I was at a financial conference, also attended by a former Democratic politician — a person some used to think was potentially veep material, at least. At one point, this person wondered aloud, “Why don’t we just make college free?” In other words, why not spend more money on higher education to increase affordability? Or, really, eliminate affordability as an issue at all? This idea seems to be gaining traction on the left.
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Now there was no consideration about the design flaws in the federal student aid system or what sorts of institutional behaviors it encourages. It’s a system where colleges are empowered, as my colleague Andrew Kelly points out, “to capture as much federal aid as they can.” It is a system that makes it almost impossible for the customers to comparison shop or truly know the value of what they are purchasing. The market test is never really conducted. Kelley: “In short, the problem is not only that we make so much money available in student aid, but that we make so much money available with very few strings attached.”
Likewise, the focus on what college costs ignores the failure of the financial aid system to promote value. So here from Kelly are several reforms that would encourage colleges to compete on price and value:
First, capping PLUS loans to parents and graduate students, which allow unlimited borrowing up to the cost of attendance, seems like a straightforward reform to curb tuition inflation. Reforming generous loan forgiveness programs to encourage prudent borrowing is another.
Second, federal policy should empower consumers with better information about costs and student outcomes. The College Scorecard’s new earnings data is a start. But the federal government should expand on this effort to collect and make public program-level outcome data.
Third, policymakers should create two simple accountability mechanisms based on loan repayment rates: a performance floor that would exclude the worst-performing institutions from federal aid programs and a risk-sharing policy that would give institutions above that floor greater skin in the game. If all colleges were held responsible for a percentage of their students’ unpaid loans, they would have incentive to contain their tuition, maximize rates of student success, and reconsider their admissions standards.
Fourth, reforms should create space for private financing that can inject more market discipline into higher education. In theory, private investors could underwrite on the basis of program quality and future earnings, driving students toward valuable opportunities. Existing private student loans do not appear to be forward-looking in this way. More than 90% of new loans feature a co-signer.
An alternative is an Income Share Agreement, under which students obtain funding for school in exchange for a percentage of their after-school income over a set period of time. Because an investor’s return is directly tied to a student’s success, ISA providers have incentive to help students navigate toward valuable opportunities There are a number of for-profit and nonprofit entities trying to offer this option to students, but a lack of legal and regulatory clarity has limited the growth of this market. Policymakers like Senator Marco Rubio and Representatives Todd Young and Jared Polis have introduced bills that would provide such clarity and put common sense consumer protections in place.
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