Senator Durbin’s golden opportunity to address college costs


Mar 22, 2012

I coauthored this piece with Gunnar Counselman, the founder and CEO of Fidelis, a venture-backed technology company that partners with leading colleges, veterans’ organizations, and companies to solve the military-to-career transition for the nation’s service members. He has also been a colleague of mine for the past several years as an adjunct fellow at Innosight Institute.

Although long overdue, there was finally a debate this past winter over how the federal government should address rapidly rising college tuition. Even as President Obama accompanied his State of the Union attack on rapidly increasing tuition with proposals to try and curb the trend, Senator Richard Durbin (D-IL) proposed the kind of action that can move the dial.

Judging by the media headlines, however, that debate seems to have faded into the background. That’s unfortunate.

Durbin suggested changing the so-called “90-10 rule”—wherein for-profit and career colleges must earn at least 10 percent of their revenue from sources other than federal student aid to be eligible to receive any federal aid—in two key ways.

First, he proposed that the required revenue split be shifted to 85-15, which means that these colleges would have to earn more revenue through non-federal aid sources. And more important, he proposed that revenue earned from military benefits such as the GI Bill be included in the 90 (or 85) percent, in recognition of the reality that military benefits are de facto federal aid.

Today’s 90-10 rule creates a powerful incentive for for-profit and career colleges to recruit aggressively anyone eligible for military benefits—but not for the right reasons.  Indeed, because military benefits count as part of the 10 percent of “non-federal money,” for every one military student a college signs up, it can acquire nine non-military students paying full tuition with federal loans.

Durbin’s proposal to include military benefits in the 90 percent is common sense; after all, these are federal funds. And if passed, at least nine of the publicly traded for-profit colleges would have to scramble to find new sources of revenue or else they would lose their ability to receive federal student aid. Given that the markets didn’t respond to the proposed bill though meant that no one thought it would pass—and that seems to have been borne out by the debate fading into the background.

That’s a shame on the one hand, but on the other, it may open an opportunity to improve the legislation both for the short term and long term.

In the short term, Durbin should modify the language of the proposed bill in three ways. First, drop the idea of moving the policy to 85-15.  But second, put more teeth into 90-10, by requiring that at least 10 percent of a college’s students should have to pay full tuition out of pocket for the college to be eligible for federal aid. This is how the rule was written for the GI Bill shortly after World War II. The idea is that if 10 percent of students have the means to pay and choose to endorse the school’s value proposition by paying full tuition, then the school must be OK.

Lastly, the 90-10 rule should apply to all colleges regardless of tax status, not just for-profit and career schools.  To our knowledge there are few if any non-profit schools that are close to the 90-10 limits, but their inclusion gives a reasonable nod to the role that companies can and should play in reducing costs and driving educational quality.

These quick fixes will eliminate the perverse incentives to recruit veterans regardless of program quality or fit, but they don’t address the persistent problem of massive annual tuition increases. Doing that requires a substantial realignment of federal financial aid with a longer-term view that leaves the 90-10 rule and its permutations behind.

Given the amount of money the federal government provides to higher education, it’s perfectly reasonable for it to use those dollars to promote affordable, high-quality options.

We recommend establishing a new track for institutions to access federal money based on measures of quality and student satisfaction relative to cost. The better a school performs on this measure compared to its peers, the higher percentage of its educational operation it could finance with federal aid—thereby eliminating the all-or-nothing access to federal dollars and encouraging students to make decisions based on quality and cost, which will drive innovation.

To create this metric—an institution’s Quality-Value Index—the government could add together four measures: job-placement rate 90 or 120 days after graduation; graduate earnings—over some amount of time—relative to the total revenue (including grants, subsidies, gifts, and endowment dollars) the institution received; alumni satisfaction; and loan repayment (although today’s popular cohort default rate measurement presents a host of problems for measuring this).

The devil is in the details, so implementation should take a few years. Nevertheless, changing the funding dynamic in this way would accomplish several things.

It would move the focus away from judging schools on inputs such as student-teacher ratios and arbitrary outputs such as degree attainment to more tangible student-centered outcomes based around how well the experience improves students’ lives relative to the cost.

It avoids controversial discrimination between for-profit and nonprofit providers.

And given that providers are motivated to follow dollars and innovate aggressively, now that innovation would focus on lowering costs, increasing speed of learning and aligning offerings with the evolving niches of employer needs—not on aggressive recruiting.

Getting this right ultimately would accomplish goals on which everyone can agree: allowing many more students to receive a high-quality education without breaking their banks or the nation’s.

Michael is a co-founder and distinguished fellow at the Clayton Christensen Institute. He currently works as a principal consultant for Entangled Solutions.