Hillary Clinton’s higher education plan is extensive and expensive.
The plan contains multitudes (almost every idea proposed in the past five years is in there somewhere—some of which are good). But most of the good ideas are window dressing for what is, first and foremost, a call for more resources. Clinton would spend $350 billion over ten years on a laundry list of priorities designed to bring the price of college down. The plan includes: Grants to states that pledge to invest more of their own money in public colleges and universities; grants to institutions (public and private) that enroll low-income students; lower interest rates for student loan borrowers; interest subsidies for existing borrowers that “refinance” their loans; more spending on childcare for student-parents; and more.
Yes, some of the $350 billion would have strings attached, but most of those strings are themselves about spending more money. In order to access “incentive grants,” states would have to guarantee “no-loan” tuition at four-year public college (and free tuition at two-year colleges) by “[halting] disinvestment in higher education” and “[ramping] up that investment over time.” States, in turn, would only distribute federal grant funds to colleges that demonstrate they can meet the debt-free tuition requirement and contain costs.
Set aside the fact that simply pumping more money into the system won’t solve quality problems and may well inflate college spending further, no matter how tight the new rules. What’s especially odd, given Clinton’s effort to cast herself as a Progressive, is where much of that new spending will go: to upper-income students who would go to college anyway.
To be sure, families up and down the income distribution are anxious about the cost of college. But we already spend plenty of money on policies that subsidize upper-income students and families—federal tax credits, loan forgiveness for graduate students, and heavily subsidized state flagship colleges come to mind. These investments haven’t made college any cheaper, they likely relax the incentive for students and colleges to be cost conscious, and they spend taxpayer dollars on those who would still attend without a handout from the government.
Clinton’s plan would double down on such policies in three key areas. First, the plan calls for a significant investment in lowering interest rates for new and outstanding federal loans. Her plan would both allow borrowers to “refinance” at current rates and slash interest rates on new loans. Campaign documents show they expect about one-third of the $350 billion price tag would go toward these interest subsidies.
But across-the-board interest subsidies are poorly targeted—they go to all borrowers, regardless of their income and ability to repay. Take loan refinancing proposals, like the one introduced by Senator Elizabeth Warren, as an example. The Congressional Budget Office estimated that about 95 percent of outstanding federal loans would be eligible to refinance at lower rates at a cost of nearly $60 billion. The problem here is that a lower interest rate disproportionately benefits those with the highest debts—often graduate students with masters and professional degrees. These grads are actually the best equipped to pay back their loans, and they are already free to refinance federal loans in the private market. Meanwhile, those who are most likely to default—drop-outs who usually have more modest balances—would receive only limited benefits.
Slashing interest rates on new loans suffers from the same problem. Any student can take out a federal loan, regardless of their income, and data suggest that about 50-60 percent of college graduates from high and upper-middle income families borrow. Low interest rates on new loans would make loans more affordable, but by the same amount for students across the income distribution and at a significant cost to the government.
Second, the Clinton plan calls for extending the American Opportunity Tax Credit (AOTC). The AOTC was created in 2009 and allows families with qualified expenses to deduct up to $2,500 from their taxes ($1,000 is refundable). In 2012, the credit was extended through 2017, and President Obama has proposed to make it permanent and expand it even further.
Here again, though, the problem is that tax credits disproportionately benefit upper-income families. These families are the most likely to spend enough on college expenses and pay enough in taxes to qualify for the full credits. An analysis by the Tax Policy Center found that a quarter of the money spent on the AOTC and half of the spending on the student loan interest deduction went to families earning between $100,000 and $200,000 a year. Students from these families are very likely to enroll whether there’s a tax credit or not. As conservative policy wonk Reihan Salam has written, “tuition tax credits increase demand for all students, including those that are already willing and able to spend large sums on higher education.”
AOTC is particularly regressive and expensive because it has much higher income cut-offs than earlier credits. In a recent paper, for instance, economists George Bulman and Carolyn Hoxby found that the AOTC caused a “massive increase” in the share of tax expenditures that went to students from families earning more than $120,000. It also “greatly increased” the credit for middle-income families. The refundable portion does help some low-income families that would not have benefited under earlier tax credits, but the real winners are higher up the ladder.
Most importantly, not a single study has shown tax credits to be effective in terms of affecting college enrollment, choice, or persistence. As a result, Bulman and Hoxby conclude that the government is unlikely to recoup its spending on tax credits through higher tax revenue. If the goal is simply tax relief, doubling down on the AOTC might make sense. But the Clinton plan says it is designed to raise attainment. Is this really the best use of finite resources?
Third, the incentive grants to states would also channel public money toward higher income families in ways that are obvious and less than obvious. Clearly, the free community college in the “New College Compact” could be a boon to upper-income state residents who choose to get two years under their belt for free. Such families would still pay something at four-year public colleges under the “no loan” requirement, but likely less than they do now.
The issue goes deeper than that, though. State funding formulas generally spend the most on students attending selective research universities, while open access institutions get less money per student. According to the Delta Cost Project, for every dollar per student that states and localities appropriated for public research universities in 2010, they sent 70 cents to community colleges. Master’s-level four-year colleges got 72 cents on the dollar. Together, these two sectors enrolled 1.75 times as many full-time students as public research universities in 2010, and they educate far more low-income students.
If Clinton’s incentive grant simply requires states to spend more but leaves funding formulas and admissions standards intact, students at selective research universities would benefit more than those at open access schools. That’s the odd thing about the Left’s constant plea for more state appropriations: as others have noted, a lot of that money operates as merit aid in disguise. Changing funding formulas to level out per-pupil funding—or voucherizing state appopriations and indexing voucher amounts to family income—would be more progressive.
The plan vaguely states that the size of federal incentive grants will “depend in part on the number of low- and middle-income students enrolled in public colleges and universities.” But it isn’t clear how those numbers would be measured or whether such a policy would compel states to change their funding formulas.
In sum, Clinton and her Democratic rivals seem to have lost sight of the problem federal aid was created to solve in the first place: that some low-income students who would benefit from college were not able to afford it on their own. Progressives have made no secret that their goal is much grander: to create a federally-funded universal entitlement for all, regardless of income.
They have a political rationale here, in that universal programs are often better funded and more protected than need-based ones. But that also makes them the hardest to reform when spending grows more than expected, as it will in this case. The poorly targeted tax benefits and interest subsidies will chew up a larger chunk of the budget each year, while public colleges will plead that they need more money to enroll students at the mandated tuition rates. Universality will raise the political costs of messing with any of this. That is, of course, part of their strategy.
Our money would be better spent on ensuring the neediest can access colleges that have incentive to serve them well. That may entail additional spending, but most of all it requires targeting our money where it belongs and creating policies that give colleges a greater stake in their students’ success. Focusing our resources and reform energy on these priorities would advance postsecondary opportunity for a fraction of Clinton’s bloated $350 billion price tag.
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