Wednesday, January 25, 2012


On Notice?

President Obama has put higher education “on notice” that if we keep raising tuition, we’ll get our public funding cut.

To which I say, huh?

We’ve had our public funding cut already.  Since 2008, an uninterrupted series of cuts has been the direct cause of severe tuition increases for public higher ed.  If you want to stop the tuition increases, the first thing to do is to require the states to restore and then maintain realistic funding levels.  (When referring to a point in time, the usual term is a “maintenance of effort” requirement.  Otherwise, it can be set as a “grant in aid.”)  When the states have cut back, colleges have turned to the Feds through the indirect means of raising tuition, much of which is funded by Federal financial aid.

That would be the Federal financial aid that is coming under attack, by the way.  This summer the six-month graduation payment deferment is supposed to go away, the interest rate on Federal student loans is supposed to double, and students who place into college through the “ability to benefit” rules won’t be eligible for aid at all.  Why on earth you’d want to start dunning new grads for loan payments in the midst of a recession is beyond me, but there it is.  

So the “on notice” thing strikes me as a bit late.  

If they want to do something intelligent and effective about cost control, on the other hand, I have a few suggestions.  Plagiarize at will, folks.

First, don’t make the classic mistake of looking at tuition increases as percentages.  Loan payments are dollar amounts, so we should look at tuition increases in dollar amounts.  For example, let’s compare Rich Kid U with Eastern Podunk Community College.  RKU charges forty thousand a year, and EPCC charges four thousand a year.  RKU announces that it feels the pain of its graduates struggling with student loan debt, so it holds the tuition increase to three percent this year.  EPCC continues to reel from state cuts, so it raises tuition six percent.  In percentage terms, it looks like EPCC is the problem.

But it isn’t.  That three percent at RKU amounts to $1200.  The six percent at EPCC amounts to $240.  RKU is the problem.  EPCC is part of the solution.

Second, kill the credit hour dead.  I’ve addressed this many times before, so I’ll keep it short here.  If you define your product in units of time, then you will never -- by definition -- increase productivity.  Ever.  Without productivity gains, cost increases in excess of inflation aren’t just predictable; they’re mathematically inevitable.  (Economists call it “Baumol’s cost disease.”)

Third, resist the temptation to replace tuition with tithes.  Out in California, Mark Yudof has generated some sympathetic press by proposing that students pay after the fact, using a set percentage of their post-graduation salaries.  The humanitarian appeal is based on the fact that new grads usually don’t make much money, so using a percentage cuts some slack in the early years.

But the tithe model has serious flaws.  First, and most basically, it decouples the amount of aid received from the amount paid back.  Over time, that’ll start to smell like welfare, and we know what happens to welfare programs.  Second, it assumes -- falsely -- that everyone who gets loans actually graduates.  As annoying as loan payments are a decade down the line, they’re that much worse if you don’t even have a degree to show for them.  Finally, Americans’ credit card habits suggest that “buy now, pay later” leads to overspending now.  In the moment, the tithe model can resemble a blank check.  This does not bode well for cost control.

The way to control costs is to cap aid upfront, and to require colleges that charge above that to make up the difference themselves whenever there’s demonstrated need.  If aid is capped at, say, ten thousand a year for a full-time student, then EPCC can do its six percent increase without much issue, but RKU has to ask itself some hard questions.  

Finally, we need to make a decision as a polity.  Do we want to direct resources to students to use as free agents, accreting credits wherever and however they see fit?  Or do we want high-quality, low-cost institutions?  Because it’s one or the other.

The consumerist, “DIY U” model suggests funneling aid through students, and letting them choose what they want.  As a consequence, institutions lose their own funding.  They make up the difference through a combination of service cuts and cost increases.  

If we want high-quality, low-cost institutions, we have to subsidize them.  This is just a basic fact of life.  

For evidence, look at the for-profits.  They charge considerably more than the publics, and offer a good bit less.  That’s what the absence of a subsidy forces.  The ideologically-driven fantasy that the market will magically make everything better simply doesn’t work for public goods, like having an educated workforce and citizenry.  That’s because they capture too little of the positive externalities they generate.

You want quality colleges at affordable tuition levels?  Me, too.  It’s not that hard.  Break the credit hour, abandon the fantasies of market-driven bounty and/or titheing, and commit to subsidies that actually meet the need.  Yes, there are some basic structural reforms within higher ed that would help -- longtime readers know a few of my favorites -- but first things first.  If you want affordability, you have to spread costs around.  

What you absolutely do NOT do is move to a consumer model.  The last thirty years provide ample evidence of that.  I know this isn’t popular in the culture right now, but institutions matter.  Resorting to the quasi-libertarian fantasy of the almighty empowered consumer will result, inevitably, in systematically underfunded public goods.  There’s a philosophical position that says “and a good thing, too...” -- let’s have that debate.  But let’s have the debate that acknowledges the costs, rather than one presuming some sort of magical harmony of interest.  If you tell public colleges to act like businesses, don’t complain when they act like the colleges that actually are.

Excellent point on dollar increases vs percentage increases.

Others have pointed out that DD does not link often to his own posts. I've gathered some links to his past writings in the hope that parties with power happen upon the post and are interested in more information about why the credit hour imposes a limit by definition on productivity.

8/26/2009 - some initial ideas about credit hour and productivity

6/21/2010 - concerns about a mandated credit hour definition

11/18/2010 - several cost concerns, including more ideas about credit hours

6/17/2011 - followup to 6/21/10 about blocking a standard definition of the credit hour.

Re: "plagiarize at will", perhaps the ideas can be copied with attribution? Maybe?
What DD has written is hard for me to relate to and understand since I graduated 40 years ago and my children graduated 20 years ago. Excuse me please if I sound like an old fogey, but I would like to share something from the early 60s. Take from it what is pertinent today.

The student loan in 1962 was the Educational Defense Student Loan started by President Eisenhower. The loan came from the Federal Government, not a bank loan guaranteed by the Federal Government.

It was paid directly to the college to disperse as the college wanted (Pell grants of today?). It was a need based loan. I think the college made the decision who got the loan. There was a cap on how much money a student could get each semester. My summer semester my cap was 150$ which paid my books and tuition. I think the cap was set at books and tuition.

The money helped a lot. If a student taught for 5 years, 1/2 the loan was forgiven. The student paid the loan payment after graduation (or quitting for 2 years directly to the Federal Government. Interest was 4%.

When my oldest child started college and got a student loan, he got it from a bank and the Federal Government guaranteed the loan. The interest rate was 8%. I don't remember any of the other details - there were so many.

I'm all for capitalism, but when some financial institutions get in the loan business handing out money and their loans are guaranteed by the Federal Government and there are no enforced regulations as to the credit worthiness of the loans, bad financial practices can happen.

I have no answers, but I suggest that student loans not be made by financial institutions unless they are heavily regulated by govt. and the govt agency regulating has teeth to make regulations stick. Same with home loans. Give the regulating bodies teeth (rules and consequences, sufficient personnel to investigate abuses of regulations) to stop abuses when they start.

That is my two cents' worth.
My stepson is transferring from a CC to a four-year public college next quarter. His parents can't help much with the cost of education, but we're counseling him to avoid student loan debt as much as possible. It's not working.

A huge part of the problem is living expenses, which aren't real to him because he will work, and get scholarships and loans. So he's making choices like a single room instead of a double in the shiny new building Playstations and single bathrooms, rather than doubling up in a bunker where there was one TV, on the top floor, and horrible furniture. Since none of us are paying much for this, we don't get much say.

I know that residential colleges make money on housing and meal plans. I wish they didn't create such plush, attractive options for an age group that was raised with platitudes telling them they deserve instant gratification, purchased with delayed debt. I don't want him to live in a bunker, but I don't think he can afford this option.

I'd rather those resources went into exceptional teaching.
What political objective did Obama meet by delivering this line?

Why was he apparently unconcerned about offending some of his core constituents?
Break the credit hour I'd also say that a systematic reduction in gen ed requirements would accomplish the same thing at some institutions. I came from a school that required 17 GE courses for students getting a B.S. That's about 52 semester units give or take - nearly half of the degree (120 units). Cut that in half and you'd open up enough capacity to get 5 kids through for the price of 4 under the current regime. It would be disruptive to the funding of many of the evergreen departments but it would be a boon to the science and math students. Our engineering students would be so happy they'd probably dance in the streets. If you're looking for additional capacity without additional cost, that's where I'd start.
I'm all for capitalism, but when some financial institutions get in the loan business handing out money and their loans are guaranteed by the Federal Government and there are no enforced regulations as to the credit worthiness of the loans, bad financial practices can happen.

Up here in Canada, student loans seem to be much the same (made by a bank, guaranteed by the government, with interest covered while you are in school and for a bit of time after).

Despite having a pretty good payback record (98% — much better than the average business loan), students are charged a very high rate of interest because they have no credit history (and so are a bad risk, according to the banks). Which doesn't make sense, as statistically they are a damned good risk.

Cynically, I don't believe the banks; I think that they charge a lot because they are lending to inexperienced borrowers who (a) don't know enough about finances, and (b) need the money to get a degree to get a decent job. And even if a student does default, the amount of the loan is covered by the government so there's no real financial risk.

Personally, I think the loan should be from the government, if the government is guaranteeing it. Collect it as a surcharge on income tax for a few years, until it is paid off, prorated so someone with a good job has larger payments and pays it off faster, while someone with a crap job doesn't have to choose between loan payments and food.
@Edmund Dantes: you're just now realizing that Obama is obsessed with shivving his allies? Your question is his answer; to Obama, the act of angering your allies is synonymous with "leadership." It's his nature to denigrate anyone who associates with him and suck up to people who try to harm him. I have no idea why, but the pattern is too consistent to be anything but that.
Increase the number of students in a class and you increase productivity willy nilly. Been there, had that done to me.
Your description of education as a public good with positive externalities is a good one. We should hammer that point home.

There is also a principal-agent problem because of asymmetric information. The school knows the economic value of its knowledge and degree more accurately than the potential student. In a private goods market, sellers who lie will generally crowd out sellers who don't (witness the market for used cars). See Akerlof (1970) "The Market for Lemons", Quarterly Journal of Economics.
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