The Price of Admission: Rethinking How Americans Pay for College
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The Price of Admission: Rethinking How Americans Pay for College
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Overview
Product Details
| ISBN-13: | 9780815750130 |
|---|---|
| Publisher: | Rowman & Littlefield Publishers, Inc. |
| Publication date: | 10/01/1999 |
| Edition description: | New Edition |
| Pages: | 176 |
| Product dimensions: | 5.99(w) x 9.00(h) x 0.45(d) |
About the Author
Thomas J. Kane is associate professor of public policy at the Kennedy School og Government at Harvard University. Previously, he was a visiting fellow at the Brookings Institution and served as the senior staff economist for labor, education, and welfare issues at President Clinton's Council of Economic Advisers.
Read an Excerpt
Chapter One
Introduction
During the past fifteen years the labor market has distributed ever larger rewards to workers who have college educations. In 1980 the average 25- to 34-year-old male college graduate earned 19 percent more than a male high school graduate of the same age. By 1995 the difference had widened to 52 percent. And the difference has not been restricted to those who complete a bachelor's degree. The earnings premium for people with some college compared with those holding only a high school degree has increased from 4 percent to 11 percent.
Not coincidentally, as the rewards for educational attainment have grown, calls to reform the education system have become louder. Reformers have lobbied for improving the quality of elementary and secondary education through school choice, national achievement standards, greater accountability from individual schools, and a long list of other ideas.
Many of these proposals, particularly those that improve accountability and allow more school-level decisionmaking, may well have merit. But ever since the publication of Equality of Educational Opportunity in 1966 (commonly known as the Coleman Report), researchers and policymakers have argued about whether incremental increases in school spending and other school reform efforts have yielded improvements in student performance. Indeed, many of those efforts have not been effective.
The reader will be reassured to know that I do not plan to enter the fray over elementaryandsecondary school reform. Rather, my purpose is to explore a different focus for investing in education: targeting existing subsidies for higher education more effectively to allow young people to continue their training after high school. Relative to the arduous process of reforming elementary and secondary schools, reforming the way Americans pay for college may offer even better opportunities for swifter gains in labor market preparedness.
Education's Response to the Labor Market
It did not take long for many American parents and families to respond to the changing labor market conditions. Soon after the wage premiums for the college educated began to increase in the late 1970s, a flurry of reports such as A Nation at Risk sounded the alarm over declining test scores. Since then, many states and local school districts have launched ambitious reform projects. A decade of these efforts has yielded progress.
— High school students are spending more time on homework. The proportion of 13-year-olds reporting that they had no homework or that they had not done their homework declined from 38 percent in 1979 to 27 percent in 1996.
— The proportion of eleventh and twelfth grade students taking advanced placement courses grew by 175 percent between 1984 and 1995.
— The average public high school graduate completed 53 percent more courses in algebra or higher mathematics, 40 percent more in science, and 8 percent more in English in 1994 than in 1982.
— Between 1980 and 1993 the proportion of students in grades ten through twelve who remained in school grew for whites, blacks, and Hispanics. The decline in dropout rates was particularly large for African Americans.
The hard work by students, parents, teachers, and school administrators has to some extent been reflected in higher test scores.
— As measured by the National Assessment of Educational Progress (NAEP), average mathematics and science proficiency for nearly every age and race or ethnic group grew between 1982 and 1994.
— Average Scholastic Assessment Test (SAT) scores in mathematics rose by 19 points between 1980 and 1997. These gains are particularly impressive considering the large increase in the proportion of high school students taking the test.
College enrollment rates have been rising as well. During the 1970s, when the gap in earnings between high school and college graduates was shrinking, enrollment rates stagnated. Later in the decade, when the earnings differential began to widen, the proportion of 18- to 24-year-olds in college expanded as well, a trend that continued throughout the 1980s and 1990s (figure 1-1). The number of associate, bachelor's, and master's degrees awarded increased by about one-third.
The Causes of the Current Financing Crisis
As American families respond to the demands of the labor market, they will need a system of paying for higher education that is up to the task. The current system, however, is showing signs of strain. Tuition at both public and private institutions has increased sharply, while the federal grant and loan programs intended to aid low-income youth have failed to keep pace. Reflecting this breakdown in the financing structure, the already troubling gaps in college entry by race and parental income seem to have widened. Although middle- and higher-income youth seem to be responding to the changing labor market conditions by enrolling in college in greater numbers, low-income youth seem to be lagging. Unfortunately, the next fifteen years will offer little respite as demographic forces increase the pressure on higher education budgets with a rebound in the number of college-age youth of all income levels.
Despite the public's urge to find a scapegoat, the primary cause of rising tuition is not the lazy college professor nor the ineffective college administrator nor the stone-hearted politician. Rather, the current crisis is the result of national economic and demographic forces that are likely to continue.
First, because the labor market value of a college education has skyrocketed, an increasing proportion of high school students want to invest in further education. The continued rise in the relative earnings of college graduates has been particularly remarkable given this rapid expansion in enrollment. The laws of supply and demand typically dictate that the prices that suddenly go up eventually come down when the market has a chance to react. As employees, high school graduates have become increasingly inexpensive relative to college graduates. As a result, employers have been given a powerful incentive to adjust their hiring policies and to find new ways to employ these less expensive workers. Yet, despite the higher relative cost of more educated workers, the relative earnings premium enjoyed by more educated workers has remained high. One can only infer that the increase in labor market demand is continuing to outpace the supply.
In the face of expanding public college enrollments, state governments have been unable to continue paying the same proportion of the cost for each student, and families have had to make up the difference with higher tuition. In 1980 state and local appropriations covered 83 percent of the educational cost per student at public two-year institutions and 76 percent at four-year institutions. Because parents were paying such a small share of the costs in 1980, even a modest shift of a few percentage points in the burden carried by students and their families meant a large percentage increase in tuition. Even though the share of costs covered by state appropriations fell by only 9 percentage points at public two-year colleges and 14 percentage points at public four-year institutions, the offsetting rise in the portion covered by tuition revenues (that is, gross tuition less the value of scholarships and fellowships) meant that the share paid by students and their families rose by nearly 60 percent.
In other words, the increasing expenses of the colleges were not the sole cause of the rising tuitions at public institutions. Rather, states simply were compelled by other demands on their budgets to cut their subsidies and raise tuitions. Even if the college presidents had been successful in keeping expenditures per pupil in line with inflation, they would have shaved off only one-third of the increases experienced in the past fifteen years.
The federal government, with budgetary concerns of its own, has been unable to fill the financial need created by the higher tuitions at public institutions. The result is that low-income students, who are particularly price sensitive, seem to be losing out. From 1982 to 1992 the expansion of college enrollment was greater for those with family incomes above $20,000. There is some evidence that the widening gap is related to rising tuitions in public colleges, since the gap between high- and low-income youth increased more in states with the most rapid public tuition increases. The gap is particularly noteworthy given that a college education has a greater payoff now than in the past four decades.
The pressure on federal and state governments to spend more on higher education is likely to get stronger. The college-age population declined by 11 percent between 1975 and 1995, relieving some of the pressure on costs created by rising enrollment rates. But that population is projected to increase more than 20 percent in the next fifteen years. And the increase is expected to be even more extreme in just a handful of states, notably California.
Thus although labor market trends seem to justify sending more people to college, a college education has become a very expensive undertaking. Even though the tuition at the average public four-year institution is now about $3,000, the actual average expenditure per student is closer to $11,000 a year. Federal and state subsidies for higher education are being stretched thin, and families are being asked to pay a larger share of the costs.
The Focus of This Book
Given that the challenges of the coming decade are likely to require an agenda more ambitious than the incremental reforms of the past decade, the goal of this book is not to provide a detailed diagnosis of any one program but to provide a broad perspective on how the financial aid system works, identify its strengths and structural weaknesses, and offer a rough sketch of possible reforms. To prepare the ground for such a discussion, the book opens with a primer on higher education finance policy in the United States.
Despite minor changes in definitions of eligibility and sources of funding, the same structure has been in place since the mid-1970s. It comprises two basic forms of aid: means-tested grant and loan programs (primarily funded by the federal government) and large operating subsidies to public colleges (provided primarily by state and local governments). Each form of aid has its strengths and weaknesses. The means-tested programs target aid according to an assessment of parents' and their children's income and assets in the previous year. Families submit an application for financial aid and college financial aid counselors respond with a package of grants, loans, and work-study arrangements.
The strength of the current system of means-tested aid, in which eligibility is a function of a long list of family characteristics and students are informed of their eligibility by individual colleges, is that it allows financial aid officers to offer individually tailored packages. Yet an underemphasized weakness of such a system is the uncertainty inevitably created for those who are unfamiliar with aid programs or baffled by financial aid forms. Many families are likely to be unaware of the precise amount of federal aid that is available until they are notified of the amount of the package. To the extent that there is more aid on offer than many families realize or that families are discouraged by the application process, much of the beneficial effect of means-tested aid in opening the doors to college may be blunted.
In contrast, the operating subsidies that allow public institutions to keep tuition low across the board do not require families to fill out a complicated financial aid form in order to benefit. A tuition announcement reported in the local newspaper helps many families anticipate what they can expect to pay for college. Moreover, to the extent that these operating subsidies are paid for with the revenues from broad-based state income taxes, they do not require the same high marginal tax rates on a single year of students' and parents' resources that are implicit in the means-tested aid programs. But this low-tuition, high-subsidy strategy also has disadvantages. When a person's eligibility for such public largesse depends solely on the ability to be admitted to college, the subsidies are bound to benefit higher-income youth disproportionately because they are more likely to have the academic preparation in high school to succeed in college. Indeed, because of the differences in college attendance rates by family income and differences in the number of years of college that high- and low-income youth complete, I estimate that the average high school graduate from a family with income greater than $90,000 a year in 1992-93 could expect to receive about twice the higher-education subsidy from federal, state, and local government of the youth from a family with income less than $20,000, even after counting means-tested aid.
After describing the basic architecture of the financial aid system, the book evaluates the likely causes of the decline in state support (and increase in tuition) at public institutions and the increase in expenditures per student at public and private institutions during the 1980s and 1990s. In the recent furor on Capitol Hill over rising college costs, federal financial aid has been a prime suspect. Although the National Commission on the Cost of Higher Education recently seemed to exonerate federal financial aid policy in placing the blame for increased college costs, the analysis in chapter 3 suggests that federal policy may very well have played an indirect role in the shift in state policy by subsidizing the states that raised public tuition during the 1980s.
Simply plotting the trends in federal student aid expenditures and tuition increases can be a misleading exercise because both could have been driven by some third factor such as a dramatic rise in the costs faced by colleges and universities. Rather, one must study the incentives implicit in the federal financial aid rules and ask whether they would have encouraged a college to raise its tuition or discouraged parents from fighting any such increase more vehemently by providing a subsidy to make up for the loss. According to the analysis in chapter 3, federal financial aid rules did offer substantial subsidies for tuition increases, but only for institutions with tuition below the federal loan and grant limits. This was particularly true in the early 1980s when the federal grant and loan limits were higher and the subsidies larger. The availability of these federal subsidies, particularly when combined with pressures on state legislatures to pay for ballooning state medicaid expenses, may have encouraged states to raise tuition at low-tuition public institutions and cut the share of costs covered by state appropriations. For example, for a middle-class family borrowing less than the Stafford Loan limits, the federal government's payment of interest on a student's loan for four years of college represents a 26 percentage point cut in the cost of the first year and a 16 percentage point cut in the cost of four years of college (at the end of four years, assuming an 8 percent discount rate). With the addition of the Hope Scholarship and Lifetime Learning tax credits in 1997, the federal government now subsidizes 87 percent of the cost over a four-year college career of any tuition increase for middle-class students attending an institution charging less than $1,000 in tuition. As such, federal policy serves as a system of block grants for state residents, essentially encouraging low-tuition states to raise tuition and be reimbursed by federal subsidies.
But while federal financial aid policy may have encouraged increases in public college tuition, there is less reason to believe that aid rules have helped drive the increase in costs at public or private institutions. Private institutions, where the increase in educational expenditures per student has been enormous, were already generally charging tuitions far beyond the federal limits for grants and loans. In other words, at the price levels where private institutions and their students were bargaining and where the cost (as opposed to tuition) increases were the most pronounced, federal financial aid was largely irrelevant. An extra dollar in tuition when a student already is being charged more than $5,000 generally brings no additional federal subsidy. Even at public institutions the costs per student generally exceeded $5,000. Therefore, although federal financial aid policies may have encouraged changes in state tuition policy at public institutions, there is much less reason to believe that aid was to blame in driving the increases in expenditures at public or private institutions.
So what was behind the higher costs? At public institutions there does not seem to be much to explain. The increase in expenditures per student was comparable in magnitude to the increase in faculty salaries, these institutions' largest expense. But the increase in faculty salaries simply mirrored the increase in the salaries of other similarly educated workers in the 1980s. Universities were competing in the same labor market that was driving up the salaries of the most highly trained workers. In fact, there is some evidence that public institutions responded to increasing salaries in a cost-conscious way by reducing the number of faculty per student.
However, at private institutions the magnitude of the increase in costs remains a mystery. In response to rising faculty salaries, many of the institutions hired more faculty per student, not fewer. As a result, expenditures per student rose even faster than faculty salaries. Although such behavior does not seem consistent with cost consciousness, the demand for the sort of education provided by elite private institutions may simply have grown at the beginning of the 1980s and even more by the early 1990s.
The book then turns to take stock of the progress over the past three decades in providing widespread access to higher education. The debate over the availability of financial aid has traditionally lacked measurable goals. Although all participants pay homage to "access" to higher education and "choice" among institutions, few seem to agree on just how much access is enough. This partly explains why the debate on higher education has become bogged down in the minutiae of the formula for calculating student need or the fees received by private banks. In the 1998 reauthorization of the Higher Education Act, the magnitude of student loan interest rates was the primary object of attention. It is hardly surprising that there is no sense of alarm because there have been no reasonable goals put forward for measuring progress.
Stated simply, the most basic goal of federal and state financial aid should be to ensure that lack of money is not the primary obstacle preventing low-income youth from making crucial educational investments. But several pieces of evidence suggest that ability to pay still weighs heavily in decisions to enroll in college. First, there are gaps in college entry rates between students from poor families and those from wealthier ones even when the young people have similar test scores and similar high school performance. Although the differences are largest for those with test scores in the bottom fourth of their high school class, differences remain even among those with scores in the top fourth. Given the differences in academic preparation of high school graduates, it would be both futile and economically inefficient to use financial aid policy to equalize college entry for rich and poor. Reforming elementary and secondary education is a better way to deal with deficits in academic preparation. However, it is troubling to note that large differences in college entry by family income remain, even among those students who leave high school equally well prepared.
A second piece of evidence suggesting that ability to pay still matters is that families overreact to changes in the price of college and under-react to changes in the return. Dollar for dollar, youth seem to be much more responsive to increased tuition and other expenses than to bigger payoffs. Studies have estimated that a $1,000 difference in tuition is associated with about a 5 percentage point difference in college enrollment. By such an estimate a $1,500 reduction in tuition would thus increase enrollments by 8 percentage points, about as much as enrollments expanded during the 1980s. However, the increase in the payoff for a college education during the 1980s was much larger than $1,500. Even discounting future earnings at the very high rate of 12 percent a year, from 1980 to 1992 the value of future earnings differentials would have grown by $40,000 between high school graduates and those earning college degrees and $24,000 between high school graduates and those completing only some college.
Sources of Financing Constraints
The sources of constraints on financing a college education are unclear, particularly considering the federal grant and loan programs available to low-income students. But rather than raising the borrowing limits or lowering the interest rates charged on federal loans, reducing the nonmonetary costs of negotiating the labyrinthine financial aid system seems a less costly and more promising place to start.
Indeed, the difficulty of applying for financial aid may explain a long-standing puzzle in research on higher education. Most research that has compared college enrollment rates in high- and low-tuition states has found that, all else equal, states with high tuition for public colleges and universities tend to have lower enrollment rates. This is particularly true for enrollments of low-income young people. But there is surprisingly little evidence of any disproportionate increase in college enrollment among low-income youth between the early and late 1970s when many federal loan and grant programs were expanded. (The primary federal means-tested grant program, originally named the Basic Educational Opportunity Grants and later the Pell Grant program, was established in 1973.) The explanation of the paradox may lie in the fact that low-income students, undecided about entering college, know about public tuition levels—they can hear about them on television or read about them in newspaper reports—but they may be less able to anticipate how much aid they could receive or to clear all the bureaucratic hurdles on the way to receiving it. Therefore, although the federal government dispenses over $6 billion in Pell Grants each year, it is not at all clear what portion of these students would have been enrolled anyway.
Justifying a Change of Course
The case for public subsidies for higher education has traditionally relied on two economic arguments. The most commonly cited justification emphasizes the hard-to-measure social benefits associated with higher education—improvements in the ability to participate in public debates, greater tolerance between groups, and so forth—that are enjoyed by society as a whole and not just by the students. To the extent that families pay the full cost of education themselves, they are likely to ignore these larger social benefits and may underinvest without some publicly provided inducements. Second, private capital markets are likely to underinvest in education because students lacking other forms of collateral cannot borrow against their future earnings, even for investments that are worthwhile. This is the familiar justification for government loan guarantees as a way to ensure loan financing for worthwhile private investments.
Although education policy has become a popular political touchstone in recent years, with politicians in both parties competing to find new resources for educational initiatives, most proposals lack a coherent rationale justifying greater public involvement in higher education. Advocates typically refer to the need to maintain national economic competitiveness or point to the rising labor market value placed on educational attainment. Yet neither of these observations suggest a need for greater public involvement in education beyond ensuring that loan guarantees are sufficient. It is not obvious that the increase in the private returns to college that are driven by labor market changes would have been accompanied by an increase in the other social benefits of higher education. By the traditional arguments for higher education subsidies, the argument for redoubled efforts or a change in direction seems tenuous.
Therefore, in attempting to make the case for a change of course in higher education finance, I rely on a third rationale for public subsidies: differential access to information about applying to college and about the rigors of college life is likely to lead some students to underinvest in their education. And because the payoff from schooling has increased the "cost" of this failure to invest, the cost of this lack of familiarity with college has also increased. Low-income students may always have underinvested in higher education, but during the 1980s and 1990s the economic costs and unfortunate social consequences of that underinvestment became more harsh.
For many young people, the first year in college is an experiment in which they are challenged to determine if they are "college material." Some youth simply have better information about how to apply to college and what will be expected of them there. Those with poor information may experiment too little. Of course, the most direct way to address any underinvestment resulting from this lack of familiarity would be to improve access to information about applying for federal financial aid or to simplify the application process.
But that is not the only way to lower the costs of experimenting with college. For instance, student financial aid dollars ought to be distributed so that the incremental gain in educational attainment (or, more accurately, in the public good generated by educational attainment) for each dollar of financial aid given college freshmen equals the incremental gain for each dollar of financial aid for college seniors. Yet when college freshmen are more likely than college seniors to have their decisions changed by an extra dollar in aid, there are potential gains to be had from raising the amount of aid available to a college freshmen to an amount greater than the aid available to a college senior. For instance, rather than providing grants to students for all four years in college, the same funds could be used to offer larger grants to students in their first two years of college, essentially encouraging those who are uncertain of their college prospects to learn about their college potential by enrolling. Those who discover the benefits of a college training could then be expected to borrow a larger share of the costs during their final years of college.
Whether a student is entering the first or the third year of college, a dollar of aid that encourages someone to attend an extra year results in an extra year of education. However, encouraging someone to try their first year of college also creates an option value with the possibility that the student will learn to thrive there.
There is some evidence that the threshhold from high school to college is more difficult to cross than the subsequent transitions from the first to the second, second to third, and third to fourth years of college.
Figure 1-2 uses information on the educational attainment of 25- to 35-year-old men in the 1990-91 Current Population Survey (March supplement) to estimate the proportion of young people completing each grade level that choose to go on to the next grade level. More than 95 percent of those who reported completing eighth grade entered ninth grade. A similarly large share of those who reported completing the ninth through eleventh grades reported continuing to the next grade level. But less than 60 percent of those completing twelfth grade reported going on to attend even one year of college. And there is a similar falloff in continuation rates between college graduation and graduate school. The proportion of youth going on to the next grade level falls at those points where students cross from one institution into another, even though the payoffs rise smoothly. Our goal should be to lower the thresholds at these transitions.
Meanwhile, figure 1-2 also shows that average hourly earnings per year of schooling completed increase more smoothly. There is no apparent fall in the increment in earnings associated with completing a year of college relative to the other increments. With the payoff to education appearing to increase so smoothly, the sudden drop-off in school continuation between high school and college seems puzzling.
Those who study high school dropout behavior know that the transition from middle school to junior high school can be extremely important. But at the boundary between high school and college, students not only have to find their way in a very different institutional environment, they also suddenly have to start paying tuition.
The proportion of those completing the first year of college who go on to attend a second year is closer to the continuation rates of high school students. Therefore, the limiting factor in school continuation does not seem to be tuition payments alone, because students considering their second year in college generally face the same incremental tuition costs as those considering the first year in college. Rather, something about the change in institutional setting seems to result in significant numbers of students falling off track.
Beyond front-loading eligibility for federal grant programs to those in their first years of college, there are a number of ways to avoid these problems. The first is to make simplicity and transparency fundamental to the aid application process. Families' uncertainty about the availability and potential amount of aid is, in part, a result of the design of federal financial aid policy. Currently, the marketing of federal financial aid is done largely by college financial aid offices when they offer aid packages to the students who apply for help. One strength of such a system is that the mixture of grants, loans, and work-study can be tailored to meet the particular needs of each student. However, parents and students are usually uncertain about the extent of aid available right up to the time they receive their package, when it is too late to adjust their savings decisions or to expand the range of colleges to which they have applied. And those whose decisions we would most hope to affect, those who would not be going to college in the absence of aid, are probably least likely to be able to navigate the system easily and anticipate the amount of aid available.
The U.S. Department of Education has tried many times to simplify the federal financial aid application process. But merely rearranging and reformatting a complicated list of questions contribute little. The price of real transparency may be to shorten the list of factors included in the need-analysis formula itself—for instance, basing expected family contributions to college education solely on family size and income. My calculations suggest that one could capture two-thirds of the variation in expected family contributions knowing these two characteristics. A simple table could replace the federal need-analysis system. Any loss in the targeting of benefits (some particularly high-asset, low-income young people would benefit and some moderate-income, low-asset families would lose) must be considered relative to the gain in transparency.
Second, the U.S. Department of Education should conduct randomized controlled experiments designed to evaluate the effectiveness of different forms of aid in affecting student choices. It seems reasonable to believe that an extra dollar in grant aid is more effective than an extra dollar of student loans in encouraging young people to experiment with college. However, a dollar in grants is a much more expensive way for taxpayers to solve a family's short-term liquidity problem than a dollar in loans. (In fact, using congressional cost estimates, the cost of a dollar in grants is roughly six times as large as the cost of a dollar in loans. Although the actual subsidy depends on future trends in interest rates, my calculations suggest that a dollar in grant aid costs between three and six times as much.) Yet the department has no way to weigh the bang for the buck achieved by these different policy instruments.
Table of Contents
| 1 | Introduction | 1 |
| 2 | How We Pay for College | 20 |
| 3 | Rising Costs in Higher Education | 55 |
| 4 | Has Financial Aid Policy Succeeded in Ensuring Access to College? | 88 |
| 5 | Rethinking How Americans Pay for College | 128 |
| References | 155 | |
| Index | 161 |