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Obama Takes on the College Cartel

Daily Ticker

President Obama’s summer “bus tour” has been sort of a snooze, with Obama touting a bunch of old ideas he knows a fractious Congress is unlikely to pass. But his new effort to revamp the whole market for higher education is new and ambitious, and it targets a problem affecting millions of middle-class families.

Related: Why College Grads Get Stuck With Lousy Jobs

“College has never been more expensive,” Obama declared during today's campaign-style speech in Buffalo. “Higher education cannot be a luxury. It’s an economic imperative.”

Maybe so, but higher education has been one of the last protected industries in America, even if most universities are technically nonprofits that supposedly serve the public interest. More people are going to college, since a college degree is directly linked to higher lifetime pay and a more rewarding career. But the supply of slots at four-year schools is relatively fixed, which is one big reason why the cost of higher ed has been rising by considerably more than inflation. Readily available student loans, many backed by the government, have only added to the gusher of money flowing into higher ed. The overall supply-and-demand dynamic has given universities the sort of pricing power typified by cartels and oligopolies.

Students (and their parents) haven’t necessarily been getting their money’s worth. Taking on debt to pay for education makes sense when you can graduate into a decent job that allows you to start paying back what you owe. But with jobs scarce, as they are now, the equation breaks down. The total amount of student debt has tripled since 2004, to nearly $1 trillion, with the average borrower owing more than $26,000. That’s a huge bill if you’re barely earning minimum wage as a barista or retail clerk.

Related: Yes, Despite the Student Loan 'Crisis,' College IS Worth It

Obama wants students to get a better return on their investment, so he’s proposing a new “college scorecard” that would be published by the Dept. of Education and rate colleges by the value they offer to students. Here are some highlights of the plan:

Rank colleges based on performance. Unlike the “best colleges” rankings published by a number of private organizations, the government’s scorecard would measure things such as affordability, a school’s outreach to disadvantaged students, graduation rates and the real-world earnings of graduates once they enter the job market. Obama wants these rankings to be in place by the time the 2015 school year begins. The Dept. of Education already provides some affordability data on colleges; under the rating system, there would be even more info and it would be easier to compare colleges.

Link government-backed financial aid to college performance. Once the ratings have been established for a few years, Obama wants Pell grants and other types of federal aid to be targeted more toward schools that have a proven record of graduating a high proportion of students who get good jobs.

Encourage states to fund public universities and community colleges based on similar performance measures. Some states, such as Tennessee, Indiana and Ohio, are already doing this. A push from Washington could encourage more to do so.

Create new incentives for “innovative” types of education. Universities that offer accelerated three-year degrees, new types of online learning or other programs that help cut costs and boost return for students will be rewarded with higher ratings, “regulatory flexibility” or perhaps a public shout-out from the president.

Ease the burden on borrowers. Obama’s plan would cap payments on student debt at 10% of a worker’s monthly income. Some students who recently took out loans are eligible for this “pay as you earn” program, which Obama wants to extend to everybody carrying student debt.

What’s refreshing about Obama’s higher-ed reform plan is that the administration can do some of these things right away, without partisan bickering or tortured efforts to pass controversial legislation. The Dept. of Education can set up a college rating scheme without any need for Congressional approval, for instance. That alone could force universities to start paying more attention to the needs of their customers, if the way they react to rankings published by U.S. News & World Report, the Princeton Review and others is any guide. University administrators typically complain that such rankings are an abomination --while making sure their schools rank as high as possible. It’s a good bet that most schools would change whatever they could to earn the best possible rating on the government’s scorecard.

Linking financial aid to a school’s rating would require new legislation passed by Congress, as would an expansion of “pay as you earn.” Obama aides argue that the overall reform plan ought to have bipartisan appeal, making it more likely to get through a cantankerous Congress than other Obama proposals. It certainly has populist appeal, since it’s hard to argue against measures that make college more affordable for middle-class students and their parents.

Still, Washington is the place where good ideas go to die, and some universities may lobby against the new measures or try to get them watered down. So while costly colleges may get a presidential thrashing, tuition may remain higher than many students can afford. Perhaps there should be a scorecard rating Washington’s effectiveness.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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