Federal Student Aid is to Blame for the Bankrupting College Mess

shocked faceSuperabundant federal student aid has done a huge amount to get us into our bankrupting college mess. To get us out, today President Obama will propose, essentially, “soft” price controls. But they will likely leave the root problem intact while, if anything, adding new kinds of woe.

On his college bus tour, President Obama will propose that Washington start publishing ratings of schools based on such measures as average tuition, graduation rates, debt and earnings of graduates, and the percentage of a college’s students who are low-income. The ratings would also “compare colleges with similar missions.” Ultimately, the president will propose that the availability of aid be partly conditioned on the new ratings.

Let’s be clear: The price of college is almost certainly far higher than it should be, fueled largely by federal aid that essentially tells colleges “charge whatever you want – we’ll give students the money.” That’s a major reason that average, inflation-adjusted prices have more than doubled in the last 30 years. And it is good that the president, and many others, are essentially acknowledging the inflationary reality of aid. But will price controls help or hurt?

Perhaps the first question is, will the controls actually lower prices? As I’ve pointed out before, there is abundant, readily available data about colleges, earnings, etc., and it seems to have little effect on college consumption. Why? Many reasons, but there are almost certainly two major ones. First, the Feds will give almost any student almost any amount of money needed to pursue any major. That eliminates the terrific service that private lenders, who need to take decent risks, would provide: telling people when their college decisions are unrealistic, and not giving them the rope to financially hang themselves. The other big problem is that soundbite-driven politicians love to tell everyone they need to go to college, both driving credential inflation – a degree is often considered an essential even if it has no bearing on the skills one needs for a specific job – and pushing people into expensive degree programs because they think they are necessary to prosper.

Publishing data – and the president promises a “Datapalooza” – simply isn’t likely to help much if aid remains. But what about conditioning receipt of aid on a school’s rating? That might control prices, but it depends on the specifics of the withholding. In particular, what triggers sanctions – for instance, what constitutes raising prices too high, too fast – and what is the punishment per, say, unit of inflation? Alas, while he suggests conditioning Pell Grant and loan terms and amounts on the ratings, the president ultimately punts on these crucial matters, saying that he will convene lots of hearings to work out lots of details, and a final decision won’t be made until 2018.

At least in the near future, then, federal price controls won’t likely exert big, downward pressure on college costs. And despite the huge problem of tuition hyperinflation, that is probably a good thing.

Read more at CATO.org

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