Dr. Richard Vedder, Professor of Economics at Ohio University, from right, Rohit Chopra, student loan ombudsman for the Consumer Financial Protection Bureau (CFPB), and Brittany Jones, former president of the Student Virginia Education Association, testify during a Senate Budget Committee hearing on student loans in Washington, D.C., U.S., on Wednesday, June 4, 2014. Photographer: Andrew Harrer/Bloomberg via Getty Images
Dr. Richard Vedder, Distinguished Professor Emeritus of Economics at Ohio University, testified June 4 at a U.S. Senate Budget Committee hearing on the impact of Student Loan Debt on Borrowers and the Economy.
Vedder is also director of the Center for College Affordability and Productivity, a Washington-based research organization and an Adjunct Scholar at the American Enterprise Institute.
“I wish to make three key points this morning. First, the current student loan debt crisis would never have happened had college costs increased at the general rate of inflation. The major cause of the student debt problem is increased university fees –period. To deal long term with this issue, you must address the root cause, namely runaway college cost inflation,” Vedder began.
“Second, there are many reasons for this university price inflation, some of which are mentioned in this written statement that I submit for the record. But one relevant major contributor to the rise in tuition fees, in my judgment, is the federal student financial assistance program itself. No significant successful solution to the problem of rising college costs can occur without rethinking the magnitude and nature of the federal financing role.
“Third, we are at or near a tipping point, where fundamental change will come to higher education. Early indications are that these changes are starting to happen. I will elaborate a bit on this. I will argue that many policy proposals gaining prominence these days do not fundamentally address the problems leading to big changes, and, indeed, they would likely worsen rather than improve the existing situation.”
Vedder discussed several possible causes of rising student debt and college costs. He addressed the view that costs have risen because higher education is a service industry “and that teaching is in inherently a labor-intensive activity where costs cannot easily be reduced by substituting capital equipment for labor, unlike in manufacturing, agriculture or construction.” But he noted that faculty salaries average only 40 percent of total spending and new technologies may lower costs by increasing capacity.
He also addressed the sharp declines in state government appropriations for universities, but he noted that while state appropriations “are relatively flat on a per-student-inflation-adjusted basis” over the last decade, “the real culprit” is increasing total university expenditures per student.
Federal Financial Aid Programs Called ‘Failures’
“This brings me to what is called the Bennett Hypothesis, named after former Education Secretary William Bennett, who asserted in a 1987 New York Times op-ed that colleges take advantage of federal student loan and grant programs, and have raised their fees to capture most of the aid money for themselves,” Vedder said.
“In the era when the federal presence in financing higher education was mostly modest, such as the 1940s, 1950s, and 1960s, tuition price inflation was about one-third as great as it has been in the era of significant and rapidly growing federal student financial assistance programs,” he said. “The federal financial assistance programs, in my judgment, have increased the demand for higher education more than the supply, leading to higher prices. Indeed, a very good case can be made that federal student loans have fueled an academic arms race financed in large part by rising tuition fees, an arms race that has led to a proliferation in higher education bureaucracies, expensive recreational facilities, lower teaching loads that have funded largely unread esoteric research, bigger subsidies of intercollegiate athletics, and other spending unrelated to promoting the core university mission of disseminating and expanding our stock of knowledge and cultural capital.
“Summing up, our federal financial aid programs have, in my judgment been colossal failures—raising costs, reducing access and quality, and leading to over-investment of federal resources in higher education. They need radical revision.”
‘What Should We Do to Avert Disaster?’
Vedder evaluated several Congressional and Obama Administration proposals.
- The President’s College Rating Plan—Accountability for performance is a positive aspect, but “I am very concerned that we are diluting and maybe annihilating one of the great strengths of American higher education—its diversity. We have thousands of universities and colleges of all different sizes, curricular offerings, religious orientations, political leanings and the like. Americans have thrived on this—no single Ministry of Education makes decisions that stifle institutional originality and competition. The ratings system appears a step away from that tradition of no centralized direction. One-size-fits-all sets of criteria determining degrees of excellence or expectations regarding performance are almost certainly inappropriate.”
- Gainful Employment Standards on Career Colleges—”If true “gainful employment” standards are to be applied, they should apply as well to all public and private four year institutions with scandalously low graduation rates and high levels of loan default.”
- Lowering rates on past student loans—”The bill introduced by Senator Elizabeth Warren to lower interest rates on student loans to millions is, in my judgment, fundamentally flawed, for at least six reasons. First, and most important, it is only directed to past borrowers, and does nothing to address the future affordability of college and does absolutely nothing to contain college costs. Second, the Warren proposal punishes those who have responsibly paid back their loans according to the terms of the loan agreement….Fifth, the Warren proposal encourages higher college enrollments, at a time when labor market data suggest we are generally overinvested in terms of the educational attainment of new graduates….”
Vedder recommended looking for long-term solutions rather than “ineffective short-term panaceas.”
“There are rarely painless solutions to difficult issues,” he said. “That applies here—some people are going to be unhappy with needed changes. But to fundamentally deal with the tuition cost explosion, we need to promote policies that will lead colleges to reduce the growth in tuition fees. The artificial fueling of demand for higher education through excessively exuberant federal student financial assistance policies is a major contributor to funding the wasteful academic arms race.
“We can humanely cut back on these programs over time without significantly hurting truly low income students –those from households living in poverty or well below the median income level. Indeed, we can increase the proportion of funds going to lower income students, which progressive Democrats should like, while reducing overall expenditures, which Republicans should like, in the process reducing the tuition-enhancing features of the federal financial assistance programs.”
What Might Help?
Specific suggestions by Vedder included:
- “Why don’t we simplify our Byzantine federal financial assistance system, going to only two federal financial aid programs? Go to a Pell Grant that is a voucher available to truly low income students and given directly to them, not to university financial aid offices, thus empowering the student more. Additionally go to a single loan program available only to those with relatively low incomes, and offered for only, say, four years of schooling.”
- “Provide a legal environment which would encourage Income Share Agreements, an equity approach to student financing that would allow private entrepreneurs to buy a portion of the earnings of students in return for assistance in paying for college.” Some states are already proposing variations on a pay-forward scheme.
- “Put in some form of performance standards….Require colleges to have some skin in the game—to share in the costs of loan delinquencies when their admission actions lead to unusually poor records in terms of student loan repayment.”
“Those of you on the left that are worried about excessive accumulations of wealth and privileges, you are making a big mistake in pushing federal financial aid policies that have been historically associated with reductions, not improvements, in income equality,” Vedder noted. “As Figure 4 shows, the rise in federal student financial assistance programs has moved in tandem with rises in measured income inequality. If you want to demonstrate your progressive egalitarian bona fides, do something different. For example, propose removing tax exemptions for schools with very high endowment accumulations, say more than $300,000 a student. You might want to propose outlawing legacy admission preferences to reduce the perpetuation of academic aristocracies. Use the federal tax exemption powers you have more aggressively and judiciously. Outlaw stadium skybox tax subsidies, indeed tax subsidies for anything not strictly academic, including housing and food facilities. Limit all federal student loans and grants to, say, $8,000 a year and cripple the ability of expensive schools which are largely enclaves for affluent students to raise tuition fees thinking they will be easily financed by greater loans. You want to help the poor? I repeat: a smaller percentage of recent college today are from the bottom quartile of the income distribution than in 1970—before the Pell Grant existed, and when college loan programs were in their infancy….
“The point is that the solution is not to do more of what we have done in the past, like making loan programs more attractive. The solution lies in changing the environment that incentives colleges and universities to raise their fees to students.”
Vedder concluded on an optimistic note. “If you were to do absolutely nothing, I think market forces, muted as they have been by the distortive effect of government subsidies, would nonetheless work in the near future to lower sharply future tuition increases. Enrollments are stagnant and many schools are desperate for students. New forms of innovative competition will eat into the market of traditional high cost schools. Fighting for survival, schools will be forced to be more innovative, more affordable, and better performing. Creative destruction or disruptive innovation has worked brilliantly in developing a vibrant competitive market economy that has made us the most prosperous of all large nations. It can work in higher education as well—if we give it a chance.”
Read Vedder’s testimony or watch the hearing at http://www.budget.senate.gov/democratic/public/index.cfm/2014/6/the-impact-of-student-loan-debt-on-borrowers-and-the-economy.
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