted based on income and need.

The above chart shows federal aid expenditures by program type, in constant 2008 dollars, between 1970-71 and 2008-09. As we can see, loans dollars began escalating rapidly a few years after MISSA was passed by President Carter. The sharp spike that we see again in 1992-93 marks the expansion of the Parent Loan (Plus) program and introduction of a new, unsubsidized loan option not restricted by financial need under the last year of the G.H. Bush Administration, and subsequent expansion of the Direct Loan program by newly elected President Clinton in 1993.

What these policy changes did, was increase the ability to pay for students from middle and high income families. My colleague Andrew Gillen, Robert Martin and others have explained this phenomenon quite well, so I won't go into much detail here.

Merging Ideas on Student Loan Reform

by Daniel L. Bennett

Bruce Chapman and Yael Shavit propose an interesting reform of the student loan system in an OpEd for Inside Higher Ed this morning. They argue that the US should adopt an Australian-style system:

when students enroll in college they may elect to pay their tuition later in a way that depends on their future incomes. Eighty-five percent of students take up this option. The debt is recorded with the Australian Internal Revenue Service and is taken from a graduate’s income, at a maximum of 8 percent of incomes, but only when incomes exceed about U.S. $35,000 a year. If the former student is in poor circumstances, for example from being unemployed or in a low-paying job, no payments are required, and no action is needed by the debtor to prove these circumstances. There are no poverty line recalculations, no need to adjust repayments with marriage or separation or the birth of a child; it is all automatic and simple. When Australian college debtors’ incomes recover, their repayment amounts increase, yet never to more than 8 percent of incomes.

They suggest that the system is effective enough that other many other countries have adopted it:

New Zealand adopted a similar plan in 1991, South Africa in 1991, the UK (partially at first in 1997 and now in full swing), Hungary in 2003, and similar efforts are planned for Malaysia, Ireland and other countries in the near future. All the evidence is that these systems have worked well and the government gets back the vast majority (85 percent) of the debt without defaults or repayment hardships from low incomes.

Tying student loans to income is an interesting idea. My main concern is that it still pits the government as the central lender and puts taxpayers on the hook for potential losses, while allowing colleges to continue avoiding accountability for their outcomes and use of scarce economic resources. In a recent article for Forbes.com, I suggested that we have colleges put some skin in the game by holding them responsible (or at least sharing in the responsibility) for potential losses when student loans go sour. The ideas of shared responsibility for losses and repayment based on income could conceivably work in tandem to provide colleges with an incentive to use their resources efficiently and focus on providing value, as well as to control debt accumulation and stymie defaults and taxpayer losses.

Comments on Student Loan Bill

Richard Vedder made the following brief comments about the student loan takeover bill for National Review Onlineyesterday:

President Obama’s signing of the education bill is triply disastrous. First, he violated basic tenets of representative democracy by tying otherwise politically unattainable education changes to the health-care bill.

Second, the bill’s student loan provisions will not save the $68 billion promised, and will move the country closer to a European-style socialism that has brought that continent stagnation. Going to a Soviet/U.S. Postal Service model of student-loan services goes against the sound maxim that competition is always better than monopoly. Moreover, the bill’s repayment terms will lead to increasing student-loan defaults, adding to the crushing fiscal burden on a government whose IOUs are now trusted less than those of some private corporations.

Third, the bill proceeds from a false premise. President Obama asserted Saturday that “by the end of this decade, we will once again have the highest proportion of college graduates in the world.” Putting aside the nasty reality of a 45 percent six year college drop-out rate, the Labor Department forecasts that, over the next decade, there will be fewer new jobs requiring college degrees than there will be new college graduates. This bill aggravates a costly and inefficient system, likely will raise tuition charges, and lead to more over-educated and over-indebted young Americans.

FFEL's Dead, Time to Work on DL

by Andrew Gillen

With half of my master plan to overhaul student loans now accomplished, it’s time to start attacking DL.

The first shot comes courtesy of The Economist telling us a bit about the UK system. The UK has had a version of the DL program for years. How’s that working out?

Those who borrow from the government to pay tuition fees need repay the loan only after they graduate and start earning steady money. Even then, interest-rate subsidies make their loans a drain on the public finances. So the government caps student numbers and fines any university that recruits too many…

We can expect politicians here to continue to try to buy votes with interest rate subsidies, loan forgiveness programs, and loan payment plans for public employees and other favored groups. So it is highly likely that DL will morph into a drain on the public purse in the US just like it is in the UK. When that happens, will we be forced to impose enrollment caps too? It seems unlikely, but then again, so did the idea of turning the federal government into a loan shark, and that didn’t stop us, so who knows.

Final Version of the Student Loan Reform Bill

From the Chronicle of Higher Ed this morning comes news of the final language of the student loan reform bill

Congressional Democrats and the Obama administration on Thursday outlined their final agreement on legislation to overhaul the government's student-loan system, with the savings providing annual inflation-adjusted increases in the Pell Grant and billions of dollars in additional aid for higher education.

The final agreement also includes $255-million a year to help historically black colleges

The agreement also includes $750-million over five years for College Access Challenge grants, which support states and other governments in efforts to prepare more low-income students to enroll and succeed in college

despite suggestions last week that money for community colleges would be cut altogether, the bill includes $2-billion over four years to help two-year institutions

also includes $1.5-billion over 10 years to finance the Obama administration's proposal to increase assistance to borrowers eligible for income-based repayment of a federally subsidized student loan by limiting their mandatory monthly payments to 10 percent of discretionary income, down from the current 15 percent, and by forgiving their loans entirely after 20 years, instead of the current 25 years

eliminates $9-billion that had been approved in the House version to reduce the interest rate on federally subsidized loans in 2012-13 and subsequent years. That rate is now due to drop to 4.5 percent for the 2010-11 academic year and 3.4 percent the following year, but then rise to 6.8 percent after that

compromise reached Thursday also eliminated a provision in the House version to spend $8-billion on early-childhood-education programs

But here's the kicker:

accompanying agreement on the health-care legislation

FFEL Savings Estimates Fall Again

by Todd Holbrook

The CBO released its latest savings estimates for the elimination of the FFEL program late yesterday. The estimated savings have dipped yet again, with the lowest coming in at a cool $40 billion, nearly $30 billion below the previous projection (and less than half of the one before that).

The report named credit assistance (present value of future administrative costs and market risk) as the basis for the alternative methodology used in obtaining the lower figure. Another estimate given was $62 billion, $6 billion below a previous estimate credited to a"projected increase in annual discretionary administrative costs in the direct program". The CBO used Federal Credit Reform Act (FCRA) methodology to obtain the $62 billion estimate, but this methodology was dropped for the $40 billion estimate. The reason: FCRA methodology does not account for market risk -seen here as default rates.

Links for 3/2/10

Ramesh Ponnuru

let's face it: college isn't for everyone, especially if it takes the form of four years of going to classes on a campus.

To talk about college this way may sound élitist. It may even sound philistine, since the purpose of a liberal-arts education is to produce well-rounded citizens rather than productive workers. But perhaps it is more foolishly élitist to think that going to school until age 22 is necessary to being well-rounded, or to tell millions of kids that their future depends on performing a task that only a minority of them can actually accomplish...

Rob Manwaring

This Wednesday, the ACLU brought a lawsuit against Los Angeles Unified to stop anticipated layoffs at three low performing schools that were decimated by last year’s layoffs… illustrates the need to carve out schools from collective bargaining contracts in order for school turnaround to have a chance…

Tim Ranzetta

this loan occured during a time in which one student loan executive admitted was "a bad lending bubble" which this lender inflated with over $5 billion of loans to high-risk students. The private loan market has overcorrected to the point now where this same lender is making loans to borrowers with average FICO score of 750 with cosigner rates north of 90%. So, I suspect there will be fewer stories like this based on loans being made today since underwriting criteria have become so much more stringent. The problem is that for the loans in this $5 billion portfolio of "non-traditional" loans (what a sweet sounding euphemism for what others might call subprime) that are now in repayment, have already charged-off at a rate over 30%...

Paula V. Smith

A biologist declared, startling the economist and physicists, “To us, equilibrium is death!”…

An influential book by George Lakoff and Mark Johnson, Metaphors We Live By (1980), asserts that all conceptual thinking relies on metaphor…

CCAP in the News

Ohio University's student newspaper, The Post, did a story on tonight's national debate on education and the economy, interviewing CCAP's Richard Vedder, George Leef of the Pope Center, and former education secretary Margaret Spellings.

increasing college enrollment should not be a national goal. He listed delayed graduation, dropouts and "mountains of student loans" as problems facing college students today, adding that postsecondary education is not necessary for everyone.

Often, college grads are mail carriers, waiters and cutting trees down with a master's degree," he said. "You don't need a master's degree to cut a tree down for someone or to drive a UPS truck. I'm not against UPS truck drivers having advanced education, but I don't know that taxpayers need to subsidize this, particularly given the other problems we're having as a nation right now

The St. Louis Post-Dispatch ran on story about unemployed grads struggling with student loans, interviewing Richard Vedder.

Look for an exponential increase in the ranks of underemployed graduates struggling to cover an education they hoped would boost their earning potential

It's going to be a long-running crisis independent of the recession

The economic downturn, he continued, "exacerbates the fact that beginning salaries are lower and the ratio of the amount of (student) loans to those salaries is getting higher and higher. When that happens, you're getting into problems."

More and more students, Vedder said, are deferring payment (and incurring additional debt) by pursuing advanced degrees. The latest statistics from the Council of Graduate Schools bear him out.

Links for 2/18/10

Jennifer D. Jordan and Linda Borg

The teachers didn’t blink.

Under threat of losing their jobs if they didn’t go along with extra work for not a lot of extra pay, the Central Falls Teachers’ Union refused Friday morning to accept a reform plan for one of the worst-performing high schools in the state.

The superintendent didn’t blink either.

After learning of the union’s position, School Supt. Frances Gallo notified the state that she was switching to an alternative she was hoping to avoid: firing the entire staff at Central Falls High School...

Ben Miller

lenders currently receive quarterly subsidies when loans they hold are in repayment. Their incentive is thus to keep borrowers active and not to let them default, for if they do, the lender could lose around 3 percent of the loan’s value. By contrast, guaranty agencies and collection agencies get sizeable subsidies for defaulted loans. When a loan defaults, the guaranty agency can tack on collection costs that can easily be upward of 20 percent. The agency also gets to keep 16 percent of any amounts it collects. If the guaranty agency, collection agency and lender are the same company, that subsidy can certainly be enough to wipe out any other losses it might sustain from a default.

That’s basically the situation we have right now with Sallie Mae…

Lynn O'Shaughnessy

Did The Value Of Your College Degree Just Drop $350,000?

Mark Bauerlein

One often hears about stressed and stretched and over-scheduled college students, but every survey I've seen, including those issued by National Survey of Student Engagement (Indiana University) and the Higher Education Research Institute (at UCLA) shows dismayingly low levels of study time and academic engagement among undergraduates…

there doesn't seem to be much difference, in general, between study time and academic outcomes…

Remember the Eastern European joke about wages under communism, "We pretend to work and they pretend to pay us"? Perhaps there is an undergraduate counterpart: "We pretend to study and they pretend to grade us."

Unintended Consequences of the 90/10 Rule?

by Daniel L. Bennett

I've been doing some thinking about the so-called 90/10 rule, which stipulates that profit-seeking colleges must obtain 10% of their revenue from non-federal aid sources. Since proprietary schools do not get state subsidies, research grants, or have a massive income-earning endowment (profit-seeking firms would likely re-invest their retained earnings in growth opportunities anyhow, as they don't have the tax advantage of a public or non-profit organization), the other 10% of revenue usually is generated from out-of-pocket tuition charges. In other words, student tuition payments from private funds such as income, family savings, company sponsorship, private scholarship or private loans.

By requiring colleges to come up with revenue sources other than the federal government, politicians believed that profit-seeking colleges would be forced to provide something valuable that students would be willing to pay out of their own pocket for, with the intent of cracking down on the so-called diploma mills operating in the for-profit space. While the implementation of the rule did lead to some for-profit providers closing up shop, I wonder if there are negative unintended consequences as a result.

For instance, it may be possible that profit-seeking colleges have an incentive to set tuition at a level that exceeds the maximum federal student loan thresholds so that students have to come up with the remainder of the tuition on their own. It may also be possible that proprietary schools set their tuition above the combined maximum annual federal loan and grant thresholds, or some ratio of it depending on the particular target student demographics. In the absence of the 90/10 rule, it is possible that profit-seeking colleges might price their tuition at or below the federal aid thresholds.

I plan to empirically investigate this matter in the future. Stayed tuned.

Links for 2/10/09

John B. Taylor

The new study by my colleague Rick Hanushek and his coauthor Ludger Woessmann shows that bringing US education levels up to the level of Finland would raise real GDP by over $100 trillion measured in present discounted value terms over the next 80 years…

Jean Chatzky

If you can come up with a third of the money your kids need for college before they go, you are doing a good job. Think about paying another third out of your then-cash flow. And have them borrow the final third…

Robin Wilson

most professors and administrators on traditional campuses continue to dismiss for-profit colleges as inferior alternatives that cost too much, consume more than their fair share of federal student aid, and turn out unprepared graduates who default on their student loans…

But the for-profit sector is not only more robust than the rest of higher education, it is helping to force some changes in the way traditional colleges do business…

For-profit universities spend a lot of money to get students in the door…

Once students are enrolled, for-profit institutions work hard to hold on to them…

Keith Hampson talks with Rich Vedder.

Links for 2/9/10

Arthur M. Hauptman

The Pell Grant has not had much effect on tuition levels in part because the amount of the awards does not vary with where a student enrolls. Institutions cannot affect how much a student receives, and the institutions that charge the most enroll the fewest Pell Grant recipients.

By contrast, despite the argument that there is no proven causal relationship between aid and price increases, there are several good reasons to believe that student loans have been a factor in the rising cost of a college education. Tuition has increased by twice the inflation rate for the past three decades while annual loan volume has increased tenfold in constant dollars.

Unlike Pell Grants, as part of the aid packaging process, colleges have some control over how much students borrow as loan amounts. Moreover, just as one couldn’t imagine house prices being as high as they now are if mortgage financing were not available, it is difficult to believe that colleges and universities could have increased their charges so rapidly over time without the ready availability of students’ ability to borrow.

Jill Laster

Portland State University is investigating a tenured professor of economics who is reported to have accused a student during class of being an FBI informant and selling weapons to other members of the class…

John B. Hall, stopped teaching in the middle of a lecture … Mr. Hall said an FBI informant was in the room and pointed at one of their classmates, Zaki Bucharest.

Mr. Hall then went on to say that Mr. Bucharest had served as a sniper in the Israeli army, tried to sell weapons to members of the class, and worked with the FBI, among other claims, the students said. Mr. Hall also showed students a letter he had written to the FBI.

Uwe E. Reinhardt

a modern university is a prepaid, staff-model, pedagogic group practice – the educational analogue of a staff-model health maintenance organization, or H.M.O., like the Kaiser Permanente Health Plan…

But suppose universities operated instead on a piece-rate compensation basis, like the current health system…

A “comprehensive initial consultation on a senior thesis,” for example, might cost anywhere from $150 to $300, depending on the student...

The faculty in the natural sciences and engineering would own the laboratories used by their students and charge a facilities fee for each use, along with a professional fee for faculty supervision and set-up costs…

Each time a student used the reserve library to read the voluminous material assigned by the professors, there would be a separate charge… Reading lists in the humanities would be especially long, leading to endless library charges for assigned chapters in archaic books found only in the library…

Students would be charged a professional lecture fee for every class they attended along, of course, with another facilities fee…

Upon requesting a fee schedule from the dean of the college, the latter would patiently explain that different prices had been negotiated with different parents and that all of those fees are proprietary information…

If universities conducted their business in this fashion they, too, might provoke endless rancor and suspicion, endless lawsuits and, sooner or later, much government regulation on how they conduct their business. It may be the reason universities prefer to function like staff-model H.M.O.’s.

And has this approach produced poor quality, as physicians devoted to the hallowed fee-for-service system have so often alleged of H.M.O.’s? It does not appear so, as universities do compete fiercely for students and faculty on their overall reputation…

Jake with a graph of unemployment by educational attainment.

Further Observations About Income-Based Repayment (IBR)

by Daniel L. Bennett

Dr. Vedder criticized Obama's Income-Based Repayment Plan in an earlier blog, which generated a few interesting responses. Here are some additional observations about IBR:

1) It does nothing to address the true underlying problem: college costs continue to soar as more and more money pours into their coffers. Such a policy essentially lets them off the hook for cutting costs and competing to provide the best value. Instead, it provides an incentive for colleges to continue to charge higher and higher prices, as they will face no consequences for running up the tab on the taxpayers for a product with diminishing returns.

2) Students will not be interested in seeking out the best value or finishing in a timely fashion, as they will know that their repayments will be only a fraction of the total debt load that they accumulate if they enter a "preferred occupation". Do we really want to encourage more humanities or art majors to run up 6 figures in student debt at the taxpayer's expense? Not to mention that this teaches our youth horrible financial management habits.

3) It will put downward pressure on wages, as "preferred employers" will have every incentive to offer low wages and let the taxpayers cough up the rest. This will actually lower people's standard of living in the long run and make them even more dependent on Big Brother than is already the case.

4) This will be detrimental to the nation's tax base as more people move into the lowest tax brackets - many not paying any taxes at all, which is already widespread in this country.

5) This plan is bad for employment growth. As businesses are forced to bear an increasing share of the burden, you can bet that many of them will move their operations overseas where the business climate is more friendly, along with their jobs.

6) The policy is discriminatory as it favors one group over another. In this case, public services over businesses.

Overall, this plan will do more harm than good to our economy and the future prosperity that we owe the next generation to try and preserve for them. IBR is a weakening of the great American tradition that has led it to prosper for many generations, and move further towards European-style socialism that has plagued the Euro Zone with stagnant growth and high unemployment for several generations now.

Links for 1/29/10

Kevin Carey

the number of college students taking at least one online course increased … to 4.6 million in Fall 2008…

Steady, predictable long-term trends rule the world, but unsteady short-term variance captures all of our attention…

This [video] is not an ad from a company that’s interested in nibbling around the edges of the gigantic market for traditional college degrees. They appear to be aiming right at the heart of it, and the Sloan report numbers indicate that they and others like them are becoming more and more successful over time…

Goldie Blumenstyk

The value of college endowments declined by an average of 23 percent from 2008 to 2009

Doug Lederman

The Assessment of Higher Education Learning Outcomes (AHELO) project aims to gauge whether it is possible to develop "reliable and useful comparisons of learning outcomes" that are valid across countries…

develop an international version of its Collegiate Learning Assessment…

Tim Ranzetta

the FFEL program had 64.8% share of federal student loans disbursed for the first six months of this academic year (through December 31, 2009)…

what percentage of these FFEL loans have been sold to the Department through the ECASLA Loan Purchase or Loan Participation programs?...

about 67%...

DL loan disbursements grew by 59.3% and FFEL by 9.4%,…

The Student Loan Debate

By Richard Vedder

Two issues are important at the moment regarding student loans. First, should repayment of loans be tied to income, and to what extent? Second, should the current system of private providers and a federal direct lending program be replaced by one where the private providers are cut out of federal guarantees and subsidies?

On several occasions, I have suggested that perhaps college students could sell equity rather than debt instruments to investors, with investor return dependent on earnings. Charles Miller, chair of the Spellings Commission, good friend, and, most relevantly, investment guru, says the idea is hare-brained, and he has some good arugments showing practical problems with it. The concept of relating loan terms to repayment potential is not necessarily unsound, however. The Obama administration wants to tie repayment of conventional loans to post-graduate income, limiting the payments to 10 percent of income beyond subsistence (is a wide-screen television, nice car and a smart phone part of a subsistence income these days?). Currently the payment limit is 15 percent. I think this is a very bad idea. Some students will have interest payments on their loans that alone approach 10 percent of all income, much less income beyond subsistence. What this proposal is is a disguised way for the federal government to make more grants via loan forgiveness. It increases the contingent liabilities of the federal government, very bad from a macroeconomic standpoint. Moreover, it is a disguised, not transparent, loan program. The idea that if you work for the good guys (government) you will eligiible for loan forgiveness, but if you work for the bad guys (private sector), you will not get this perk is repugnant and indicative of the Obama Administration's hatred of capitalism. Is it no wonder the inflation-adjusted Dow-Jones Industrial Average today is nearly 30 percent lower than it was a decade ago or that the price of gold is up well over 40 percent since Election Day 2008?

We don't need more federal student grants, even ones disguised as loans. The big access problem is not money, as Bob Zemsky kept telling me years ago when we wrnagled in a friendly fashion on the Spellings Commission.

The reason why Hispanics and blacks and low income whites don't get college degrees is vastly more connected to family background and behaviors, poor academic training, and, in some cases affirmative action programs that push students into inappropriate learning environments. Attrition rates are higher among lower income students, even ones with generous financial support.

We are dealing with symptoms, not the disease. The disease is the fact that the cost of college is rising faster than people's income, which is unsustainable in the long run. Obama is trying to keep the Titanic from sinking rather than build a new ship. No one has the guts to force the higher ed establishment to change its ways --which the politicians have the power to do via the money spigot. Until my three I's of innovation are dealt with --incentives information, and and innovation -- the Law of No Consequences rules in higher ed --nothing much happens to you no matter how irresponsible your behavior. Making loan programs more generous is setting us up for another financial crisis, albeit on a smaller scale, like that occuring in the housing market. My sidekick Andrew Gillen has been talking about a tuition bubble, with good reason.

Too many kids are going to college, borrowing too much money, enabling too many universities to employ too many people, do too many non-academic things, enjoy too large economic rents, etc. etc. Stopping the expansion of student loans would force either a mini-crisis of a financial nature that will lead to true reforms, or significant enrollment declines that are needed if the cost explosion is to be contained.

President Obama is, in his heart, a socialist in the German Social Democratic party tradition. He wants to kill off private lending, thinking that the government is more efficient than private lenders, that profits are exploitation of students, etc. The evidence is clear that both students and the colleges themselves like having the private lending system, and have been slow to voluntarily move to the Obama student loan model. Moreover, the U.S. Senate has not adopted a plan that would end private lending and likely will not in this election year. I suspect something is at work here similar to health care -Americans are not wild about private insurance companies and other aspects of the current system, but they are against radical change that increase the government's role. Moderate Democrats valuing job security along with a newly empowered Senate Republican minority can keep the Obama plan from happening this year, which may mean, keep it from happening forever. Long live the voters of Massachusetts!