August 25, 2013
Information About Colleges and Student Loans
Information About Colleges and Student Loans-Becker
Colleges in the United States, and in most other countries as well, vary enormously in the quality of education provided, their cost, and their overall efficiency. The over 3000 American colleges compete fiercely for students in terms of tuition, quality of faculty and student bodies, athletic programs, student loans, student grants, and in many other ways. Even though many academics complain about the distortions of business advertisements, the catalogues and other "information" provided by many colleges and universities make lots of advertising look like models of accuracy and probity.
Therefore, to better assess different colleges, high school students, especially those from more educated and financially better off families, spend considerable time and effort in gathering information about colleges. All potential college students can use good information about courses offered, performance of the student body on standardized tests and other information about the students who have attended, the availability of student aid, and the earnings of graduates.
The market has responded to this interest in knowing about colleges by providing guides, rating system, and other school information. These include the well-known US News and Washington Monthly's rankings, and many lesser known surveys and rankings that range from the frivolous to the informative.
The federal government has a role to play in making readily available many kinds of information useful to students applying to colleges. The government also could help, at least up to a point, by requiring colleges to release relevant information that they may try to keep hidden, such as default rates on student loans, earnings of graduates, dropout rates, and the like. This and other information would be particularly valuable to students from poorer families since recent studies show that these students, even those with very good school records and high scores on achievement tests, are not well informed about different colleges, partly because they put relatively little time into their college choices.
I do not see any good role for the federal government in providing rankings of colleges, as proposed by President Obama, and discussed by Posner. Competition among private market providers of ranking and other college information is far more likely to give students what they want in making their choices. To be sure, market-driven information tends to neglect information that students are not interested in knowing, even when the information might be helpful in their college choices. But the federal government is unlikely to be efficient in discovering this information, and presumably students will give it little weight in making their school decisions.
Student debt has grown rapidly during the past 25 years, due to the rapid increase in school tuition during this time period, the significant subsidy to most loans, and the growth in high school graduates who attend college. Even though many in the media and elsewhere are complaining about this expansion in student loans, the average student loan of about $26,000 is not large relative to the average income of college graduates of about $70,000. Young families often take on mortgage debt that is twice or even a larger fraction of their earnings.
There is a legitimate concern about those persons with much larger student debt, and about those who make much less than the average college graduate, such as students who drop out of college, or who attended proprietary schools. The federal law that excludes student loans from personal bankruptcies makes the burden for these students still much harder to manage.
The president addresses this problem by proposed various changes in the student loan program, including a move toward a more universal income-contingent repayment system. I have supported income contingent loan programs because returns on investments in a college education are risky. Risky business investments are generally financed by equities rather than debt, and an income-contingent repayment system is more like equity than debt financing of student investments.
Income contingent loans appeal least to students who expect to earn a good income, such as graduates of medical, business, or engineering schools, because the repayment "taxes" on their earnings would be higher. This is why in order to get a balanced demand for such loans from both high and low earners, repayment rates should begin to decline after earnings exceed a certain level.
College is still a very good economic deal relative to their alternatives for the great majority of college graduates, including most of those with sizable loans. The returns from college are not so good for some students with lower abilities and poorer college preparation who come from poorer backgrounds, who do not attend colleges that help them much, and who take on too many loans. These students would benefit from better information about what different colleges have to offer, and from student loan systems that tie repayments to earnings.
President Obama's Plan for College Reform—Posner
Several days ago the President proposed that the federal government create a rating system ("scorecards") beginning in 2015 to rank colleges by such metrics as tuition, percentage of low-income students, graduation rates, alumni earnings, and debt of graduates. Federal financial aid to students, currently running at $150 billion a year, would be allocated on the basis of the ratings, though this part of the proposal would require legislation; the other parts the President can effectuate without congressional action. For a good summary of the program, see Dylan Matthews, "Everything You Need to Know About Obama's Higher Ed Plan," Wonkblog, Aug. 22, 2013, www.washingtonpost.com/blogs/wonkblog/wp/2013/08/22/everything-you-need-to-know-about-obamas-higher-ed-plan/.
There are of course college rating systems already, such as that of U.S. News & World Report. A federal rating system would probably have somewhat greater credibility; and if it became the basis for allocation of federal financial aid, the system would have far greater effect on college choice, given that more than 80 percent of college students receive federal financial aid.
Multi-factor rating systems have an obvious, and very serious, problem: weighting. It is almost certainly the case that the factors in the proposed "scorecard" don't have the same importance to an intelligent choice of which colleges to apply to. Worse, there is unlikely to be agreement on which factors are the most important and so should be given the greatest weight—and how much more weight than the other factors. That won't matter a great deal as long as the ratings just guide college choice, for then parents and their kids will give whatever weight they want to the various factors. But the ratings will matter greatly—and influence that choice—if Congress allows them to be used to govern the allocation of federal financial aid to students.
To evaluate the President's proposal, we need to step back and consider what ails our higher-education system. It is helpful to note the affinity between its rather doleful situation and that of our health care system. The top institutions in both systems provide world-class quality of service, mainly to children of the affluent and nearaffluent—the top tier of American universities and colleges is generally considered tops in the world. Both systems provide indifferent quality at the bottom, the bottom-tier universities and colleges being worse than the bottom-tier hospitals and clinics. Both systems are very expensive, with much of the tab picked up by the taxpayer—both are very expensive in part because of poor quality control by the federal government. The government is not a very competent financier, in major part because it is buffeted by interest groups wielding formidable political power.
The Administration's Affordable Care Act ("Obamacare") is an enormously ambitious, almost incomprehensibly complex, effort to improve medical care and at the same time reduce the rate of growth of the nation's medical expenditures. The President's new higher-education proposal is much less ambitious, especially if one sets to one side the part that requires congressional approval—the part about keying federal financial aid to universities and colleges to how well they perform on the "scorecard." It is worth analysis, of course, but can be relegated to secondary concern on the pragmatic ground that congressional approval appears to lie far in the future.
The Presidente's proposed ratings do identify characteristics of colleges and universities that parents and their high-school children should consider in deciding whether (and where) to apply to college. True, most of the information is available already, but not (so far as I know) in a compact, readily readable and comprehensible form, amd of course missing the imprimatur of the federal government. The Wall Street Journ al in an editorial yesterday (August 24) scoffed at the supposition that the government can pick "winners." But that isn't the purpose of the ratings. The purpose is to provide accurate, readable information for the relevant consuming public, and so understood seems perfectly appropriate. The "picking winners" criticism will become more apt if and when Congress authorizes the allocation of federal financial aid on the basis of the ratings.
But I do think the scorecard even when viewed purely as an information device can be criticized. For example, while I can see why the percentage of low-income students in a college would be an appropriate factor to consider in allocating federal aid, I don't see its relevance to the choice of a college by would-be applicants. Tuition, on the other hand, is a relevant factor, obviously, but is disclosed up front by any college or university to which one applies. Alumni earnings sound relevant, but the problem is that they necessarily are backward looking. They are the record of experiences of previous students, and may reflect characteristics of the college or of the job market that have changed since those generations of students graduated. The amount of debt of graduates is similarly an ambiguous signal to a prospective applicant. If the debt of graduates of a particular institution is above average, this may reflect career choices or excessive optimism, things for which the college may bear only limited, if any, responsibility. The factor is included in the scorecard I assume because of a belief that some colleges lure students by obfuscating the financial obligations that a student who applies for financial aid will be taking on. I think this belief is correct but I don't know how much of the indebtedness of graduates it is responsible for.
Most American colleges and universities are nonprofit, but that just means that are don't have shareholders; profit residuals are dissipated in generous salaries for administrators and faculty, student amenities designed to attract rich kids and thus increase (along with high-powered sports programs) future donations, and lavish building programs. The colleges compete with each other with Darwinian ferocity. Federal financial aid has them to increase tuition at an astonishing rate, which has funded the competitive extravagances. The nonprofit colleges and universities seem just a tad less avaricious than the profit-making ones.
The competition has greatly increased the number of college graduates—to the point where many cannot find a job requiring a college education. IQ is a limiting factor in the value of a college education in the job market.
So below the very top tier of institutions, the picture of American higher education has become rather depressing. The President's newly announced program seems unikely to work any significant improvement.