Merit Aid is a Lie

In an article titled "To Keep Students, Colleges Cut Anything But Aid," the New York Times reports that:

With the economy forcing budget cuts and layoffs in higher education, colleges and universities might be expected to be cutting financial aid. But no. Students considering a wide range of private schools, as well as those who are already enrolled, can expect to get more aid this year, not less. The increases highlight the hand-to-mouth existence of many of the nation’s smaller and less well-known institutions. With only tiny endowments, they need full enrollment to survive, and they are anxious to prevent top students from going elsewhere.

There's nothing factually wrong with the article, but it's also a good example of how language can obscure meaning. The practice the Times describes, which is used to some extent by the vast majority of colleges, is called tuition discounting--charging students less than full tuition. This is what economists call "price discrimination." In a normal market, price is determined at the intersection of supply and demand. But to maximize revenue, a firm doesn't want to charge everyone the equilibrium price. It wants to carefully walk up the demand curve and charge each individual customer the most that they're willing to pay. This is normally hard to do, because the amount of money a customer is willing to pay is, in part, a function of how much money they have, and most economic transactions happen at arm's length--when I walk into a car dealership to haggle, the salesman doesn't know if I'm living hand-to-mouth or if I hit the Powerball jackpot last week.

But colleges have an unusual advantage in their market, because in order to be eligible for financial aid, you have to fill out a long form disclosing your income and assets, and only then does the college decide how much to charge you. This makes price discrimination much easier. (Imagine if you had to do that to buy a car!) The good thing is that this ends up being a fairly progressive and economically efficient system--rich students pay more than poor. But it's really not accurate to say that colleges are spending money on financial aid when they regularly discount their price below a published tuition level that is actually far above the equilibrium market  price. If, for example, Georgetown raised its tuition to $100,000 per year and then charged everyone exactly the same amount that it currently does, it would report vast new aid "expenditures" that aren't real. Nor would students actually be "getting more aid." 

More pernicious is the practice of dividing all financial aid into two categories: "need-based" and "merit" aid. Most people are in the habit of believing that words mean what they appear to mean, and so they assume that "need-based" aid is given to students who meet some generally-accepted standard of financial neediness, while "merit" aid is given to students who exhibit some kind of academic or other merit. In fact, only the former is true. Here's one college official describing what merit aid actually means, in the Times article:

At Dickinson College, in Carlisle, Pa., for example, merit aid, at its highest, made up about 22 percent of the financial-assistance pie. The share declined to 6 percent two years ago, but crept up to 7 percent last year and will increase to 8 percent for next year’s entering class. “The families I’m concerned about are the near-misses — the $90,000 to $130,000 families, who almost qualify for aid but not quite,” said Robert J. Massa, the college’s vice president for enrollment. “Those are the families I want to target more merit-based aid to.”

Very clearly, there is nothing "merit-based" about that aid. It's just financial aid for the middle-  and upper-middle class, disbursed as part of Dickinson's price discrimination program. Which is not to say there is no actual merit aid, there is, but I suspect the vast majority of the aid labelled as "merit" is actually disbursed for reasons like this. I personally know a very wealthy lawyer whose academically marginal son was offered "merit" aid at a number of private colleges that were obviously keen to enroll a student whose parents would pay close to full freight. "We were surprised," he told me. "My son's not a very good student!"

The problem with falsely describing this as "merit aid" is that it makes discussions of equity in financial aid policy more difficult to have. While financial aid spending has (caveats above notwithstanding) increased significantly in recent years, a smaller proportion of those dollars are going to true need-based aid. But if you complain about this, as I am known to do, the reaction is often "What's wrong with merit? Shouldn't we reward excellence? Isn't that what this great nation is all about?" Followed by, depending on the person, a long disquisition on how the moral fiber of America is weakening and socialism is just around the corner (or has long since arrived.)

The point being, let's call things what they actually are.   

 

Charity Cynic

The Obama budget has already received vociferous opposition on its proposal to raise billions of dollars in additional revenue by capping the tax deduction for charitable contributions at 28 percent. One tv pundit predicted horrible unintended consequences and that contributions would fall "off a cliff." That analysis is actually dead wrong, and the policy is really quite brilliant.

Individuals who itemize their taxes are eligible to reduce their tax liability for charitable donations by the percent of income they pay in taxes. In other words, someone in the highest tax bracket (35 percent) is eligible to cut their taxes by 35 percent for every dollar they give to charity, up to 50 percent of their adjusted gross income. Someone in lower brackets reduces their liabilities at lower levels. Obama's proposal would cap the reductions at 28%, even for those in higher income brackets.

The chart at left (from this NBER paper) shows why this proposal will work for both the short- and long-term. It depicts charitable giving over time sorted by income. Pay particular attention to the black and red lines, because those are the income groups that will be most affected by Obama's proposed changes (the tax will technically hit those with incomes $250,000 and above, but the Alternative Minimum Tax makes many of these filers pay the 28% rate already). Note that the black and red lines take significant dips and dives. These are not random.

Upon taking office in 1981, President Reagan lowered the highest income tax bracket from 70 to 50 percent. As this rate fell, high-income tax filers had lower tax incentives to donate to charity. In 1986, Reagan proposed lowering the rate again, this time to 33 percent. Before the tax provisions took effect but while the proposal was being discussed, charitable contributions from high-income tax filers rose. That's the spike you see in 1986. The rate lowered again the following year, and it stayed relatively constant until 1993. President Clinton had campaigned on raising the highest-income tax brackets, and he set about to do that once in office. Note the big giving spikes around 1992 and 1993. President George W. Bush successfully lowered the top rate in 2002, and again, the giving rate responded.

All this is to say that tax policy works in the short-term. Givers are very responsive to changes in charitable deduction rates, and they modify the timing of their gifts. If President Obama wants to stimulate giving in the short-term, lowering the rate on deductions is the best way to do it. If donors have the option of deducting 35% of their tax liability this year or 28% next year, they're going to do it now. His proposal actually stimulates giving in the short-term.

So what about the long-term? Actually, there's not a whole lot to worry about here either. Americans have historically been the most generous donors of all industrialized societies, and in the last 50 years, growth in charitable giving per capita has outpaced GDP per capita. Some individual non-profits may have a hard time attracting donors, but on the macro level we'll be just fine. A 2006 survey found that only seven percent of high-income donors would dramatically reduce their giving if the tax benefits fell to zero. Twenty-eight is a long way from zero.

Obama's proposal stimulates short-term giving (which we desperately need), it shouldn't hurt giving in the long run, and it will bring in needed funds to the federal budget (that will be directed to health care). It's an incredibly brilliant scheme.

Department of Corrections

I put up a post yesterday saying that Secretary of Education Arne Duncan has signed up several people for senior slots in the department. I took the post down after I learned more details about their status. Here's where thing stand:

Marshall (Mike) Smith, head of the education program at the William and Flora Hewlett Foundation until last November and acting deputy secretary during the Clinton era (and, until recently, an Education Sector board member), has signed on for a year or two as a senior counselor to Duncan and is currently playing a key role on the education portion of the stimulus package.

Jon Schnur, co-founder and CEO of the social entrepreneur enterprise New Leaders for New Schools and a former aide to Vice President Al Gore, is on leave from New Leaders and is serving as a senior consultant to Secretary Duncan.

And Bob Shireman, founder of The Institute for College Access & Success and a long-time Washington higher education wonk, is on leave from his organization to advise Secretary Duncan on higher education.

Stay tuned. The stimulus package and the Obama budget suggest the Education Department is going to have a very high profile.

Time to Take a Stand

President Obama's Access and Completion Incentive Fund, which will help large numbers of low-income students graduate from college, is part of a larger package of reforms including the elimination of the Federal Family Education Loan Program (FFEL)--that is, the program in which the federal government guarantees and subsidizes student loans made by banks and other for-profit companies. Under the plan, the federal government would lend the money directly, as it already does for many students. The savings would be used to help fund the completion initiative and transform the Pell Grant program from a "discretionary" program subject to the whims of the annual appropriations process into a "mandatory" program with permanent funding and the grants indexed to inflation. All in all, this would be a huge boon for college students in need. 

But early word is that the past 24 hours have generated an enormous amount of counter-pressure from the student loan industry. Given what a good deal they're getting, it's not hard to understand why. From today's New York Times:

The government already pays a subsidy to banks and others making what are called federally guaranteed student loans. It also covers nearly all the losses if a student defaults on such a loan. In the current economic crisis, it is buying the loans, thereby providing the banks with capital for new lending. That has caused critics to say they wonder whether a middleman is really needed in this business.

“What has happened is, we set up a system in which we ensure liquidity by allowing them to dump their paper on us,” said Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers. If lenders rely on the government for money to make more loans, he continued, “What is the purpose of the loan industry?”

In other words, we now have a system that works like this: The federal government hands for-profit lenders some money. The lenders put some of that money in their pocket and hand the rest to students in the form of loans. If the students don't pay it back, the federal government hands the for-profit lenders some more money to cover the loss. If the students do pay it back, the for-profit lenders put some more of that money in their pocket and hand the rest to the federal government. Rinse, repeat. It's nice work if you can get it. 

The loan industry argues that it provides better "service" than the federal direct lending program. I am skeptical, for I was a student borrower once. For the first five years, the loan was held by a bank. Then I switched over to the federal direct lending program. In both cases, the "service" consisted of: A) Providing me with a mailing address where I was supposed to send my monthly check, and B) Cashing the check. Keep in mind that this is the same industry that recently used its government-subsidized profits to lobby the government to make sure that students can't discharge their loans in bankruptcy. Of course, they kept that option open for themselves, so now we have students in desperate financial straights who can't get out debt to companies that have walked away from all their own debt.  

It will be interesting to see how higher education responds to this proposal. It's easy to lobby for more Pell grants when there are no complications or downsides. Now it means going up against an industry with which higher education has long had a cozy--perhaps too cozy--relationship. Many college financial aid officers are said to support the FFEL program. Keep in mind these are the same people who were recently caught up in a series of embarassing scandals in which the loan industry used some of its government-subsidized profits to wine and dine college loan officers or even give them stock and/or put them directly on the payroll. 

Moments like this don't come along very often. Finally putting the Pell grant program on secure footing while helping more students graduate would pay of for students and society alike. It's time for everyone involved to stand up and be counted. 

See more from the always-valuable Higher Ed Watch here, while Matt Yglesias hits the politics:

Rather than a debate between progressives who want the government to provide a public service and conservatives who want the service to exist just insofar as it can be supported by the private market, we have a debate where both sides agree that the service ought to exist but the right thinks it’s important that it be done in a less efficient more costly manner because doing it that way generates profits for people who in turn give them money in some kind of nutty sense is supposed to preserve the integrity of the private sector.

A Brand New Day for Federal Higher Education Funding

President Obama's FY 2010 Budget Proposal includes the following:

Focuses on College Completion. It is not enough for the Nation to enroll more students in college; we also need to graduate more students from college. A few States and institutions have begun to experiment with these approaches, but there is much more they can do. The Budget includes a new five-year, $2.5 billion Access and
Completion Incentive Fund to support innovative State efforts to help low-income students succeed and complete their college education. The program will include a rigorous evaluation component to ensure that we learn from what works.

If enacted, this could be a very big deal. The federal government provides higher education with a lot of money, but nearly every penny comes in the form of tax preferences, research funding, and student financial aid. Back in the late '60s and early '70s, there was talk of giving institutions direct subsidies, much as the feds had recently begun funding K-12 schools. Instead, lawmakers created the Pell grant and federal student loan program. Ever since, national higher education policy has been governed by a well-understood principle: The feds don't give colleges any money to directly support education, and in exchange the feds don't have any say in what colleges do.

This could alter that relationship, perhaps fundamentally. And for that reason, a lot of pressure will be brought to bear in the coming months to send the Access and Completion Incentive Fund to a quiet death. You won't read about in the newspapers, because nobody wants to be seen as opposing college completion, and that's not how lobbyists who know what they're doing operate. But there are plenty of folks in the higher education world who would gladly turn down $2.5 billion in order to preserve the sacred principles of institutional autonomy and federal non-interference. And if there's one thing they have in common, it's this: they're not the people educating low-income college students.

Higher education likes to speak with one voice, because that's the smart thing to do, but in reality there are all kinds of divergent interests at play. Institutions that are in the business of maintaining admissions policies that give preference to legacies, the children of wealthy donors, and graduates of classist private high schools--that is, institutions with policies that discriminate against poor students--aren't going to have any interest in trading autonomy for resources designed to help low-income students graduate, because they enroll very few low-income students, and most of them graduate anyway. If allowed, these institutions will roll right over the community colleges and public four-year institutions whose students are in great need of these resources.

To be clear, I'm not sanguine about an expanded federal role in higher education. Federal lawmakers could screw it up--there's certainly plenty of precedent. The key here is to structure the initiative so that the hard-edged federal role focuses on outcomes while preserving institutional autonomy to act in a way that best serves their students and institutional mission, and doesn't sacrifice academic standards in the bargain.

I don't know how much of an effect a new program like this will have. What I do know is that if nothing is done, the same terrible completion rates that disadvantaged students have experienced in the past will continue in the future. Institution-level graduation rates for low-income students are hard to come by, but national studies show that only 54% of students from families with income below $25,000 who begin college at a four-year institution with the goal of getting a bachelor's degree actually graduate within six years. Their four-year graduation rate is 26%. And when we break down institutional graduation rates by race/ethnicity, some truly appalling statistics emerge.

This table, for example, from a report Education Sector published last year, shows that only 14% of black students enroll in colleges where at least 70% of black students graduate within six years, while over 27% enroll in colleges where fewer than 30% of black students graduate within six years. Improving these outcomes does not inevitably lead to lowering expectations for students--quite the opposite, in fact. And contrary to popular belief, it's simply not the case that all those non-graduates eventually hang on to swirl and transfer and graduate in eight, 10 or more years. Many just don't graduate at all. If we can't fix this problem, President Obama's ambitious goals for higher education completion will come to naught.

If we had institution-level graduation rates for low-income students, I strongly suspect we would find similar results--institutions where the odds of low-income students earning a degree are so low as to call into serious question why why nobody is standing at the gate with a sign that says "Abandon All Hope, Nearly All of Ye Who Enter Here." That's what autonomy has given us. It's time to do something new.

Corn is Evil

In education circles, people love to say that "it's all about the kids" - a good motto, if overused sometimes, and a helpful reminder of the purpose of all of those education policies. As hard as it is to keep education policy from being hijacked by adult interests, I have a hard time imagining that folks at the Department of Agriculture sit around thinking about the well-being of schoolchildren when they're implementing the National School Lunch Program. And, as Alice Waters describes in this NYT op-ed, the result is a program that feeds students unhealthy, processed foods that hurt, not help, the battle against childhood obesity and diabetes. And, for the education world, the fatty, overly sugary foods likely contribute to behavioral and attention problems in the classroom.

While it's difficult to change the meals parents feed their children, the free lunch program is an area over which the government has control, and it can be redesigned to provide students with at least one fresh, healthy meal a day. And, even better, it can also help support local, sustainable farming. So what is the hold up? Corn.

Okay, not just corn, but it serves as a symbol of the large agribusiness lobby that has an interest in keeping the free lunch program just as it is. As Waters explains, the Department of Agriculture pays big American food producers for their leftovers and then passes these foods--processed cheese, frozen chicken nuggets, pizza--along to schools at substantially reduced prices.

Fortunately, there is an ongoing revolution in food, led by people like Alice Waters and Will Allen, a 2008 MacArthur fellow, showing that good, healthy food doesn't need to be limited to those who can afford to shop at Whole Foods and that the interests of schoolchildren and local farmers can be joined in a way that improves both the environment and children's health. The federal government can make it easier, not harder, for people like Waters and Allen to introduce healthy food into schools by shifting away from the highly processed leftovers sold by large food producers and better supporting connections between schools and local farms.

Obama's pick of Tom Vilsack, a former Governor of Iowa, to head the Department of Agriculture does not bode well, however, for any dramatic changes in the National School Lunch Program. Maybe one day, though, the Secretary of Agriculture will turn away from the industrial farm lobby and say "no thanks" to the frozen chicken nuggets because, you know, it's really all about the kids.

Update: Our resident Iowan, Chad Aldeman, responded with this commercial from The Corn Refiners Association explaining the virtues of highly processed corn products:



Sounds vaguely familiar...

Government Autopilot

President Obama's budget is out (.pdf), and the first thing that strikes me as entirely sensible is indexing to inflation some of our established tax and spending programs. Instead of arguing eternally over whether or by how much federal Pell Grants should be expanded, they would now automatically rise with the Consumer Price Index (plus one percent, a concession to the ever-increasing costs of higher education). We've done this before with elements of our tax code, and it's an effective solution to policy gridlock.

Prior to the 1980s, our tax code suffered from what's called bracket creep. Our tax brackets were set as real dollar amounts, but inflation would cause salaries to rise into higher brackets than intended. Over time, people slowly paid higher taxes each year until we began indexing our tax brackets to inflation. Bracket creep has been essentially eliminated.

Other programs are not indexed to inflation and thus face similar problems. The Alternative Minimum Tax (AMT) is one such example that's causing problems in today's political climate. The AMT was a response to a 1969 IRS study showing that 155 individuals earning over $200,000 managed to avoid paying any income taxes whatsoever. The AMT targeted these individuals who were escaping their tax burdens, but since it was not indexed to inflation, it has ensnared greater numbers of people each year, to the point that it would have affected millions of taxpayers if Congress had not adopted patches each of the last two years. Those "patches" have replaced sound policymaking. Rather than finding an appropriate level and letting it move with inflation, we have to wait for Congress to debate on changes each year.

Obama's budget would begin indexing the AMT and Pell Grants, but there's no economic or political reason to stop there. The federal minimum wage could also be indexed to avoid the consequences that occur when Congress imposes changes over a short period of time. Republicans in power in the past let the minimum wage erode over time to inflation. Democrats, once back in power, quickly upped the rate. These cycles impose real costs on the economy as businesses adapt to radically higher rates. To keep the minimum wage's buying power at a steady level over time, we should be indexing it as well.

The budget will no doubt be a political ping pong ball in the coming weeks, but this is one provision that should stay. It will set controversial parts of the government on autopilot and avoid recurring debates. Who knows, it might even free up time and airspace to debate neglected policy.

The Real 21st Century Skills

The question of so-called "21st Century Skills" has been subject to hot debate in education circles recently; you can read Elena Silva's thoughtful take here, a more skeptical perspective in a recent U.S. News & World Report column from Andy Rotherham here, the Partnership for 21st Century Skills web site, hostility to the whole idea live-blogged by Fordham here, and more. It's a tricky set of questions, whether new skills are really needed for the current era, whether they should properly be thought of as distinct from so-called "basic" skills, etc. Fortunately, we need worry about those questions no longer, because it's hard to imagine a more definitive dialogue than this:

Comparing Treatments

The recently-passed stimulus bill provides money for comparative analysis of medical treatments for various ailments. It's the first such authorization, and it will allow us to answer whether ailment X is best treated with pills, therapy, or surgery. These types of comparisons have long been absent in discussions of educational pedagogy, but yesterday's IES/ Mathematica report does just that. It looks at four common math programs that collectively control about 32 percent of the K-2 math curricula market. It found statistically significant scores for students using two of the four programs:

average math achievement of Math Expressions and Saxon students was 0.30 standard deviations higher than Investigations students, and 0.24 standard deviations higher than SFAW [Scott Foresman-Addison Wesley] students. For a student at the 50th percentile in math achievement, these effect sizes mean that the student’s percentile rank would be 9 to 12 points higher if the school used Math Expressions or Saxon, instead of Investigations or SFAW.

One program (Saxon) offered one additional hour per week of instruction, which suggests its success may owe partially to additional time expenditures, but the two successful programs tended to offer more lessons per week devoted to word problems, addition and subtraction of facts with whole numbers, money, place value with whole numbers, fractions, probability, decimals, and percents.

The study looked at 39 schools implementing new math curricula in the 2006-7 school year. Researchers added 71 additional schools for 2007-8, so we'll have expanded results next year. Math is a good place to begin this comparative process, though, because for too long we've relied on industry-created demonstrations of effectiveness. While this study is only preliminary, it's extraordinarily useful to have objective, comparative results on educational programs.

Obama Draws the Line on Charter Schools

One of the most important education lines in President Obama's speech was "We will expand our commitment to charter schools." This is best understood not in terms of any particular public policies but rather in terms of the awesome power presidents have to define the boundaries of public debate. To see evidence of this in education, we need go no further than Obama's predecessor.

Education was one of the most important issues in the early pre-9/11 Bush presidency, with intense negotiations around the reauthorization of the Elementary and Secondary Education Act (which ultimately led to No Child Left Behind). As Nicholas Lemann described in a terrific New Yorker article, in mid-2001 the press was mainly focused on one issue: vouchers. This was understandable; the standard conservative Republican line on federal education policy had been, since at least the Reagan era, mainly about abolishing the U.S. Department of Education and privatizing K-12 schools through vouchers. 

But Bush wasn't interested in that. Instead, he went the opposite way, empowering the feds and focusing on improving public schools through test-based accountability. Reasonable people can disagree about how well this worked, but it's very clear that it had the effect of marginalizing vouchers and privatization as national issues. Organizations like the Heritage Foundation, which are influential in many other areas, were completely shut out of the DC education debate. If you define yourself as being more extreme and conservative on an issue than a president who is widely seen as extreme and conservative, you don't leave much space on which to stand.

Obama's forceful position on charter schools is likely to have the same effect, but this time on those who want no forms of choice in public education at all, who reject the idea of letting independent, mostly non-profit organizations run public schools. If you believe, as some people do, that charter schools are nothing more than a stalking horse for the Wal-Mart-ification of public education, you're in for a long eight years. 

Obama's Bold Goals for Higher Education

In his speech last night, President Obama said, "By 2020, America will once again have the highest proportion of college graduates in the world. That is a goal we can meet." Not long afterward, a friend emailed to ask if I though this was realistic. Answer: it depends, as these things often do, on exactly what the president means.

President Obama is almost surely referring to educational attainment statistics compiled by the Organisation for Economic Co-operation and Development. OECD statistics showing that America has lost its long-standing lead in the percent of adults with a college degree are frequently used in education policy circles as evidence that we need to repair various parts of our leaky education pipeline. (As someone who's written a lot about low college graduation rates, I was glad the president noted that this is substantially a problem of people starting college but not finishing.) The relevant statistics, if you're interested, can be found here, by clicking on "Indicator A1: To What Level Have Adults Studied?" and then selecting Table A1.3a on the spreadsheet. 

A glance at the table shows that there are two important questions to answer: Are we talking about just bachelors degrees ("Type A"), or bachelors and associate's degrees ("Type B")? And is the 2020 goal in relation to all adults, or just the newest generation of adults?

If we want to be #1 in the percent of adults age 25-64 with a bachelor's degree, that won't be too hard, because we currently trail only Norway, 31% to 30%. 

If we want to be #1 in the percent of adults 25-34 with a bachelor's degree, it will be much harder. We're still at 30% on that measure--educational attainment in the U.S. has been steady for a long time--but Norway is at 40%, the Netherlands 34%, Korea 33%, Denmark 32%, and Sweden 31%, Israel 30%. This is the trend that has everyone so worried--the difference between the two age cohorts shows that we used to be much better than everyone else (we're far ahead in the 55-64 age bracket), but other countries have since caught up and moved ahead.

In terms of the percent of adults 25-64 with a bachelor's or associates degree, we're #3 at 39%, behind Canada (47%) and Japan (40%). In the 25-34 cohort, however, we're 12th (also 39%), and some countries like Canada, Japan, and Korea are so far ahead (55%, 54%, 53%) that catching up in eleven years is unrealistic.

This is further complicated by the fact that these aren't all apples-to-apples comparisons. Different countries choose to structure their higher education systems and define degrees in different ways. Norway, king of Type A degrees, basically doesn't offer Type B degrees. That's not necessarily a good thing; I think there's a lot to be said for diversity in credentialing so students can go to college for enough time to learn what they want to learn, and no longer. (I'd say that we should also have one-, three-, and five-year degrees, but what we really need is degrees that aren't based on how much time you were taught but what you actually learned, and no, I don't mean simple test-based certification but rather much richer processes that make learning goals and outcomes in higher education a lot more transparent than they are today.) 

Also, if these numbers are going to be the basis for national policy, they need to be accurate. The American Council for Education, the leading higher education lobbying group in DC, uncovered inaccuracies in the 2006 OECD numbers recently. (The numbers cited above are correct.) 

A decline in educational attainment relative to other countries is obviously cause for concern. But we probably shouldn't get too hung up on a few ordinal positions at the very top. America's great advantage historically has been to combine high attainment rates with size. If we end up in a position where we have much better college attainment rates than all other countries or population groups of comparable or larger size (i.e. China, India, the collective E.U.) and fall behind only a few countries that are far smaller, we'll still be in good shape. (When we identify our most fearsome economic competitors, I suspect Norway and the Netherlands aren't near the top of the list, and for good reason.) 

Put another way: As long as we're the best of the biggest and the biggest of the best, we'll be okay.

No Cheese for You

Last week, the New York Times reported on the particularly hard hit historically black colleges and universities (HBCU’s) are taking in the current economic downturn. As the article notes, these institutions serve, often as a central part of their mission, a disproportionately large number of low-income students who are the first in their family to attend college. In other words, the goal of these institutions—historically and currently—is to expand college access. As a result, HBCU’s enroll a much higher percent of students receiving Pell grants and loans to pay for their college education—not exactly the best population for building a large endowment to float you through tough economic times.

In the NYT article, Dr. Marybeth Gasman, an expert on HBCU’s, is quoted as saying that, "At some institutions, you might be going from eating brie to cheddar, while at H.B.C.U.’s, you might not have any cheese left." As this recent report from the Delta Cost Project shows, it's not just HBCU's that might be left without any cheese—there is a large and growing wealth gap in higher education, and institutions serving anything but the most elite populations of students are at risk of significant cutbacks that threaten the quality of education students receive. HBCU’s may be getting the news coverage today, but they are the canary in the higher finance coal mine for many more colleges.

Particularly threatened are the public open access 4-year and 2-year colleges—those institutions serving students most like the populations at many HBCU’s. As the Delta Cost Project report describes, students at these institutions have been paying more in increased tuition, but have not been getting more (and in some cases less) as spending on education related expenses has stayed steady or declined.

Even during times of plenty, many of these institutions operated on thin budgets and actually cut costs even while tuition prices rose because of declining state contributions. Now that states are facing huge budget deficits, colleges will likely be asked to cut back further and increase tuition even more. Eventually, the constant cost cutting required as states ratchet down their investment in public higher education will result in less college access, poorer learning outcomes, lower graduation rates, and will reduce the ability of higher education to help fuel an economic recovery.

As the money from the stimulus bill begins to flow to states, increased college access and affordability for low-income students should be a top priority for state lawmakers. By supporting the colleges and universities that educate the largest numbers of students and ensuring that these students continue to receive a quality education, state lawmakers can utilize the stimulus money to help the U.S. economy get back on its feet.

Diminishing Funds = Diminishing Leverage

It's too bad the Washington Post reporter covering a new piece of higher education legislation in Virginia didn't read the bill's fiscal impact statement. If she had, she might not have portrayed the it as evenhandedly as she did. The legislation, which would force Virginia institutions to enroll at least 80 percent of their undergraduates from in-state, would impose almost $21 million annually in additional costs on the institutions. In exchange, state legislators have offered to appropriate about half that amount, $12.5 million, for this initiative while simultaneously cutting about $150 million from general fund appropriations to higher education. It's not exactly a fair trade.

This fight is mainly about coveted spots at the University of Virginia and the College of William and Mary. Legislators proposing the changes have heard from constituents that qualified in-state applicants are being rejected to these schools in favor of out-of-state students. The institutions now have in-state enrollment rates of 58 and 64.3 percent, respectively.

It's an admirable sentiment for state legislators to see the state universities as serving state residents. Unfortunately, the same legislators do not see their own obligations, namely, that it takes state revenue to do so. Prior to the current round of budget cuts, the state provided only 18 percent of William and Mary's budget and eight percent at UVa. Those numbers will likely fall in coming years, and with already low percentages of revenue coming from state coffers, the state has little leverage to demand changes in enrollment policies. The institutions got used to the current funding model in which out-of-state tuition heavily subsidizes in-state students. The state cannot easily rescind one half of that equation.

If legislators are successful in passing this bill, they should be mindful of another passage in the impact statement:

Given that the additional general fund can cover only a portion of the lost revenue under this proposal, it is likely that these institutions would increase their tuition and fees to cover the difference.

If and when this happens, legislators will have only themselves to blame.

College Dropouts

Matt Yglesias had an indirect hit on an important piece of data this morning. In the post, he uses Census data to show that a majority of Americans attend college. What he glosses over in the process, though, is that 17 percent of Americans in 2007 reported their highest level of educational attainment as "some college, no degree." In other words, about a fifth of adult Americans are college dropouts (represented by the red slice in the pie chart above). We have almost as many college dropouts age 25 and up as we do adults with associate's, Master's, professional, and doctorate degrees combined.

Kahlenberg on KIPP

Rich Kahlenberg published a review of Jay Matthews' new KIPP book (Work Hard. Be Nice.) in the Washington Post Book World back of the Washington Post Outlook section yesterday. Rich spends the first half of the review giving Jay good marks before devoting the second half to warning readers that:

...there are also two misguided "lessons" that many readers may take from "Work Hard. Be Nice": that the KIPP example suggests that union-free charter schools are the key to closing the achievement gap and that poverty and school segregation are just excuses for teacher failure.

This is pretty close to the consolidated left-liberal attitude toward KIPP, so it's worth spending a little time unpacking the two "misguided lessons" Kahlenberg describes.

On unions, Rich notes that while it's true that most KIPP schools don't have unions, some do, and that some schools with unions have achieved KIPP-like success, and that many schools without unions are bad. All valid points. But this just serves to underscore the need to get beyond a top-level "Unions are good vs. Unions are bad" way of thinking and focus on the actual issues at play. 

At KIPP, Kahlenberg notes, teachers "put in a longer school day (beginning at 7:15 and ending at 5 p.m.); teach Saturday classes and three weeks of summer school; and [are] subject to firing without due-process rights." Given that KIPP-like results have proven damnably hard to achieve, it's fair to assume that longer days and fewer work rules are an important part of the KIPP success equation. That doesn't mean those things are needed in every school, but they seem to be needed in these. So the union / KIPP question strikes me as pretty simple: if unions screw up the winning KIPP formula, they're a problem. If they don't, they're not. Union-free charter schools are surely not the only key to closing the achievement gap, but they're pretty clearly a key for thousands of students in KIPP schools today. 

Per the second lesson, Rich notes that "KIPP does not educate the typical low-income student but rather a subset fortunate enough to have striving parents who take the initiative to apply to a KIPP school and sign a contract agreeing to read to their children at night." Again, there's doubtless some truth in this. But as the KIPP DC Web site notes, the first class of students arrived in Fall 2001 scoring at the 21st percentile in reading and the 34th percentile in math. In 2005, they were at the 71st percentile in reading and the 92nd percentile in math. Somehow, despite the magic power of having exactly the same "striving parents," those students were crashing and burning in the regular public schools four years before. 

One could theorize that KIPP might not have been able to achieve the same results with a demographically similar group of students with parents who didn't give a damn. Maybe. And maybe, as Rich suggest, KIPP's results are further enhanced by students who can't handle the rigor and move back to other schools. But even if those things were true, so what? Nobody else was stepping up back in 2001 to help those students. Not enough people are stepping up now. This is a problem, all of sudden, organizations that have figured out to help disadvantaged students with parents who care about their children's future? KIPP stays under the microscope of suspicion until it proves that it can help every poor child, while thousands of public schools across the country stay open even though they've definitively proved unable to help any poor children? 

Click here for the audio of a recent Education Sector event featuring Jay and others discussing the book. 

Teacher Pensions

Call it the chart that launched a conference. In 2007 Michael Podgursky and Robert Costrell released a report called “Golden Peaks and Perilous Cliffs: Rethinking Ohio’s Teacher Pension System.” The report, and the attention spawned by it (including a two-day conference Thursday and Friday last week), was driven by one simple chart.

The chart shows the retirement wealth accrual over time for teachers. The report’s title is evocative of the chart; namely, it demonstrates vividly the enormous financial pressure teachers face at various stages of their careers. Podgursky, Costrell, and others have since drawn similar charts for a number of states, and they all show how teacher retirement accounts grow slowly over time, only to spike dramatically at various ages determined by state pension plan formulas. Ohio’s, the first of the state charts and the one below, has two such spikes, one for an early retirement incentive and again at the “normal retirement age.” In the chart below, the hypothetical teacher who enters teaching at age 25 gains over $100,000 in future pension wealth at age 50, 55, and 60. Every year they choose to work past age 60, they forfeit pension wealth, meaning they’re actually losing money by working additional years.

Not surprisingly, these peaks correspond neatly to retirements: teachers do respond to the incentives, and they are, for the most part, retiring when the retirement formulas tell them to do so. Research from California shows that teachers changed their retirement age to 61.5 (an unusual retirement age) in response to changes in the state’s retirement structure in the late 1990s. In an era when Americans in general have been retiring at later ages (due to declines in average pension and Social Security wealth), teachers have been retiring younger.

So there I was spending two days last week in frigid Nashville discussing these peaks and how, if, or whether they could/should be fixed. With the Dow and the S & P 500 plunging to six-year lows, it was an interesting time to be having the discussion.

With only a few exceptions, most teachers have defined benefit (DB) pension plans. This means they are guaranteed retirement benefits determined by a formula, which are almost always derived by multiplying some replacement factor (typically 1-3%) times years of service times average final salary. If a teacher lived in a state with a constant replacement rate of 2% and retired after 25 years on the job with a final average salary of $50,000, her benefits would look like this:
Monthly benefit = (.02 X 25 X 50,000)/ 12
= $2,083.33

DB plans were once common in the private sector too, but their frequency has fallen since the mid 1970s. They have been replaced by defined contribution (DC) plans. DC plans, like their name, define the retirement contribution an employer makes on an employee’s behalf. In most DC plans, the employer contributes a certain percentage of an employee’s wages into a 401(k) account.

The conference at times devolved into a DB versus DC debate, but before I get into why that’s a false choice, I’ll take some time to weigh their strengths and weaknesses.

DB plans allow individuals to make predictable estimates of their retirement wealth. Since they are usually accompanied by cost-of-living adjustments, they should not erode significantly because of inflation. They last until the individual passes away. They pool risk, so that the fund can make wise, long-term investments. And when a recession hits, current teachers and all taxpayers bear the responsibilities of DB benefit promises. If their goal is to provide a secure retirement as a reward for a career of service, they do their jobs.

At the same time, DB plans transfer wealth from mobile workers to non-mobile ones (mobile workers contribute but never capture the full benefits that longevity assures), from young to old (the young pay into a system that backloads rewards), and from men to women (women live longer and thus earn benefits for more years). (As an aside on teacher quality, DB plans promise nothing to prospective teachers who want to try out the profession. If they leave before being “vested,” usually after five or ten years, they get nothing.) State-run DB plans are subject to interest group influence, which has caused rising payout rates and given teachers more generous pensions over time, especially when compared to private-sector workers. Worst of all, public sector DB plans are typically locked in. A state that increases pension benefits during boom times cannot rescind this offer during boom cycles. In fact, in many states, pension benefits can never be reduced from the time a teacher begins their career.

DC plans offer an alternative. They give every employee the same percentage of salary contribution. In this way, they make it much easier for employers to project future obligations. Individuals have choices; they can participate if they want to or not, invest as they please, and take the money with them when they leave. There is no “maximum” DC pension wealth, because the contribution stays the same regardless of age or service. If a teacher passes away prematurely, her heirs inherit what remains of the account.

Or, the money in a DC plan could run out. Individuals tend to do a bad job of investing, not saving enough, not diversifying their portfolio, investing in too risky or too conservative assets. DC plans are also subject to the whims of the business cycle, since an employee must reduce risk as they near retirement. All of these factors make DC plans less efficient; DB plans often earn investment returns one to two percentage points higher than DC participants.

Ultimately, the DB plans suffer from two main things. One is the aforementioned peaks, and the other is portability. Both are fixable.

The peaks of the current systems are a serious problem. They pull bad teachers to stay in the profession too long, just so they’re able to earn a full pension. And they push out teachers who want to stay in the profession, because of the severe financial penalties on teachers who opt to stay in after their “normal retirement age.” But peaks are not unique to DB plans. Employees with DC plans time their retirement decisions to coincide with high market values of their accounts. Alternatively, we’re now seeing stories of people delaying retirement because of current economic conditions. Of the two, DB plans are the ones that are not inherently linked to peaks.

Politicians like to reward active interest groups with tangible benefits, especially if those benefits are obligations only at some time in the future. Teacher pensions fit this precisely: their unions have significant influence on state politics, and a promise for pension benefits accrues to members slowly over time. Current politicians saddle future ones with the budget problems while satisfying an interest group. In an analysis of the actions of Missouri’s state legislature, which increased teacher pensions nine times during a ten-year period from 1991-2001 (netting each teacher about $75,000 in future benefits and imposing a $5.4 billion long-term liability to the state), researchers saw little evidence of any real analysis. The economy was running smoothly, so state legislators spent as if there were not going to be tech or housing bubbles looming in the next decade.

Other states have taken similar paths, making reform seem impossible, but two states have experimented with legislation that has introduced sanity to the process. Oklahoma and Georgia now have laws on the books requiring a two-year deliberation period before making any changes to the state pension plan. The state must create an analysis at the front-end of the impacts of the proposal, update the analysis after an additional year, and then pass the legislation. Legislators are no longer able to commit the state to large future budgetary obligations without two full years of deliberation.

The second problem with DB plans is interstate portability. Because benefits accrue slowly over time, a teacher who splits her years of service between two states will earn a significantly smaller pension than someone with the same number of years of service in only one state. Researchers at the conference found a hypothetical teacher with 15 years of service in each of two states would accumulate 35-65% less pension wealth than one who stayed put. Thus far, mechanisms to increase portability mostly fail. Teachers can cash out of the first pension program to purchase additional years of service, but in the process they often must forfeit all of the employer’s contributions in the process. These are substantial sums, since employers often contribute the majority of the fund. Some states even mandate the teacher forfeit any earned interest.

But these rules are not fixed in stone. In reality, these prohibitive rules are in place for nothing other than to enrich the state fund on the backs of teacher-leavers. States have no real incentive to fix them now, but they could form partnerships across borders to agree to more equitable rules for interstate movers. If this didn’t work, the federal government could threaten a pension fund’s tax-exempt status if it refused. Or, employers could begin offering a form of DB plan called cash balance (CB). CB plans guarantee individuals a (generally low) return on their investments and typically require the employer to contribute some percentage of the employee's salary. The account is in the employee's name, but the benefit--the interest rate and contributions--are guaranteed, placing the risk with the employer. An employee can choose whether to take the account balance as a lump sum payment or transfer it to a lifetime annuity.

Ultimately, the peaks and portability problems are the largest barriers to the status quo. Because while defined benefit retirement plans for government workers often come under scrutiny for being too generous(including and especially those of teachers), it's important to think about the goal of any retirement system. Defined contribution plans might be better if the goal is to minimize cost and risk to the employer while giving the employee maximum flexibility. But if it is to create a loyal workforce with the prospect of a secure retirement, then defined benefit plans are quite successful.

Lessons from Grey's Anatomy?

Beyond the Bubble discusses how technology can provide opportunities to improve student assessment. The report briefly highlights iStan, a life-like, sensor filled mannequin used by medical and nursing schools to simulate patient interactions and responses.

Medical education is obviously very different from K-12. But, it's not so different that we can't learn from the practice. Examples from medicine and a variety of other fields show that we can think differently about how to assess students' knowledge and skills -- with profound implications for more personalized instruction. Here's one account from Oklahoma:

“See one, do one, teach one’ is what we used to say,” [Dr. Rhonda] Sparks said. “Once I’d watch something and an instructor had talked to me about it, then I could perform that procedure. Then once I could perform that procedure, I was responsible to teach someone else.” She said some students wouldn’t gain as much experience as others because of random chance, poor mentoring or even simple shyness. The training center allows the university to standardize the learning experience for all students and even tailor the lessons to the students’ strengths and weaknesses.

This is the world that we need to prepare our students to succeed in. It's not just doctors, but also nurses and physician assistants working both individually and in teams. Nor is it some distant future. This is the profession today -- in hundreds of hospitals, medical schools, and even on Grey's Anatomy...