With respect to providing for upward mobility, the most important social mobility function a government can perform may be that of education. But in the field of higher education, the federal government may not be an ally of the young people who most need that education.
The crisis of higher education is intimately tied up with its soaring costs. And to fund these costs, tuition has also soared. Tuition at public four-year colleges has nearly quadrupled since 1980; tuition costs grew by 80 percent in just the ten years between 2003 and 2013, whereas the consumer price index grew only 26 percent. To pay these increasing tuition costs, students have gone into severe debt. And with this debt has come default.
Student borrowers are increasingly falling behind in their loan payments. The New York Federal Reserve has found that almost 30 percent of student loans are now delinquent. More than 600,000 borrowers who graduated in 2010 had defaulted by 2012, according to Education Department data. This was the sixth consecutive year of rising defaults.
According to the Federal Reserve, educational debt has surpassed every other category except home mortgages, reaching some $1.3 trillion this year. In the class of 2014, the average borrower had a debt of $33,000. And research from the Pew Research Center indicates that 20- and 30-year-olds are delaying marriage and childbearing because of their student loan debt.
Federal spending on college aid now amounts to $170 billion a year, compared with $10 billion in 1970. But this program has had a perverse effect, contributing significantly to rising prices and costs. Increases in federal financial aid have enabled universities to raise their tuitions, knowing that federal loans would support those increases without decreasing the supply of students.
Before the late 1970s, federal financial-aid programs were modest in size. Correspondingly, annual tuition increases were roughly one percentage point more than overall inflation. Since 1978, however, during the era of rapidly growing federal loan programs, annual tuition increases have been three to four times that of the pre-1978 period.
Debt-enticing Government Policies
The federal student loan program not only leads to increasing loan defaults, it also entices young people to incur unmanageable debt to fund financially suspect endeavors. In 2012, 681 public colleges had graduation rates of less than 25 percent. Nationally, only a little more than half of all college students graduate within six years — and all the people who start college but never graduate will earn substantially lower wages than those with degrees, which then makes their student-loan debt all the more burdensome. As for those students most in need, those from the bottom income quartile, only 31 percent who start college manage to complete a degree.
Government encouragement of students to incur debt to attend college resembles the housing bubble, where the government induced poor people to take out mortgages they couldn’t afford. Likewise, the student loan debt is being increasingly held by unemployed or underemployed college graduates. And the effective delinquency rate on student loans is now as high as it was on subprime mortgages at the height of the housing crisis.
Federal programs have been successful at one thing: increasing enrollment, notwithstanding the relevance or applicability of the educational program into which a student is enrolled. Student loan programs encourage students to pursue any degree, regardless of price. This creates an open invitation to incur an indebtedness unconnected to a later ability to repay the loans.
Through the student loan program, the federal government and higher education institutions effectively partner to maximize the number of young people becoming indebted tuition-paying students. Naturally, given this unrestricted availability of cash at such an early age, students grab it and head to college. But in the end, the students end up holding all the debt, which exists regardless of whether the student actually graduated or pursued a course of study that qualified him or her for a decent job. College students, for instance, are increasingly taking on debt for high school-level remedial-education courses that do not even count toward a degree. They spend loan dollars for such courses, despite evidence that these courses are ineffective and contribute to higher dropout rates. Although any high school graduate can enroll in college and receive federal aid, disadvantaged students unprepared for college face an uphill climb. They end up using their federal loans to enroll in remedial courses that do not count toward a degree and are a notorious dead-end for many students.
The Failure to Reach Those in Need
Not only is there serious doubt as to whether the federal student loan money is being effectively spent, but there is much evidence that the program is failing those low-income young people it was designed to help. Only about 7 percent of recent college grads come from the bottom income quartile, compared with 12 percent in 1970 when federal aid was scarce. Thus, a smaller proportion of college graduates now come from low-income backgrounds than did so before federal financial-aid programs became so large.
According to the Educational Longitudinal Study, which followed high school sophomores from 2002 to 2012, only 14 percent of students from the lowest socioeconomic quartile had attained a bachelor’s degree or higher after 10 years. Another study found that 5 percent of low-income eighth graders born in the 1960s earned a bachelor’s degree, compared to just 9 percent of those born in the 1980s. That’s only a four percentage point increase, despite the vast increase in student loan funding since 1980. So while the promise of a college degree for low-income youth was used to justify an expansive federal college access agenda, this agenda has not delivered on its promise. What it has delivered is increasingly unmanageable student debt.
Publicly funded grants and loans provide almost no information about the value or quality of different programs. Critical information for low-income consumers – the graduation rates of Pell Grant recipients, for instance, or graduates’ post-graduation earnings and employment rates – are not generally available. Consequently, lacking the data necessary to make sound choices throughout the college-going process, a large percentage of students are mismatched – attending an institution that does not match their academic qualification.
The current system has encouraged colleges to raise tuition while providing little incentive for colleges to monitor student achievement. Reforms must motivate colleges to control costs. New and more flexible accreditation standards and procedures should also be implemented so as to allow new higher education institutions to compete with existing ones. And instead of just focusing on traditional four-year institutions, financial aid programs should also support occupational opportunities like high quality apprenticeship programs that provide the non-college-bound with valuable job skills.
Transparency reforms should require universities to disclose information on how their graduates fare in the labor market and whether those graduates are able to repay their loans. Such disclosure would obviously help students and parents make more informed decisions on where to enroll and which majors are most likely to pay off. With no current underwriting standards of any kind, federal loans provide no signal as to the expected value of a given program.
Due in part to a 2008 law that prohibited the federal government from collecting data on all college students, colleges do not adequately provide information on the proportion of students who graduate on time and the percentage of those who earn enough to pay back their loans after graduation. These information gaps would be less problematic if the accreditation agencies held colleges accountable, but rather than protecting consumers, the accreditation process actually keeps poor-performing colleges in business.
Under the current system, poorly performing colleges that would never pass muster in a functioning market are rarely stripped of their access to federal aid, even though they saddle students with debt that far outweighs the value of their training. The goal of any higher education reform should be to change the incentives that allow colleges to survive and even thrive, regardless of the quality of their education.
The answer is not to eliminate all federal aid — although that would certainly lead to a drop in prices – because without any aid many low-income students who would benefit from higher education could not afford it. A better way to improve the system is to make colleges more accountable when it comes to student loans.
Unaccountability was what led to the financial crisis – mortgage lenders who made risky loans removed themselves from the risks of those mortgages when they bundled and sold them to unsuspecting investors. So under the lesson that those who make or contribute to the risk should bear the risk, colleges should be made responsible for a certain percentage of the loans on which their students default. A second way to make colleges accountable and to empower students is to require colleges to disclose the information that students need to make informed decisions.
As the experience in higher education funding has shown, far-reaching federal government programs do not necessarily help the individual student. In fact, such programs can even disadvantage those low-income students most in need of the opportunities for upward mobility created by higher education.
Patrick Garry is a professor of law at the University of South Dakota, and Director of the Hagemann Center for Legal & Public Policy Research.