Is There a College Tuition Bubble?

Andrew Gillin at the Center for College Affordability and Productivity released an interesting paper this week exploring the parallels between the housing bubble and ever-rising college tuition.

The comparison is imperfect, because the higher education market lacks the crucial leavening ingredient of naked greed--you can't get rich quick by speculating on a college education, since you can't sell your ownership of the asset. And while student loans are often securitized, government guarantees against default reduce the dynamic of banks and rating agencies conspiring to develop and sell exotic, over-valued financial instruments with a hidden risk of collapse.

But, as Gillin explains, there are a number of similarities. As with the (recent) mortgage market, higher education lenders have little incentive to enforce lending standards, since the government pays off on loans that go bad. Student loan interest rates, like mortgages, also enjoy substantial public subsidies. As a result, demand increases and more people want to buy higher education than otherwise would.

This, of course, is precisely the point, and there's a powerful societal and moral argument for expanding access to higher education. But it has consequences that ultimately play out in the form of inflated tuition, largely because higher education doesn't behave like a normal market.

When the government subsidizes a normal market, the end result is greater production and consumption with both the producer and consumer getting some of the government money. But that depends on a reasonably elastic supply--the ability and willingness of the producer to ramp up production to meet increased, subsidy-driven demand.

Higher education doesn't work that way--the sector is substantially unable and unwilling to increase supply, particularly in the short term. Unable because there are major regulatory and cost barriers to entry--building a new college or university is massively expensive and time-consuming, and involves jumping through a lengthy, hoop-laden accreditation process. Unwilling because the vast majority of higher education institutions aren't profit-maximizing institutions--they're prestige maximizers. Their response to increased demand is to keep production (enrollment) constant, thus improving their admissions selectivity and the "caliber" of student they educate and as a result becoming a more elite institution. Meanwhile, the lack of objective information about quality makes price and quality synonmous, so institutions have to raise prices in order to compete.

So in the end, all the subsidies ultimatlely go to the institutions in the form of increased prices, and the consumer is no better off than when he or she started. Consumers who lack subsidies, meanwhile (mostly middle-income students who don't qualify for need-based financial aid) are worse off. So political pressure mounts to increase subsidies through aid, interest rate reductions, etc. in order to amelioriate spiralling prices, and the whole cycle repeats itself.

This can't go on forever, because there's a limit to how much money the government can or will spend to subsidize higher education. In the meantime, the negative impact of constantly increasing higher education costs are being hidden in part by an overly-simplistic conception of what higher education financial aid is for.

The goal of aid is nearly always framed as access, as in "all students deserve an opportunity to go to college." The problem (only in the sense of an already hard-won success) is that the large majority (nearly 80%) of high school graduates are in fact going to college, a number that has changed little even as costs have risen, a number which is (more or less by definition) an understatement of the percent of people who should go to college who do.

The real issues of concern relating to increasing college prices are threefold:

1) Where students go to college
2) Whether they graduate
3) What happens to them once they leave

Rising prices push non-wealthy students out of presitigous, expensive four-year colleges into cheaper, less-prestigous four-year colleges, and out of the four-year sector into the two-year sector. They also reduce the chances that people who begin college will graduate, because they force students to work nearly full-time (a major risk factor for dropping out) and increase the cost in the cost/benefit equation of staying in school. Finally, they force more borrowing, which narrows post-graduation (or non-graduation) career choices, increases the risk of costly loan default, and simply takes money out of the pocket of people who need it more than their alma mater.

A crucial element of solving the college cost problem lies with policymakers recognizing the link between rising costs and the lack of data about quality, and talking about the issue in more than just simple access terms.

Great idea! But haven't we heard this before?

Christina Samuels at EdWeek turns in another great piece on special education, this time focusing on the over-representation of minority students in special education, particularly in disabilities that require the most subjective assessments. The U.S. Civil Rights Commission will be looking into the issue over the next year and hopefully issue some solid recommendations to address the problem.

Of course, the National Academies looked into this back in 2002 and recommended that teachers be better trained to identify students with disabilities, that resources should be focused on early intervention, and that preschool could provide needed help and support for low-income students before they enter school. I’m not sure what else the Civil Rights Commission will come up with, except maybe some ideas on how to make sure these steps are actually taken.

Our take on this here.

Speaking as Someone...

...who used to regularly take the Greyhound bus from Binghamton to Schenectady back in college, I can tell you that this is just about right.

Pre-K Nearly Everyday

Preschool policy is constantly hitting the headlines these days, this time in NJ. Check out Education Sector's policy course curriculum unit on pre-K policy, great for education and public policy students and anyone wanting to learn about the key issues in the pre-k debates. And if you tell us what you think, you could win a $40 Border's gift card. Good timing for the holidays.

Muddying the Waters

In a column about Blaine Amendments and the efforts of a former Liberty University official to open religiously-oriented charter schools in New York City, George Will writes:

Now he wants to create a charter school -- a public school enjoying considerable autonomy from, among other burdens, teachers unions. It would be affiliated with his New Horizon Church.

This kind of reflexive anti-teachers union commentary make things more difficult for everyone.

It's true that there are places, like Los Angeles and Detroit, where teachers unions are actively on the wrong side of the charter school issue. But how do you write about charters, unions, and New York City without noting that the United Federation of Teachers has opened its own charter school?

Moreover, it's simply not the case that a desire to evade dealing with unions is the principal force, or even a significant factor, driving people to open charter schools. A lot of the "burdens" they're trying avoid come from adminisration, not teachers. Mostly they're just really motivated to create and run a public school, because they see it as a way to make the world a better place.

But that depth of understanding is beyond George Will, who never misses an opportunity to take a shot at labor. I've been free with criticism of unions on this blog and elsewhere, but there's a big difference between being a union critic and a union opponent. This kind of rhetoric just politicizes and polarizes the issue, which in turn makes it harder to create and sustain charter schools--an agenda Will supports.

Christina Hoff Sommers: New Success for Girls Clearly a Horrible National Crisis

Got an email from AEI today which begins as follows:

The New York Times reported yesterday that girls swept the team and individual honors for the prestigious Siemens Competition in Math, Science, and Technology. Two 17-year-old girls split first prize, a $100,000 scholarship, for their work on creating a molecule to block the reproduction of drug-resistant tuberculosis bacteria. Young women have also been doing well in the older contest, the Intel Science Talent Search (formerly the Westinghouse Science Talent Search). Both the accomplishments of young women generally and the progress women are making in the sciences are subjects AEI resident scholar Christina Hoff Sommers has been studying. In October, she hosted a conference at AEI on the National Academy of Sciences report that examined the claim that women are the victims of widespread bias in the fields of engineering and science. Her book, The War against Boys: How Misguided Feminism Is Harming Our Young Men (Touchstone, 2000), looks at the gains young women have been making and argues that society needs to pay attention to how boys are faring as well.

Let me get this straight: Women are vastly under-represented in the sciences, particularly at the highest levels. This is substantially a function of the fact that girls have traditionally been steered away from the sciences, both explicitly but also as a result of broader social norms. As a result, boys have traditionally dominated things like science fairs. Now, in 2007, for the first time ever, girls sweep the top awards at a prestigous science fair. In the past, when boys won all these awards, it was seen as unremarkable at best and at worst as evidence that girls were either unsuited for or ininterested in the sciences.

And AEI and Christina Hoff Sommers see this as further evidence that we must immediately start paying more attention to boys. I assume that when the first Fortune 500 company hired a black CEO, similar memos were circulated announcing the end of racism and the need to address the burgeoning crisis of anti-white discrimination.

President Bush's Secret $5 Billion Anti-Poverty Program

The Bush Administration hasn't exactly been a friend to low-income Americans. Vetoing health insurance for poor children, undermining labor protections, squandering resources on tax cuts for the super-rich--the list goes on. But as David Hoff reports in Education Week, there's one area where both the President and Congress have consistently pursued what can only be described as progressive public policy focused on the welfare of the neediest children: the formulas used to distribute Title I funding.

Title I is the main funding program under No Child Left Behind, and as such has been highly controversial, because of wide-spread perception that NCLB is "under-funded." This largely a matter of perspective--Title I gets a lot more money, almost $5 billion per year, than it did pre-NCLB. But Title I funding has also fallen far short (over $10 billion in the current year) of what Congress could have provided under the law's authorization targets. Congressional Democrats see this as a broken promise, and by any measure it's a wasted opportunity to build bipartisan support for the law.

But lost in the debate over total Title I funding has been the issue of how Title I money is distributed. Before NCLB, Title I funds were squandered using the so-called "Basic" formula, which essentially gave districts a flat dollar amount per poor student, even if district poverty rates were very low. That's a good strategy for spreading funds among as many Congressional districts as possible, but a lousy way to target resources to those who need it most.

Since NCLB, all the considerable new money has gone into a different set of formulas that are far more targeted, either by limiting eligibility to districts with a minimum poverty rate, or by increasing funding per low-income student on a sliding scale tied to poverty rates. The new formulas also give states incentives to distribute additional state and local resources based on poverty.

As Ed Sector wrote in a policy brief last year, the result has been substantial new funding targeted to the progressive ("Targeted," "Concentration," and "Incentive") formulas (FY 2007 looks much the same):





























There's no secret political calculus here; much of the impetus for this reform back in 2001 came from Democrats like Senators Kennedy, Landrieu, and Bayh, along with Representatives George Miller, Adam Smith and Cal Dooley. The net effect is to throw hundreds of millions of dollars into places like New York City and reduce what would have otherwise gone to Republican-leaning suburbs.

And while President Bush, to his discredit, vetoed the recent education and labor appropriations bill that would have provided the first major increase in Title I funding since 2003, both his proposed budget, that bill, and all the other funding proposals from Democrats and Republicans alike have stuck to principle of focusing new federal education resources on the districts with the most poor students. If you believe school funding levels matter, this has made a significant difference in the lives of the most disadvantaged children. In a time when such consensus is hard to come by, this deserves more attention.

Default Rate Amendment a Step in the Right Direction

Inside Higher Ed’s article on student loan “cohort default rates”—the percent of students not repaying their student loans as calculated by the Department of Education—is well worth reading for a good background on how we ended up with the current 2-year calculation. It also talks about the potential implications of a proposed amendment by Rep. Raul Grijalva to change the calculation to a 3-year default rate. Currently, the cohort default rate is calculated as the percent of students who default in the first two years of repayment—the proposed amendment would extend this to the first three years of repayment. Adding another year to the calculation could increase the default rate by as much as 62 percent, putting some schools at risk of losing their eligibility to participate in the student loan program.

Possibly the most interesting part of the article is the extensive comments section at the bottom, which shows the contentious nature not just of this amendment, but of student lending and defaults in general. A few selections:

As a colleague once observed back in the early 90s, institutions don’t default, borrowers do. The observation is still valid today.

There are definitely suspect people in every profession, but this pointing the finger business has got to stop. You can find many ways to calculate the default rate, but instead of wasting the time of the congress to manipulate these numbers, why don’t they take that time to fix the economy? Stop pointing fingers in the wrong direction. Instead, see what you can do to improve your immediate area.

If enacted, this will put financial aid offices on the defensive for matters they have little if any control over. The schools who this type of policy punishes are inevitably schools who admit a large number of students who have been poorly served by the K-12 system and from lower economic backgrounds (often the same group).

Low default rates are not evidence that elite universities are good schools, they’re evidence that their students have economic advantages to begin with. High default rates reflect the opposite.

The highly charged nature of this debate is even more reason to have more, and better, information on loan defaults. Yes, there are student risk factors that impact default rates, but as Education Sector’s recent policy brief showed, total debt levels also have a big impact, and institutions can go a long way to ameliorating that risk factor.

In the end, default rates are a symptom, though, not the problem. To truly address the problem of growing student debt, we need to figure out a way to keep college costs in line with inflation. Until that happens, all federal student debt policy will be just a stopgap solution.