Want to reduce college costs? Get Colleges to Pay for it
Note: The views expressed in this article are my views alone and not the views of my employer or anyone else.
The most important issue in higher education today is affordability. In 2016, student loan debt hit a record high of $1.3 trillion [1], a number only set to grow higher in the coming years. Some argue that tuition is high because the government isn’t funding higher education, whereas others say that colleges have become wasteful with money, largely because of their guaranteed income from the federal student loan program.
The real question is why colleges have so little skin in the game. If you work in consulting, you are measured by the difference in performances of the companies you consulted for before and after. When I was a tutor, I was measured on differential performance of my students. I was considered a good tutor if I raised students grades and made them learn more. In the private sector, this is a general practice — Your caliber is pegged to your performance.
In higher education today, a university is considered “prestigious” if it can select highly qualified students and basically not damage them. That might sound like an exaggeration but it really isn’t. Consider that in the US News and World Report rankings, one of the measures the universities are ranked on is their incoming freshman class. This is the only industry that I am aware of where you are measured based on your starting point. There are other post-graduation measures such as graduation rates, starting salaries, etc. but those measures give credit to the university instead of the students who are actually doing the work. It is the student’s responsibility to make sure that their degree pays off. There are also some very perverse incentives for the cost structure. A college is ranked higher if it spends more per student; it is basically rewarded for inefficiency. The methodology says that this is because more resources leads to better outcomes for students [2]. This might be true but colleges are spending money on several non-academic resources that are unlikely to make a difference for the students.
The central problem though is that too many people go to college. College is not for everybody and if you need any evidence just look at the vast numbers of underemployed college graduates [3]. Lower Ranked Non-Profit & For-Profit Colleges have fed this problem by taking in students who they know are not cut out for college. Since their stream of students and revenue is almost guaranteed, these colleges have no short term incentive to care about student performance and control costs.
The best way to fix this problem is to change the way colleges collect tuition. Instead of collecting tuition upfront, colleges should charge a percentage of a student’s income after graduation. Rather than charging fees upfront, the college would charge, for example, 25% of the student’s income for 4 years after graduation or maybe 5% over 20 years. There currently is a Federal income based repayment plan but that puts the liability on the government [4]. The government is on the hook if the degree doesn’t pay off. This model puts the onerous on the university. This would do four things:
1. Colleges would have more skin in the game and therefore the students they do admit will not be left on their own. With this, the college will have a direct vested interest in making sure that the student succeeds, graduates and finds a good job.
2. Since the university is being held more accountable for each student it takes in, it will take in less students and thus rebalance the number of students that should go to college.
3. It would force universities to seriously consider every dollar that they spend since the revenue is not guaranteed. This would remove a lot of the administrative bloat and the excessive spending on campus development.
4. It would truly be need blind since the students current economic status does not impact tuition revenue. This would level the playing field for affording college.
Now despite all of these upsides. There are downsides:
1. American universities are research universities and they work on this simple principle — The undergrads pay for the PhDs. Research is a long term investment for a school. One that they are less tempted to make if they are worried about “the bottom line”. One way to fix that would be to increase government spending on basic research and give greater incentives to companies for research thereby closing the gap.
2. Students that are less academically gifted, who pick less lucrative majors or career paths in life will be seen as a liability for the university. Part of this is good in that if somebody is not cut out for college, the colleges will filter them out unlike today. But there are downsides in that colleges should not only pick winners and it should play a role in giving back to our society. Colleges can fix this by making the payments over a longer period of time. If the student is paying 5% over 20 years, then the school is able to cushion the shocks better.
3. If a student goes to Grad School mid payment plan, that can mess up the cash flows for the Undergraduate School. A simple solution would be to increase the payment percentage or time horizon post-graduation as a disincentive similar to the current system of accruing interest on a loan. This system will force students and employers to seriously consider the value of graduate degrees and not just make them weed-outs for job postings.
In short, the upsides are enormous and there are workable solutions to any downsides. The overarching issue more than anything is getting universities to sign on to this. Universities have many entrenched interests and this new way of funding rips into that completely. This is where an incremental approach is needed. Some schools will need to be pioneers and set the trend for others.
There currently is a small scale example of this with a placed called App Academy. This is a non-degree awarding school where students learn to code over a 12 week period. There are multiple payment plans but one of them is a deferred payment plan which is based on the student’s income after graduation [5]. This is a similar to the type of model that I described but there are differences. Every school can have their own modification of this idea but the basic concept is this — colleges need to have more skin in the game!
Sources:
1. https://debtclock.tv/world/us/student-loan/
2. https://www.usnews.com/education/best-colleges/articles/how-us-news-calculated-the-rankings
4. https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven
