• November 1, 2014

Fixing Financial Aid

For 40 years, federal money has sustained higher education while enabling its worst tendencies

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Fixing Financial Aid

In 1972, Clark Kerr was, once again, helping shape the future of American higher education. He was 61 years old, and his greatest works lay behind him. The California Master Plan for Higher Education, which he helped broker in 1960, would become the model for organizing public colleges and universities. The Uses of the University, delivered 50 years ago this April as the Godkin Lecture at Harvard University, became one of those rare books that both predicted and, through sheer force of insight, created the future.

But Kerr had been secretly targeted by J. Edgar Hoover's FBI as too soft on student radicals and was pushed out of the University of California presidency by newly elected Governor Ronald Reagan in 1967. Rather than retreat from controversy, Kerr joined the influential Carnegie Commission on Higher Education. As with his assumption of the UC presidency, in 1958, Kerr's timing was fortunate.

The federal government was about to change its financial relationship with higher education in a way that would shape the character of the academy for decades to come.

The early 1970s followed a long period of vibrancy and expansion in American colleges. A tidal wave of new students had arrived at the same time that the cold war produced vast amounts of federal money to finance university-based research. Hundreds of new community colleges had been built, and regional colleges transformed into public universities. Higher education was strong, confident, and had its sights set on a new deal with Congress. Instead of relying solely on state legislatures for financial support, lobbyists at the American Council on Education and elsewhere wanted direct continuing appropriations to institutions from Uncle Sam.

Clark Kerr thought that was a terrible idea. The higher-education lobby was, in his estimation, poised to make a "Faustian bargain of incurring long-run dangers of national control as the price for receiving short-term, lump-sum checks." His position on the Carnegie commission gave him a platform from which to say so.

His views were branded as "treason" by members of the Washington educational establishment. But Kerr won the day—instead of giving aid to institutions, the federal government gave it directly to low-income students, in the form of vouchers, to spend as they pleased.

Kerr's judgment was vindicated. The program that would later be named after its congressional benefactor, Senator Claiborne Pell, grew along with federally guaranteed student loans into a pillar of financial support for higher learning. Generations of low-income students went to college with Pell Grants, and millions more used federal loans to finance their education. Colleges continued to expand and, in many respects, thrive. Ten years into the new century, college enrollment approached 21 million, more than double the number in 1972.

It was a four-decade run that sustained higher education even while enabling its worst tendencies. The end may have come on February 12, 2013, when President Barack Obama delivered his State of the Union address.

"Skyrocketing costs," the president said, "price way too many young people out of a higher education, or saddle them with unsustainable debt." He went on to place the blame squarely on colleges themselves: "Taxpayers cannot continue to subsidize the soaring cost of higher education. Colleges must do their part to keep costs down, and it's our job to make sure they do. Tonight, I ask Congress to change the Higher Education Act, so that affordability and value are included in determining which colleges receive certain types of federal aid." On the matter of federal control, Kerr's long run had finally arrived.

Nor did Obama stop there. In a policy document released after the speech, the president proposed the most sweeping change in federal aid since the great debates of the early 1970s. In addition to value-driven accountability measures for colleges, he called for "establishing a new, alternative system of accreditation that would provide pathways for higher-education models and colleges to receive federal student aid based on performance and results."

"State lawmakers, in essence, have been ripping off their peers in Washington."

Against a backdrop of a growing number of reports on reforming financial aid, in a handful of words, the president had proposed nothing less than a postinstitutional future of higher education—­one in which "colleges," as defined by other colleges, as defined by higher education itself, would no longer have a monopoly over the receipt of public funds.

Higher-education leaders in Washington were clearly caught off guard (the head of the organization representing accreditors called the plan "startling.") They shouldn't have been. It was the inevitable result of a federal financial-aid system that, for all its virtues, has failed to keep up with the times.

The system created in the early 1970s had two signal virtues. First, it treated all colleges equally. To this day, private colleges and flagship research universities still get a disproportionate share of federal work-study money because their grants have been grandfathered in at levels set in the 1970s by old-boy clubs of college officials. By contrast, Pell Grants and loans are available to any college that can win accreditation, and every student who qualifies can get the same amount.

That arrangement spurred the great motive force of American higher education: institutional ambition. Research and consumer rankings gave institutions yardsticks against which to measure themselves. Federal aid created a new source of revenue beyond state appropriations, which were marred by favoritism, politics, and, in some states, the enduring legacy of state-sponsored racism. It also created a robust public-revenue stream for the nation's many private institutions. As long as they could increase enrollments, colleges could make their dreams and aspirations come true.

Giving money to students rather than institutions also provided a second benefit: a stronger political foundation than in the past. A comparison to federal financing for elementary and secondary education is instructive. In 2008, Congress appropriated about $16-billion for the Pell Grant program. Funds for Title I of the Elementary and Secondary Education Act, an antipoverty program designed in the same era and spirit as the Pell Grant, amounted to about $14-billion. Both Title I and Pell were created to help low-income students. The biggest difference between them is the recipient: Title I grants go to high-poverty schools, while Pell Grants are for low-income people.

After 2008, federal revenues were hammered by the recession. At the same time, the number of low-income students at all levels of education swelled. Federal programs that help institutions—colleges and schools—struggled to maintain Congressional support for fund levels. By 2011, Title I was still stuck around $14-billion. Pell, by contrast, had ballooned to nearly $40-billion, as increased aid amounts were combined with an unemployment-driven surge of families with less income.

Pell is seen as a kind of entitlement, and that is the key to its financial success. Federal loans, meanwhile, are limited only by the relatively small cost of subsidizing them and the ability of the Treasury to print money, which is to say, limited hardly at all. The federal government lent students more than $100-billion for the 2011-12 academic year, more than double the amount lent just 10 years before.

But the simplicity of the federal aid system that Kerr, Pell, and many others helped create has drawbacks. It rests a gigantic amount of money on a small, feeble regime of quality control. And entitlements are just that, automatically paid out­­—if a student is eligible, a college gets paid. Those characteristics have made the system ripe for exploitation.

The first exploiters have been state governments. The creation of the federal student-aid system was closely followed by a sea change in the conduct of state lawmakers. The tax revolt that began in California in 1978 begat a generation of public officials possessed by a dogmatic opposition to taxes and public spending. Many of them also held a strong, if contradictory, enthusiasm for incarcerating people, on a scale without precedent in the Western world. At the same time, the baby boom aged, and health care got very expensive. By the late 1990s, some analysts were already observing that higher education would very likely be squeezed by those trends. Higher-education appropriations had been used as a kind of fiscal balance wheel, dropping precipitously in bad financial times in order to keep other budget lines intact. Doubtless they would be so used again.

That proved true in the 2001 recession, and calamitously so in that of 2008. By 2011, inflation-adjusted state spending per student had declined to $6,290, a 22-percent drop from 1986. Over the same time period, tuition revenue per student nearly doubled. When states passed the buck to colleges, colleges passed it right along to students and their parents. As the nonprofit Delta Cost Project has documented, students are paying an increasing share of their higher-education costs, across all sectors and types of institutions, public and private, two-year and four-year, undergraduate and doctoral.

Much of that tuition is financed by federal financial aid. State lawmakers, in essence, have been ripping off their peers in Washington.

The second exploiters were the giant for-profit higher-education corporations, which grew to significant scale in the 2000s. I have no principled objection to profit-making in higher education. When "nonprofit" colleges sit on multibillion-dollar cash hoards and pay legions of administrators six-figure salaries, the distinction starts to lose meaning. And for-profits are hardly homogenous in their business practices.

But an exhaustive investigation released by the Senate Health, Education, Labor and Pensions Committee last summer revealed more than a little evidence of for-profits' treating the federal aid system like a piggy bank while offering students substandard degrees. The fact that Congress needed to pass a law in 1998 prohibiting for-profits from getting more than 90 percent of their revenues from federal aid shows, at the very least, that some people have been making a great deal of money from an aid system not designed with that outcome in mind.

The final exploiters have been traditional colleges themselves. As states spend less and colleges spend more, students and their families are making up the growing difference in tuition that is increasingly financed by debt. To be sure, spending patterns vary widely within the industry, with private research universities far outpacing the field in their endless quest for much and more. But public institutions, including those not well known, have doggedly increased their spending, too, dreaming perhaps of reaching the promised land of research funds and selective admissions.

Damningly, the money hasn't even been spent on the students who are picking up a larger share of the tab. Instead of hiring more tenured professors to teach them, colleges have brought on board legions of low-paid adjuncts. In 1975 most instructional faculty were tenure-track or full-time. By 2009, that percentage had dropped below 40 percent. At the same time, the ranks of college administrators have grown. And anecdotes of universities' building elaborate recreational facilities featuring things like lazy rivers (these having replaced climbing walls as emblems of excess) are commonplace, as are money-losing sports programs, aggressive building programs, and other expenditures that belie any sense of financial restraint.

College leaders will admit to these and other offenses if you press them. But, they insist, the true cost drivers in higher education are structural, if not eternal. Whole books have been written arguing that spending on higher education must inevitably grow because of an economic phenomenon commonly associated with the work of the economist William Baumol. Higher education, this thinking goes, is a labor-intensive service not susceptible to the technology-driven productivity increases found in sectors of the economy such as manufacturing. Economic growth in labor-intensive industries, of course, drives up the price of labor, which colleges must pay despite realizing no corresponding increases in productivity. The resulting rise in college costs and prices simply must be borne by some combination of students and society, if the quality of learning is to be maintained.

The counterthesis to Baumol’s view of the labor-driven economy has been advanced by Howard R. Bowen, a former president of the University of Iowa, who asserts that colleges increase costs not because they must but because they can, as they wage never-ending competition for status with their peers. While there is probably truth in both claims, a recent analysis by the economists Robert E. Martin and R. Carter Hill suggests that "for every $1 in Baumol cost effects, there are over $2 in Bowen cost effects."

The thesis advanced in some conservative and libertarian circles that federal aid causes increased college spending has tenuous empirical support. But federal aid has certainly abetted college spending, allowing institutions to avoid the kinds of difficult structural reforms experienced in other industries.

All three forms of exploitation of the current financial-aid system have the same root cause: a weak, opaque system of quality control. Federal lawmakers assumed that the combination of accreditation, state regulation, and consumer choice would be sufficient to safeguard public funds. They were wrong. All of the abuses in the for-profit industry have occurred at accredited, state-licensed colleges that students have voluntarily chosen to attend. The same is true for the hundreds of public and private colleges that fail to graduate the majority of their students on time and which, if research like that discussed in Richard Arum and Josipa Roksa's Academically Adrift (University of Chicago Press, 2011) is any indication, don't teach particularly well. The idea that market forces alone are no guarantor of socially desirable outcomes should be familiar to many in the academy.

The quality-control system, moreover, has provided exceedingly little information about quality itself. Accreditation was designed to produce a binary result: Institutions either are or are not accredited. That ignores vast differences among departments and programs within institutions, and says nothing about the degree to which institutions exceed minimal standards.

The limitations of accreditation have added to the incentives for state disinvestment in higher education. Education leaders protest each round of recession-driven cuts by predicting that academic quality will suffer. But they have no evidence to demonstrate that that is so. Disinvestment has been a wonderful free lunch for irresponsible state lawmakers: They can pull money out of public colleges with near impunity because nobody can prove they are wrong.

The information void has also contributed to price inflation—and the need for financial aid for students. Since there is no comparable information about the quality of undergraduate learning at different institutions, colleges have been free to define quality in terms of the selectivity of their admissions process, the prestige of their research, and price itself. Crucially, that is what they have wanted to do. The 1970s marked the end of a 100-year period of near-constant change in higher learning. Institutions know what they are, and what they want to be, which is nearly always a richer, more famous, more exclusive version of what they were. That requires money, which taxpayers, students, and parents have been paying in ever-larger amounts.

At the same time, the federal-aid system has suffered the accumulating defects of incrementalism. Every year has brought a new set of tweaks and alterations, add-on programs designed for growing constituencies, compromises made with short-term budget considerations in mind. Today students face a bewildering array of loan and grant programs, with different mechanisms of subsidy and criteria for eligibility. You need a college education to figure it all out.

All of which led inevitably to President Obama's call to fundamentally renegotiate the relationship between the federal government and the academy. If it hadn't been him, it would have been someone else.

Higher education might have avoided greater national control if its demands on the public treasury had remained modest. But that didn't happen. Obama simply voiced what federal lawmakers of all political persuasions are coming to realize: If higher education is going to be nationally financed, it must serve the national interest, as they define it.

What will that mean, exactly? In the short term, there are many opportunities to make the existing aid system simpler and more effective. Instead of subsidizing student loans through broad and indiscriminate interest rate cuts, we should have a single loan program that limits repayment to a percentage of the borrower's income and forgives remaining balances after a long period of time. Such programs already exist, but most students don't use them. The key is to take a page from the research in behavioral economics popularized by scholars like Cass Sunstein, who recently stepped down as head of the White House Office of Information and Regulatory Affairs: Make income-based loan repayment the default option for all borrowers. The government is also squandering billions of dollars per year on tax breaks for college for the upper-middle class that would be better used for Pell Grants. Public resources are too scarce and college too important to continue that kind of waste.

But the real work will involve a reorientation of how higher-education quality is measured and defined. Obama's predecessor tried to take on the accreditation system directly, following recommendations by the Commission on the Future of Higher Education, led by Secretary of Education Margaret Spellings. (It speaks volumes that two presidents who agree on so little agree on this.) In response, the higher-education lobby went to Congress and weakened the executive branch's already minimal oversight over accreditors.

Obama has wisely proposed a different course, going around accreditors instead of through them. Under his plan, the existing accreditation system would have the chance to participate in setting and enforcing better standards of college success. At the same time, an alternate system would proceed unburdened by the weight of historical practice and institutional obligation.

Most amazing about the initial reaction to Obama's proposal was the way the leaders of the higher-education establishment missed entirely the most radical part. Creating an alternative accreditation regime would represent a major change. But none of them seized on the fact that by defining the scope of the new system to include "higher education models and colleges" (note my added emphasis), Obama had proposed opening the federal financial-aid system to organizations that are not "colleges" at all.

At the heart of the college-spending debate represented by Baumol v. Bowen is the assumption that colleges, as we know them, account for the whole universe of institutions that can provide higher learning and deserve public support. The change-averse nature and deeply rooted cultures and structures of colleges undergird the fiscal fatalism inherent to both Baumol and Bowen—for one reason or another, colleges are destined to become more expensive. If we want students to be able to afford college, therefore, we have no choice but to spend ever-larger amounts of money on financial aid. Exploitation can be mitigated but never avoided entirely.

Obama's plan blows that assumption apart. A higher-education market in which colleges and noncolleges compete on a level financial playing field would behave very differently from the traditional higher-education ecosystem we know today. Many of the new companies organized around online and technology-driven learning operate with vastly different organizational models and financial margins. If they become eligible for federal aid, the consequences will be profound.

Unsurprisingly, Clark Kerr saw this coming, too. In the fifth edition of The Uses of the University, published in 2001, two years before his death at 92, Kerr looked ahead to the new millennium and described "a road I see filled with potholes, surrounded by bandits, and leading to no clear ultimate destination." The subsequent for-profit scandals showed that he was right about the bandits, and more besides. Kerr wrote:

"Perhaps above all, higher education is going through its first great technological change in five centuries—the electronic revolution. Late confrontation with fundamental technological change is the main reason that universities are the major institutions in the Western world that have changed so little over the past five centuries. Agriculture, transportation, industry, and the military have all been impelled forward by new technology. Now it is higher education's turn. It is too early to tell in detail how the electronic revolution will affect higher education, but it is likely to be dramatic."

In the decade after Kerr wrote those words, the number of students taking online courses grew from 1.6 million to 6.7 million, nearly a third of everyone enrolled. But instead of confronting fundamental technological change, colleges for the most part tried to exploit it, charging students standard tuition rates or more for credit-bearing online classes that cost far less than brick-and-mortar equivalents, and relying once again on federal aid to keep the dollars flowing.

It was a nice deal while it lasted, but it had to end someday, and now that day is in sight. The federal financial-aid system of 1972-2012 helped two generations of Americans move forward on the path to opportunity. Now it's time to build something better for generations to come.

Kevin Carey is director of the education-policy program at the New America Foundation.

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