Should we shift our current system of financing higher education from its current emphasis on subsidized student loans to an exclusive reliance on progressive higher education vouchers? Richard Vedder makes a strong case in a recent column in Bloomberg View. He begins by identifying a number of problems with the status quo:
(1) Universities are indifferent to the plight of student borrowers forced to default on their loans because they don’t bear the consequences. Taxpayers are forced to eat the loss, but there are no effective advocates on their behalf.
(2) The incentives for completing a degree quickly are extremely weak. Students who spend more years in the system but who never complete a degree receive a larger amount than those who complete a degree early.
(3) The student loan program doesn’t do a good job of accounting for the fact that students vary in terms of how likely they are to repay. As we’ve discussed in the context of the Lumni model, a user-friendly tool designed to evaluate the individual repayment prospects of students based on high school grades, college major, degree program, etc., would help students make informed decisions about how much debt they should be willing to take on.
(4) The Free Application for Federal Student Aid form actually helps colleges and universities engage in more effective price discrimination. It is easy to see why higher education providers would find this attractive. It’s not clear that this will actually help make a college education more accessible and affordable. (Imagine if a consortium that included all consumer electronics retailers could see all of your financial information before you purchased a television.)
(5) Colleges set tuition and fees without being subject to serious cost control pressures. Loan volume increases to accommodate rising tuition and fees. In the housing market, in contrast, we have the opposite dynamic, in which the amount of loan volume tends to increase home prices.
(6) Suggestively, programs designed to help poor students have grown as the share of recent college graduates from poor families has declined.
To address this tangle, Vedder offers a few ideas of his own:
– The federal government should get out of the student loan business.
– It should provide educational vouchers (similar to Pell Grants) directly to students (not schools), and make those vouchers progressive (very low-income students receive the most, fairly low-income students a little, and middle- and upper- income children nothing).
– Add performance incentives, rewarding timely degree completion and good performance.
– Remove the tuition tax credit that largely assists relatively affluent students and their families; perhaps use savings from all of the above to reduce the budget deficit.
– Eliminate the Free Application for Federal Student Aid form and require that applicants give the Internal Revenue Service permission to provide family-income data.
Perhaps the most eye-catching aspect of Vedder’s column is that he argues that this policy shift would lead to a decrease in the number of students attending four-year colleges:
My guess is that the total number of students attending four-year programs would fall modestly, a good thing given the disconnect between the labor market and college enrollment; that the proportion of students from lower-income families would probably increase (also good) both because the Free Application for Federal Student Aid form is a barrier for lower-income families, and the burden of aid reductions would fall mainly on the colleges and more affluent students.
The more important point, however, is that this system might yield more college graduates with the kind of training they need to secure remunerative employment than the status quo.