Will President Obama’s proposals make college more affordable?

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Aug 23, 2013

President Obama’s new initiative to make college more affordable, which he announced yesterday, represents a significant step in the conversation around driving better value for students in higher education.

In what’s perhaps not a coincidence, the basic tenets of the proposal possess some strong similarities to the QV Index we introduced over three years ago, but there are also appear some key differences. The QV Index was designed to encourage students to make enrollment decisions based on value—meaning student outcomes relative to cost—which would drive institutions to innovate. The President appears to share those goals, and his plan would advance them in important ways, although fall short in others.

In the Fact Sheet introducing the President’s plan, the administration says that despite the President’s increases in student financial aid like the Pell Grant award, college tuition keeps rising. What’s strange is the administration’s surprise. Increasing financial aid certainly won’t stop college tuition from rising; in some circumstances it may in fact contribute to tuition increasing, as it creates a price floor below which colleges and universities have very little incentive to price their programs.

What’s important about the President’s announcement, however, is that it shifts away from those policies and a half-century of an access agenda that asked how to allow Americans to afford an education regardless of true cost and quality toward asking how do we make a quality higher education fundamentally affordable—and thereby extend access.

There is a lot in the proposal. Much of it is just a direction to the Department of Education to develop a plan that would still need to be passed by Congress, so caution is important. But let’s unpack the early pieces.

Pay for performance

The proposal seeks to encourage students to select those schools that provide the best value according to the rating system that the President charges the Department of Education with creating. The implication is that a higher tuition price tag will no longer be held as a proxy for high quality in higher education.

The rating system

As the Department develops these ratings through public hearings around the country to gather input, it is critical that the final ratings calculate the affordability of a college by its total cost—that is, its revenue per conferral, including tuition, all federal and state funds, gifts, and endowment returns. At the moment, the administration seems not to have endorsed this element of the QV Index based on its suggestion that affordability should be based upon average tuition, scholarships, and loan debt.

The outcome measures that the administration suggests—although somewhat different from those we suggested in the original QV Index—seem smart, as they are based on graduation and transfer rates, graduate earnings, and advanced degrees of college graduates.

Using the rating system to compare colleges with similar missions also seems like a useful addition to our QV Index, so that not all colleges feel the need to compete with each other. As we have observed, not all colleges should strive to be like Harvard nor should colleges seek to be everything to everyone. Strategic focus is critical. Encouraging and celebrating colleges with different focuses and missions makes sense.

Basing student aid on college value

The President asks that the rating system be in place before the 2015 school year, but that it would not be tied to financial aid until 2018. This delay is smart for a few reasons. First, this is a big change, and we should see if the ratings in fact work and learn what might be the unintended consequences of such a shift. Second, it is also important to give colleges and universities a few years to shift their operations accordingly. Third, many argue that the simple transparency that would result from having these ratings and others that point toward student value instead of today’s flawed U.S. News & World Report rankings that focus largely on inputs would by itself help students make smarter decisions. If this begins to happen, then perhaps it would be unnecessary to tie the rankings to student aid.

There are many reasons to prefer a measure that bolsters transparency so students can make more informed decisions rather than one that so directly injects a value system into the federal financing of higher education. Already some conservative Republicans have lambasted the proposal, as they have suggested that tying these ratings to financial aid represents a significant overreach by the federal government.

There are three reasons though to temper this criticism, however.

First, the critics should acknowledge that the federal government already made a decision to get involved in higher education in a significant way when it began using federal dollars to extend access to college for students. Its dollars already have a profound impact on the higher education landscape, and much of that impact is increasingly a questionable investment at best. Decreeing how federal dollars are spent doesn’t seem like a huge overreach. If a college doesn’t like it, it’s not obligated to accept federal financial aid. Although critics are fond of saying how much these proposals might affect places like Harvard, in truth it’s unlikely that they would impact elite schools that much where the majority of the revenue does not come from federal financial aid.

Second, some conservatives respond that they would actually like to see the federal financial aid subsidy significantly reduced—or eliminated in some cases altogether—because it distorts the market in unfortunate ways that this would only exacerbate. The distortion of the college market is a legitimate worry, but the elimination of federal financial aid is almost certainly a non-starter politically. More interesting, if the administration’s proposal is implemented correctly and it creates a more affordable higher education sector—lower in both price and total cost—then over time the measure could lessen the total federal student dollars needed, which would in fact create the opposite of an overreach and what conservatives have long advocated.

Third, if transparency is enough, then great. We should not tie the ratings to aid. But there is a real worry that it might not be enough because today’s federal dollars essentially make it no easier for students to afford colleges that offer a stellar return on investment than it is for them to afford colleges that offer a poor one. Because students are using dollars that are not their own, although they do experience a real opportunity cost by attending a college that offers little value, there is arguably less incentive for them to use the transparency metrics wisely. We should experiment in the three-year period, test assumptions, and only once we receive proof decide on which course is best, but not rule out either option from the start. As AEI’s Andrew Kelly has observed, today there is remarkably little research on how financial aid affects students’ higher education outcomes.

If the ratings do tie to financial aid, then it is critical to take the recommendation from the QV Index and end today’s all-or-nothing access to federal dollars. Instead, a relative measure—by which the actual competition and performance of colleges would set what is “good” performance as opposed to arbitrary decrees—is important. In today’s all-or-nothing system in contrast, in the debate over the gainful employment regulations, the administration had to set an arbitrary hurdle for being eligible for federal dollars that couldn’t be too high lest it roll back access for many students. And for those institutions that clear the bar, there is little financial incentive to continue to improve and innovate. Fortunately the administration seems to have taken this advice and improved upon our mechanism in the QV Index in some respects, as it stated that students attending high-performing colleges would be able to receive larger Pell Grants and more affordable student loans—presumably because they would be less of a credit risk.

Seeding innovation

The President also proposed a new $260 million “First in the World” fund to test and evaluate innovative approaches to higher education that yield dramatically better outcomes. These approaches could presumably bypass the broken traditional accreditation process that encourages institutions to look like traditional colleges.

This is intriguing, but I would restructure it to accord with one of our suggestions in the QV Index—and one that might gain more bipartisan support in the process. As we said at the time, because tying financial aid to a ratings system is a big shift, you would want to implement this responsibly. One way would be to make this fund just one way to gain initial access to a limited pool of total government funds—that is, make the $260 million a test kitchen for tying these ratings to federal aid, and possibly a carve out of existing federal financial aid, not a new pool—and bypass the accreditation system.

Other pieces of the proposal

The initiative contains many other elements, some smart and others less so.

Its proposal to prevent the waste of Pell Grants by disbursing student aid over the course of a semester as students persist and progress instead of in a lump sum at the beginning of a student’s enrollment makes sense if it can be implemented successfully. Regardless of what is implemented, it’s also great to see the administration use its bully pulpit to promote competency-based learning and online learning. And reducing the regulatory barriers for competency-based and distance education makes consummate sense.

The Race to the Top for Higher Education proposal for states seems to be of more questionable value. And the Department of Labor’s plan to disburse $500 million more to existing institutions—community colleges and eligible four-year institutions—next year is highly unlikely to create the disruptive change that we so desperately need in higher education, as entrant organizations are far better at implementing disruptions than are existing ones.

Overall the President deserves praise for focusing the higher education conversation on boosting student value—improving outcomes while making higher education far more affordable—through innovation.

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