Republicans and Democrats are hurtling toward another bipartisan standoff, this one over rival plans on the interest rates to be charged on subsidized federal loans to help students and their families pay for postsecondary education. Unless Congress can agree on a plan, the interest rate on new loans will double on July 1 to 6.8 percent from 3.4 percent.
While the interest rate on student loans is important, there are much bigger problems in the financing of higher education: soaring tuition costs, the exploding volume of total student debt and shockingly low college completion rates. Americans are spending unprecedented amounts, both privately and publicly, on higher education. What are the returns? Are there ways to get more bang for the buck on this substantial investment in the nation’s future work force?
Students are already borrowing about $113 billion a year, more than twice as much as a decade ago, and student debt now tops $1 trillion. The federal government accounts for nearly 90 percent of all student loans and the Congressional Budget Office estimates that students will take out $1.4 trillion in new federal loans over the next decade.
For young college graduates the unemployment rate is 8.8 percent, and the underemployment rate, which includes those who have given up looking for a job or who are working part time because they cannot find a full-time job, is about 18.3 percent. In addition, many college graduates have been forced to settle for low-paying jobs that do not require a college degree.
Not surprisingly, the default rate on student loans is increasing: more than 13 percent of students whose loans came due in 2009 were in default as of September 2012, meaning that they had missed payments on their loans for more than 60 days.
The rising cost of college and the soaring student debt burden have led some to conclude that a college education is a bad investment for young Americans. Don’t believe the naysayers. The value of a college education as a way to improve lifetime earnings is near an all-time high. The returns to a college education outpace the returns to other investments — stocks, bonds, housing and gold — by sizable margins. A college graduate is almost 20 percentage points more likely to be employed than someone with a high-school diploma. Although the cost of a college degree is 50 percent higher than it was 30 years ago, the increase in lifetime earnings associated with a college degree is now 75 percent higher.
Higher education is also a good investment for the country. In a recent study, the Organization for Economic Cooperation and Development compared the fiscal costs and fiscal benefits of higher education. The fiscal costs include government spending on higher education and forgone tax revenues while students are not working. The fiscal benefits include higher tax revenues from college graduates because of higher incomes and lower outlays for safety-net programs. The bottom line: on average across O.E.C.D. countries, the public return from higher education is about four to one — with a net public benefit of $100,000 per man and about $52,000 per woman. In the United States, the net public benefit is more than $250,000, or five to one for men and about three to one for women. A college degree has not closed the gender pay gap, but it does generate sizable returns for both men and women.
From a fiscal standpoint, cutting government spending on higher education may be penny-wise but it is undoubtedly pound-foolish. That said, there are certainly ways to improve the returns to both private and public spending on higher education, starting with our dismal performance on completion rates.
Almost half of all students who begin college at a two- or four-year institution — about 60 percent of Hispanic and black students — will not get a degree within six years. When students leave college with no credential and huge debt, they are often worse off than when they entered. The average default rate for those with no credential is more than four times the rate for those with a bachelor’s degree.
College is supposed to be the great social equalizer, and the share of low-income students entering college has climbed sharply as a result of federal and state assistance. But despite successful public investment in improving access to higher education, the gap in college completion rates between students from the bottom and top fifths of the income distribution has doubled since the early 1970s. Today, students from the top 20 percent of the income distribution are seven times more likely to graduate than those from the bottom 20 percent. Low-income students are much more likely to end up with crushing debt and nothing to show for it.
What can be done? A report just released by the Center for American Progress contains several worthwhile recommendations. ("300 Million Engines of Growth: A Middle-Out Plan for Jobs, Business and a Growing Economy," Center for American Progress, June 2013). The first step is greater transparency, and technology as well as disclosure can be helpful here. For students to make wiser choices among competing postsecondary institutions and programs, it must be easier to compare costs, average debt loads, completion and graduation rates, and placement rates after graduation. A bipartisan bill, whose backers include Senators Marco Rubio, Republican of Florida, and Ron Wyden, Democrat of Oregon, would require the Department of Education to provide easy access to clear, current and verified information on every college and university whose students receive federal support.
Transparency isn’t enough, however. A second step is the use of such data by the federal and state governments to hold postsecondary educational institutions accountable for their performance. The federal government has an immense potential stick to influence performance: it could withhold financial aid and student loan support for institutions that do not prove their value.
President Obama has called on Congress to incorporate performance standards on affordability, debt loads and completion rates into the accreditation process that determines the eligibility of institutions for federal student support. The administration has created a "score card" to track performance on these measures. And building on the success of the "Race to the Top" competitions in K-12 education, the administration has proposed grant competitions among states and colleges to improve affordability and completion rates. Several states are already experimenting with programs that link aid for higher education to measures of student performance.
A recent report by a coalition of the leading nonprofit higher-education associations identified college completion rates as the top priority, calling for more program flexibility, easier credit transfers and more online courses to enable more timely completion of degrees, especially among nontraditional students juggling the demands of education, work and family. Of course, higher completion rates in themselves do not speak to the quality of the education provided, so attention must be paid to how colleges make it easier for students to complete degrees. For example, the availability of stand-alone open online courses is no guarantee that students will complete their course requirements and get a degree. Online courses and e-mentoring systems must by packaged into programs that include scalable and significant faculty-student interactions leading to meaningful degrees.
Despite its rising cost, college education remains a great investment both for students and for the country. But there is much more that can be done to increase the value of this investment by improving completion rates through greater transparency and accountability, greater program flexibility and the growth of well-planned online courses and degree programs.