How to Beat the High Cost of Learning
How come a college degree is the one thing that never gets any cheaper? The financial burden of virtually all goods and services has lightened over recent generations, with this one big exception. Since about 1980, the price tag of attending university has soared faster than overall inflation and the growth of family incomes. Recent “free tuition” proposals would be nothing more than extremely expensive Band-Aids. The way to address rising college costs is to rethink the entire government student-loan system.
In a 1987 op-ed, Bill Bennett, President Reagan’s education secretary, hypothesized that tuition was rising partly because of the explosive growth of federal financial assistance. He observed that as it became easier for students to borrow money or get grants from the government, demand for college grew. This led schools throughout the country to raise fees aggressively.
From 1840 through 1978—a period when federal aid was nonexistent or very modest—inflation-adjusted tuition rose about 1% a year, according to my analysis of the available data. The Higher Education Act of 1965 created small loan and grant programs, which were enormously expanded in legislation signed by President Carter in 1978. Since then, federal data show, college tuition has been rising roughly 3% a year. If tuition after 1978 had grown only as fast as it did in the preceding four decades, going to college today would cost half what it does.
Instead, aid programs were expanded even more. They are now 10 times as large as they were in 1970, adjusting for inflation. Some $158 billion is spent annually on student aid, and more than 40 million Americans have student loans, according to the College Board. Total student debt has reached $1.3 trillion, and despite extremely liberal repayment terms, loan delinquencies are substantial. Newly corrected data from the Education Department show that a majority of borrowers at over 1,000 institutions repaid nothing in the three years after finishing school. A January report from the Consumer Financial Protection Bureau says that the number of student debtors older than 60 has quadrupled in a decade.
New studies have also lent more credibility to Mr. Bennett’s 30-year-old insight. Researchers at the New York Federal Reserve suggested in 2015 that a common result is a tuition increase of about 60 cents for every increased dollar of student aid. A paper last year by Grey Gordon and Aaron Hedlund for the National Bureau of Economic Research also strongly supports Mr. Bennett’s theory.
The system of student aid is incredibly complex, with over a dozen federal loan, grant, work-study and tuition-tax-credit programs. The Free Application for Federal Student Aid, known by the acronym Fafsa, is unnecessarily complex and deters some low-income students from applying for assistance. The proportion of recent college graduates from the bottom quartile of the income distribution has fallen significantly since 1970, to 10% from over 12%, data from the Pell Institute suggest. On balance, federal assistance has not helped poor Americans gain access to college.
These programs also have no educational performance standards, meaning they don’t give students an incentive to work hard. As college enrollments continue to grow, they have aggravated a large underemployment problem. More university grads are taking unskilled jobs as baristas or Uber drivers.
Perhaps the federal government should get out of the student aid business. Washington doesn’t have the financial discipline to pay its own bills fully. Why should it borrow money to send moderately affluent Americans to school? Yet abolishing federal aid would impose severe short-term hardships, and it is politically infeasible.
What would a more realistic plan look like? First, simplify. Everything about the federal aid system is too complex, starting with the Fafsa. There should be only two programs: a grant program to replace the Pell Grant and a federal loan program to replace Plus loans, tuition tax credits, work study and the litany of other schemes.
Another change: Give educational vouchers directly to students. That would empower the recipients to weigh costs more closely and reduce colleges’ incentive to increase spending. Grants and federal student loans should be given only to those with incomes below 150% of the poverty level. Aid should come with modest academic expectations, like maintaining a 2.0 grade-point average; and when a student’s prospect of success becomes remote, it should be cut off. A time limit of five years of government assistance might be helpful. Should all graduate or professional education be subsidized? The feds don’t necessarily need to help people attending expensive M.B.A. programs whose graduates earn large starting salaries.
Schools also need to have some skin in the game. Many colleges now knowingly accept marginal applicants who ultimately drop out and fail to repay their loans. The schools collect tuition, but the taxpayers get burdened with delinquent debt. Colleges should be required to share some of that burden. For example, schools with abnormally high loan delinquencies should have to pay a tuition “tax” to the government to help cover costs. This could raise graduation rates and shrink bloated enrollments.
Stricter eligibility rules will inevitably affect some good candidates for aid. But Congress can still help them by passing legislation to make income-share agreements enforceable. Under these arrangements, students sell equity in themselves. An engineering student might receive $40,000 for college from a private investor, in return for 8% of his postgraduate income for 10 years. Since markets would determine the exact terms, students in less practical majors, those with poor academic performance, and those who choose low-reputation schools would face longer payback periods at a higher proportion of their earnings.
There is no silver bullet to fix this country’s student-loan problem, but the status quo is unacceptable. There’s no time like the present to get moving on serious reforms—before that $1.3 trillion in student debt grows even bigger.
Mr. Vedder, an adjunct scholar at the American Enterprise Institute, is director of the Center for College Affordability and Productivity.