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Rethinking College — and How to Pay for It

The Editors

(Bloomberg Opinion) -- No advanced society can thrive without a well-functioning system of higher education. College can be an equalizer, providing opportunity to all regardless of race or class. It can enhance human capital, boosting the economy’s productive capacity. It can make people better citizens.

On all these counts, the U.S.’s system of postsecondary education is falling short. Fixing it will require rethinking what it should be aiming to achieve — and how to pay for it.

It used to be that only a privileged elite had access to college. That began to change in the late 19th and early 20th centuries, as the U.S. expanded its state universities to produce skilled workers for the Second Industrial Revolution. After World War II, government subsidies such as the G.I. Bill and Pell Grants made a four-year education at state institutions free or at least affordable. This helped push the share of young adults with a bachelor’s degree to 29 percent at the end of the century, from just 6 percent in 1940. This investment played a crucial role in America’s post-war economic success.

Lately, though, that virtuous system has fallen into disrepair. For one, it has become too expensive. The price of a college education has outpaced both incomes and federal grants, as administrative bloat and cuts in state funding have led private and public institutions to increase their tuition fees. This has hit the poor hardest. For the lowest-income quarter of students, the average annual cost of attendance (including living expenses, net of grants) reached about $11,600 in 2016, roughly 30 percent higher in real terms than in 1996. That’s about 80 percent of average family income for this group:

Cost matters a lot. When people can’t afford the full cost of attendance — including tuition, books, food and rent — they struggle in college or don’t even apply. Studies suggest that a $1,000 increase in price reduces enrollment by about 4 percent, as well as harming performance and graduation rates, especially for lower-income students.

The federal government has sought to fill the breach with a crazy quilt of loan options, both subsidized and not: Stafford, Perkins, Plus loans for parents, and a system intended to consolidate them all. No matter the choice, those who enroll emerge with increasing debts, which weigh on the economy by impairing their ability to start families, buy houses and save for retirement. As of June, total student debt stood at an estimated $1.48 trillion, or about 36% of disposable income. That’s up from $250 billion, or 12%, in 2003.

The ballooning costs and debts wouldn’t be so bad if schools provided value for money. At an individual level, they typically do: The median annual income of people with a bachelor’s degree is about twice that of their high-school-educated counterparts. College graduates are also happier and less likely to die of heart attacks.

Unfortunately, the benefits appear to have little to do with what people actually learn. A 2009 survey across 25 institutions found that four years of college had only a limited effect on critical thinking, complex reasoning and writing. About a third of students saw almost no improvement at all. A separate 2006 study, based on the 2003 National Assessment of Adult Literacy, found that just 31 percent of college graduates could correctly explain and compare opposing newspaper editorials.

So why is a degree so lucrative? In part because employers see it as a sign of inherent qualities: Here is a person with the intelligence, persistence and demeanor to get through four years of college. Research shows little earnings premium for otherwise good students who, for whatever reason, fall just short of receiving a diploma. And the premium attached to the diploma persists even in jobs such as bartending. The market values the piece of paper much more than the education. To a troubling extent, college has become an expensive and time-consuming credentialing exercise.

In some cases, higher education doesn’t even serve that lesser function. Black Americans, for example, disproportionately end up with diplomas of dubious value from nonselective or for-profit schools — thanks in part to aggressive marketing and a dearth of information about better alternatives. As a result, they often go deep into debt for nothing. This helps explain why, despite decades of progress in closing the education gap with whites, the average black family has made no progress in narrowing the wealth gap.

The combination of big debts and low-quality education has caused a lot of financial distress. People who earn degrees from well-respected institutions can usually handle the burden. But those who drop out or attend for-profit schools, or who were simply unlucky enough to graduate into a weak economy, often find themselves with obligations they can’t hope to pay — and can’t discharge in bankruptcy, thanks to the special legal status of student debt. At the end of 2018, the 90-day delinquency rate on federal student loans stood at 11.4 percent, up from 7.8 percent in 2008.

How, then, to improve a system that isn’t reaching everyone who could benefit from it, and isn’t doing enough to enhance the skills of those it does reach?

There’s no quick fix. Proposals to make higher education free for all or forgive student debt would primarily benefit the wealthy, who already account for the majority of college-goers and loans outstanding. Also, debt can be a legitimate way to finance an education that provides a high return. Its growth can even be seen as a positive sign, reflecting Americans’ desire to invest in themselves.

Removing public support and letting the market sort things out is not a great option, either. For one, it would cut off access to additional millions. Also, at its best, higher education creates broad social benefits — such as faster economic growth, lower crime rates, better health, greater civic involvement — that private actors lack the incentive to pay for. That’s why the government got involved in the first place.

That said, policy makers can take steps to improve the system. Consider three areas: access, cost control and quality.


For too many Americans, money is the main obstacle to getting a college education. Yet the existing system of Pell Grants, federal loans and tax breaks spends a lot on people who don’t need it. About half of the American opportunity tax credit, for example, goes to households with more than $50,000 in annual income — with little or no effect on enrollment. Loan subsidies skew even more toward the wealthy: The top half of borrowers by income account for almost two-thirds of all student debt outstanding.

The government should replace this tangle of subsidies with a single grant program focused on poorer students — including those in the middle class for whom college has become increasingly out of reach. If properly targeted, even the current level of spending could go a long way toward covering the full cost of attendance for those who need it most.

The government’s approach to student lending, with no consideration of ability to pay, has left too many people with unbearable debt. That’s bad in its own right, but it also discourages the less well-off from embarking on college. Better-targeted federal grants would reduce the need for students to go into debt. Still, borrowers will continue to face risks beyond their control, such as falling ill or graduating into a bad job market.

To mitigate these, repayment of all new loans should be tied to income. Automatic deduction from paychecks would help avoid unnecessary defaults. Congress should give bankruptcy judges more leeway to write off loans, and the Education Department should revive its initiative to offer forgiveness in the most egregious instances of for-profit colleges conferring worthless degrees. Also, the government should simplify its dizzying array of repayment plans and make them more accessible.

Importantly, a four-year undergraduate education needn’t be the only option. Other programs — including apprenticeships and short-term retraining — can provide the skills that the job market demands. To that end, the government should increase its support for community colleges, and federal grants should be extended to worthwhile certificate programs lasting less than a year.

Last but not least, students and families need better information about the available options. A kid growing up in a poor neighborhood might not know anyone who went to college, and faces an onslaught of advertising from less-than-scrupulous institutions offering unduly expensive educations. To remedy this, the government should give high school students and their parents clearer guidance: Here are some quality institutions that you can attend free if you start preparing now.

Cost Control

The current system rewards colleges for raising prices. Families fill out the Free Application for Federal Student Aid to estimate what they can afford, but the result has no effect on what institutions can charge. Consider a student who qualifies for $10,000 in grants and loans. If the college charges $5,000 in tuition — leaving the student $5,000 for books, room, board and other expenses — it’s forgoing additional income. Why not capture the full federal subsidy by charging $10,000? This is precisely what colleges tend to do, often using the extra money to supplant state funding.

The government should provide money only to those schools that agree to charge no more than what the FAFSA says students can afford — while meeting other conditions, such as enrolling a reasonable share of low-income students and investing in instruction and academic support. This would curb tuition and sharply lower costs for the poorest families, in many cases to zero. Most important, it would reward colleges for keeping costs down.

To achieve the greatest impact, any reform of federal funding should be structured to encourage greater responsibility on the part of the states — which in the last decade radically cut funding for higher education. Washington could, for example, channel more grant money through the states, getting them involved in monitoring compliance and offering bonuses to those that restored funding to designated levels. This could vastly increase the total resources devoted to meeting the reform’s goals.


All accredited institutions have equal access to government aid. Even schools with terrible outcomes and the highest loan default rates get as much money per student as the best schools. This rewards bad actors for skimping on instruction and engaging in aggressive marketing to bring in as many people as possible. The Trump administration has aggravated the problem, reversing an Obama-era effort to shut down one of the worst accrediting organizations.

In general, it’s too hard to know how colleges are performing. Even sophisticated researchers won’t find comprehensive information on student outcomes, such as median earnings: In 2008, Congress effectively forbade the government to gather it.

To shed more light on quality, Congress should allow the Department of Education to bring together the tax and other data needed to provide a complete picture of the expected return of different schools and programs. All this information should be available on the department’s College Scorecard website, along with other metrics on transfer and part-time students and veterans. Such transparency can help students avoid aiming for degrees they can’t complete, or ending up with big debts and worthless diplomas.

Armed with improved data, federal and state officials could do a much better job of ensuring that taxpayer dollars are well spent. Initially, they could track the share of students who graduate in a timely manner and go on to earn a living wage, reducing aid to institutions that failed to meet reasonable thresholds. Ultimately, they should also monitor learning outcomes, to ensure that programs are building human capital rather than merely selling their imprimatur. This must be done carefully: Schools will try to game whatever metrics the government chooses. That said, at least one recognized standard already exists, and academics are working on measures better tailored to specific fields.

This year, Congress is aiming to reauthorize the Higher Education Act, creating a rare opportunity to take action. Many of these proposals on access, cost control and quality have bipartisan support. Some would require new spending. Fully meeting the needs of the poorest students, for example, could cost the federal government almost $40 billion a year, and state governments almost $20 billion. Finding the money may require economies in other areas. But if this investment would help restore the role that higher education once played in the U.S., the price would be well worth it.

--Editors: Mark Whitehouse, Clive Crook.

To contact the senior editor responsible for Bloomberg Opinion’s editorials: David Shipley at davidshipley@bloomberg.net, .

Editorials are written by the Bloomberg Opinion editorial board.

For more articles like this, please visit us at bloomberg.com/opinion

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