Improving the Higher Ed Market

One of the frustrating thing about working on higher education policy issues is that DC is pretty much a one-issue town: all anyone cares about is costs. From the average politician's perspective, our higher education system is fantastic with one exception: it costs too much, and costs more every year. This is reflected in the version of the Higher Education Act now moving toward final passage up on the Hill, with lots of new provisions designed to hold down the cost of college. Congress has thrown huge amounts of money at the problem over the last year or so by boosting funding for Pell grants and lowering student loan interest rates. Now there are proposals to shame colleges that have the highest annual tuition increases and force them create internal task forces to ask themselves tough, probing questions about why they made the decision they just made. Because if there's one thing colleges don't have enough of, it's committees.

None of these things are going to work. There's no amount of money that the government can throw into student aid that the higher education system can't absorb, and then some. The only way to hold down costs in the long run is to change the system of incentives under which individual colleges make pricing decisions. Currently, price and quality are seen as synonymous in the market. Colleges have every incentive to raise prices and none to lower them--in fact, they can't lower them, because it would reduce demand. High barriers to entering the traditional market keep price-undercutting competitors out, and students keep coming because there's almost no amount of money you could pay for a four-year degree that's not worth it over the course of a lifetime.

Higher education is also in the peculiar position of being dominated by non-profits that sell extremely valuable and expensive services for lots of money. Being non-profit means there's no incentive to increase margins by being more efficient; all the incentives run toward simply raising as much money from as many sources as possible--students, governments, and donors, primarily--and spending it willy-nilly.

The key then, is to introduce more quality information into the market and shift from a price=quality dynamic to a value = quality / price dynamic, which is the way normal markets work. Unfortunately, the DC higher educaton lobby has pressured Congress into putting a series of provisions into HEA that would limit the ability of the federal government to produce such information. In other words, Congress is actually making it harder to solve the expensive cost problem it's so worried about.

For more, see this ($) from yrs truly in today's Chronicle of Higher Education.