Step Two: An Actual Plan

During his higher education speech earlier this week, President Obama talked at some length about college costs:

Many of you are living each day with worries about how you’re going to pay off your student loans. (Applause.) And we all know why. Even as family incomes have been essentially flat over the past 30 years, college costs have grown higher and higher and higher and higher. They have gone up faster than housing, gone up faster than transportation. They’ve even gone up faster than health care costs, and that’s saying something. (Laughter.)

So it’s no wonder that the amount student borrowers owe has risen almost 25 percent just over the last five years. Think about that. Just in the last five years, the debt of students has done up 25 percent.

And this isn’t some abstract policy for me. I understand this personally, because Michelle and I, we had big loans to pay off when we graduated. I remember what that felt like, especially early in your career where you don’t make much money and you’re sending all those checks to all those companies. And that’s why I’m absolutely committed to making sure that here in America, nobody is denied a college education, nobody is denied a chance to pursue their dreams, nobody is denied a chance to make the most of their lives just because they can’t afford it. (Applause.) We are a better country than that, and we need to act like we’re a better country than that. (Applause.)

Now, there are a couple of components to this. Part of the responsibility for controlling these costs falls on our colleges and universities. Some of them are stepping up. Public institutions like the University of Maryland, University of North Carolina, some private institutions like Cornell, they’re all finding ways to combat rising tuition without compromising on quality. And I know that your president is looking at some of these same approaches to make sure that the actual costs of college are going down. I want to challenge every university and college president to get a handle on spiraling costs.

It’s good that the president is talking about this. But I can’t help but notice that when he talked during the health care debate about the looming Medicare solvency crisis and bending down the long-term medical cost curve, he immediately followed with an actual plan to control health care costs. That plan did not consist of simply challenging doctors and hospital administrators to try harder. Obama understood that doctors and hospital administrators are by and large rational actors who respond to incentives created by the system in which they work. If you want them to make different choices, you have to change the system itself. Which is exactly what he did.

The American higher education system in 2010 is such that everyone in a position to raise tuition has a good reason to do so, and nobody has a good reason to lower it. Thus, it gets raised a lot, and hardly ever lowered. If that doesn’t change, tuition will keep rising. If you’re a state legislator with a busted budget, you can raise tuition as a stealth tax increase. If you’re a college president who wants to join the ranks of nationally recognized institutions, you can raise tuition to build nice buildings, hire smart professors, increase your marketing budget, and send a signal to the prospective students that you’re expensive, and therefore worth it. If you’re managing a for-profit college and 90 percent of your revenue comes from federal grants and loans, you can raise tuition to increase profits for shareholders. When SUNY lobbies for more authority to “control” tuition, everyone understands that’s just a euphemism for charging more. And so on. Most of these people aren’t bad people who want students to live in penury. But all those individual decisions add up.

In general, an arrangement whereby the government gives colleges money to keep prices below market rates but then lets colleges set prices is going to be unstable in the long run absent some kind of countervailing downward pressure on prices. No such strong pressure exists today. It won’t exist until current or (more likely) new firms have the ability to enter the market and make a compelling value proposition to consumers. Value is the ratio of quality to price. So if President Obama wants to do for higher education what he did for health care, he needs to pursue a multi-pronged research and regulatory strategy aimed at vastly increasing the amount of available information about quality. This would give researchers the ability to seriously evaluate competing claims and students, regulators, and colleges the information they need to distinguish between real innovators and charlatans. We should be optimistic about the potential benefits. As Michael O’Hare said recently while weighing in on the UC online education debate:

There is no reason to believe we face a cost/quality trade doing education in a way that really embraces the technology at our disposal. We should assume we are nowhere near the production possibility frontier on those dimensions, and strike out to the northeast, expecting to deliver something much better and much cheaper that we make now.

I think he’s right. But it’s hard to do that without some general consensus about which way is north.