Altering the Incentives Around Higher Education

The cost of higher education continues to grow. Part of the reason for the increase is that young Americans have been told a college credential is the key to a life of wealth and happiness. College has become a rite of passage. As Judah Bellin writes in National Affairs, “Perhaps this explains why 75 percent of Americans believe college is too expensive and 57 percent believe that an investment in college yields inadequate returns, yet a staggering 94 percent of parents expect their children to attend college.”

Many politicians see the price tag and want to make college free just as we make K - 12 education free. Other politicians want to grow government-sponsored loan programs, and many want to wipe out the entirety of outstanding student debt. In my view, these policies would make the situation worse. Instead of bailing out the current system, we should look to reform it. The goal is to get to a place where my eight-year-old niece and four-year-old nephew have better, less expensive options for pursuing career goals when they graduate high school.

But before discussing the future, it’s important to explore a key reason for why college costs have risen so much. In 1958, Congress created the National Defense Student Loan program. Given the Cold War, politicians saw a benefit in providing low-interest federal loans to students seeking post-secondary degrees in science, math, and foreign-languages. Loan expansion grew several years later with the passage of the Higher Education Act. This law made it possible for any student who desired a college education in any field to receive some funding. In 1972, Congress established the Student Loan Management Association (a.k.a. Sallie Mae), making it easier for banks to issue even more loans. When reauthorizing the Higher Education Act in 1992, Congress broadened the scope of the loan program even further, eliminating income limits on who can borrow and lifting the ceiling on how much students and their parents could borrow. As Matt Yglesias writes, “When we subsidize higher education via low-interest loans we eliminate all kinds of quality control.” The status quo enables colleges to keep raising their prices without having to face a drop in the demand side of the equation.

I remember attending the fun events sponsored by University of Virginia. There were musical guests like O.A.R., Guster, and Jason Mraz. Comedians Lewis Black and Bob Saget stopped by. Every year the sleep hypnotist Tom Deluca put on a great show. There were the expensive gyms and fancy food facilities. All this made for a good time, but it also made the college experience much more expensive.

It isn’t just the money budgeted for buildings and fun activities, a big problem is the increase in the number of administrators. According to data from the National Center for Educational Statistics, public and private institutions spent $20.7 billion on instruction and $13 billion on student services in 1980. By 2014, total instructional costs had climbed to $148 billion, while the same grouping of administrative expenses had risen to $122.3 billion. Put another way, administrative spending comprised just 26 percent of total educational spending by American colleges in 1980 while instructional spending comprised 41 percent. Three decades later, the two categories are almost even.

The best way to end the price increases is for high schoolers to reject the current college business model, which focuses so much money on amenities and administrators. But it is unlikely that such a correction will occur if a future cohort of students expect for their loans will get wiped away. So while I’m 100 percent in favor of canceling a portion of student debt, wiping out 100 percent of student debt will only make the matter worse. “Even if all $1.6 trillion is forgiven, current estimates show that an additional $1.6 trillion in new student loans would be borrowed in a little more than a decade. We’ll be right back in the same situation,” writes economist Brian Riedl.

Objecting to the cancellation of all student debt isn’t some radical, right-wing view. The Washington Post editorialized that “across-the-board student debt cancellation would amount to a regressive subsidy for many high-income university graduates.” According to the New York Times, “Canceling this debt would set a bad precedent and do nothing to change the fact that future students will graduate with yet more debt — along with the blind hope of another, future amnesty.” Besides, if we have such an obligation, why not start with with mortgage debt, auto loan debt, or credit card debt?

While some defenders of universal loan forgiveness, including Congressman Ro Khanna, challenge the idea that such a policy amounts to a “regressive subsidy,” Khanna’s data excludes the very asset the person borrowed to buy—an education that increases lifetime earnings. “That’s like assessing a homeowner’s wealth by counting their mortgage balance but not the value of their home,” writes Adam Looney of the the left-of-center Brookings Institute.

According to Looney’s research, about a third of student debt is owed by the wealthiest 20 percent of households and only 8 percent by the bottom 20 percent. By comparison, when accounting for only the measure of income, the top 20 percent owe about 35 percent of student debt, the second highest income quintile 33 percent, and the bottom 20 percent only 2 percent. Further, forty percent of all student debt was borrowed for graduate and professional programs, and those with the graduate degrees invest in much higher future incomes, making the debt affordable.

To be clear, I’m open to a small amount of loan forgiveness to help those most in need, as delinquency and default are most common among those who are less than $5,000 in debt. But my larger goal is to get a point where my niece and nephew have less expensive options for pursuing career goals. Forgiving loans without adjusting underlying systemic issues ensures the problem of unaffordable higher education never gets fixed.

Universities keep raising their prices because we have been shouting from the rooftop that the college experience is part of the American dream. This college-for-all mentality has been damaging, which is why we need to open more avenues for people to obtain jobs without attending a four year college or graduate program. I’m excited to read about coding bootcamps and the PenSole project. I’m happy to report that Google, Apple, and 12 other notable technology companies no longer require a four-year degree to land a job. It is great to hear of Maryland dropping four-year degree requirements for thousands of state jobs, allowing potential employees to cite skills picked up from community college, the military, apprenticeships, or other jobs on their applications.

While we need to create more pathways for people to learn skills and trades, it is also the case that colleges and graduate schools will be the right path for millions of Americans. On this front, changes at Purdue University make me hopeful. I’m excited about online degrees from UDacity and Coursera the prospect of a new college called University of Austin, which plans to allocate more resources toward teachers and much less to administrators.

In short, we should celebrate Americans who choose work as plumbers, HVAC installers, electricians, and construction workers. Americans should be proud to work as a chef or as a masseuse or, as in my case, selling groceries in a store like Trader Joe’s.