The College Cartel
Excerpt from a recent National Review
Quote:March 19, 2012 4:00 A.M.
The College Cartel
(Page 3 of 4)
By Vance H. Fried & Reihan Salam
...The trouble with regulating the lucrative higher-education industry is that it won’t necessarily force colleges, whether explicitly for-profit or “non-profit,” to lower their prices. The reason is that the flow of new entrants into the higher-education industry has been severely restricted by regional accreditation bodies, which effectively determine whether colleges are eligible for the lucrative federal subsidies. These accreditation bodies present themselves as the guardians of high standards. In practice, however, they serve as cartels that protect higher-education incumbents by setting difficult and sometimes arbitrary hurdles to accreditation for new schools. In the past, for-profit colleges simply bought faltering accredited institutions outright to avoid having to go through the onerous accreditation process. Now, however, regional accreditation bodies have closed off that option, further limiting competition.
The existence of accreditation cartels is not in itself a reason to abandon regulatory efforts, but it does suggest that addressing accelerating cost growth in higher education might require more radical solutions, such as dramatically reducing federal funding and creating a process through which innovative schools can do an end-run around regional accreditation bodies.
There is good reason to believe that actually eliminating federal subsidies for higher education would lead to lower tuition even as it reduced federal spending by $60 billion a year. This doesn’t mean, however, that federal loans should be eliminated; such loans serve the valuable function of guaranteeing that everyone, regardless of family income, can secure a long-term loan with interest deferral until graduation. Rather, loan programs need to be redesigned and operated on a break-even basis.
Even given today’s high in-state tuition, it is quite possible for people with a net worth of zero and no family support to work their way through college and graduate owing no more than $30,000, a very serviceable debt. The problem with the current loan program is that it doesn’t adequately protect the interests of students and taxpayers. The default rate has risen considerably, in no small part because many young adults who can’t finish their degrees are nevertheless burdened by an enormous amount of loan debt. Imposing reasonable caps on the amount students can borrow, and implementing better monitoring and collection policies (such as reducing the amount students are eligible to borrow if they fail to complete some number of credit hours), can do a great deal to limit the burdens upon students.
Improving the design of the federal loan program will greatly reduce, if not eliminate, the need for the Pell Grant program, which currently subsidizes 40 percent of students. Only students with extremely low incomes will require any additional assistance, which state governments are well positioned to provide. In a similar vein, it is important to eliminate the provisions in the tax code that subsidize tuition, which overwhelmingly benefit relatively affluent households.
Will reducing the flow of subsidies into higher education simply starve colleges and universities out of business? That is the claim we will no doubt hear from members of the cartel. But returning to 1980 prices just means returning to 1980 profit margins. While this will certainly be painful for colleges, it is doable. However, it would be naive for policymakers to expect established universities to take a lead in reducing their own profits. That is where competition comes in.
As Bowen observed, cost containment must come from the outside — either from state legislatures, or from students and their families, or from competitors. At the time Bowen wrote, most state legislatures were actively involved in controlling cost. Tuition increases required lawmakers’ approval, which was often hard to come by.
Then legislatures began to cede the power to set tuition to their colleges. Not surprisingly, the colleges chose to raise tuition aggressively. Prices have risen so much that many legislatures have become alarmed. There is a natural tendency for policymakers to try to micromanage individual colleges — something that will not work, either politically or practically. They can, however, create a competitive higher-education system that places the power to keep costs down in the hands of students and families.
State governments would be wise to pursue two complementary strategies:
First, break up existing higher-education cartels. State governments often insulate incumbent schools from competition. For example, State X might prevent the University of State X from competing with State X U by barring it from opening a campus on the other school’s turf. This might make sense if our goal were to preserve the market share of both schools, but it does not make sense when our goal is to foster robust consumer-friendly competition. Prices are often fixed by the state so as to eliminate any potential for competition. States should let their individual public colleges freely compete with one another. Some colleges will be winners and others losers, but the consistent winner will be the student, who will get lower tuition and a higher-quality education.
Second, level the playing field. State higher-education subsidies are generally paid only to state-owned colleges, giving such schools a huge competitive advantage over private colleges: State colleges can spend just as much as a private colleges, but then charge a substantially lower price, because of the subsidy. States should instead allow private colleges to receive the subsidy as well. One approach would be for state governments to develop partnerships with private colleges. For example, private colleges located within the state could become private charter colleges, akin to K–12 charter schools. In return for the state subsidy, private charter colleges would agree to charge in-state students a lower tuition than the most expensive public college currently charges. The goal of leveling the playing field would be to pressure the most expensive public colleges to spend public resources responsibly, not to run the public colleges and universities out of business.
Not all states will take such steps, and very few will take them quickly. But the federal government might contribute to breaking up higher-education cartels by providing an alternative route to accreditation. The aforementioned Kevin Carey of Education Sector has called on the federal government to create a mechanism through which high-quality providers of instruction — for example, a program exclusively devoted to teaching college-level calculus or Mandarin — can get approval to accept federal loans. Carey would require that such educators offer their services at low cost and provide transparency regarding their effectiveness. If they meet these criteria, any college or university that accepts federal loans would have to accept the credits they provide. While some may find Carey’s approach heavy-handed, it has the potential to strongly encourage the adoption of low-cost business models in higher education. Existing schools that can’t compete with the new providers will die out as they see their business cannibalized. Those that rise to the challenge will do so by improving the quality and cost-effectiveness of their offerings.
There have been a number of promising recent developments in higher education. The most impressive may be the rise of Western Governors University, a highly innovative institution built around entirely online delivery and a competency-based degree — i.e., WGU grants credits based on test performance, and does not require class attendance. A WGU student who is already very knowledgeable about software programming, having worked as a coder before starting work on her degree, might secure a credit in computer science by passing a final exam without actually taking a course. In essence, WGU offers the equivalent of a CPA exam for every subject.
Moreover, WGU charges its students based not on the number of credits they complete, but rather on an “all you can eat” basis over two semesters: If you can demonstrate competency in seven or eight semesters’ worth of credits in only two semesters, you pay the price for two. The beauty of the WGU model is that it allows students to seek instruction anywhere they can find it — they can read independently, study with a tutor, enroll in some other school, etc. — while turning to WGU to certify that they’ve mastered the relevant material.
In a somewhat similar vein, the Massachusetts Institute of Technology has sponsored MITx, a program through which students who take free online courses offered by MIT can, for a modest fee, secure an MITx credential by demonstrating a thorough understanding of the material.
It’s not just online programs that show promise. Grace College, a small institution in northern Indiana, uses a much more traditional, residential model. But it has recently trimmed some unnecessary spending and moved summer school totally online. As a result, a Grace degree can now be earned in three years for total tuition of $38,000, about the same as an Indiana resident pays over four years to get a degree from Purdue or Indiana University Bloomington.
The combination of low profit margins and innovation-encouraging models might even allow higher-education costs to fall well below 1980 levels — and if current levels of state-government subsidies were maintained, higher education could even be tuition-free. Through competition and innovation, we can achieve the dream of left-wing higher-education visionaries — but without breaking the bank.