Obama's Aid Proposals Could Use a Reality Check

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President Obama speaks at Lackawanna College, in Scranton, Pa., as part of a bus tour to promote his ideas for controlling college costs.
August 26, 2013

In the last few days, President Obama has rightly called the nation's attention to the importance of higher education. He is right to criticize states for not putting postsecondary education higher on their list of financing priorities. He is right that the federal government should design effective incentives for both states and institutions to better serve students.

But students would stand to lose quite a bit in the unlikely event that the key proposals he advanced last week were implemented as described. Student aid would become much more complicated. Students would be punished for the acts of their states and institutions. The focus would move even further away from what students learn and toward how much they earn shortly after they graduate.

Let's step back a moment to review some basic realities. The federal government provides about $136-billion in grants and loans to undergraduate students annually. And the federal government has responsibility for addressing questions of inequality and opportunity for Americans, in addition to maintaining the overall strength of our economy. So higher education is a valid federal concern.

But state governments are primarily responsible for establishing, supporting, and managing colleges and universities in this country. Despite their retreat in recent years, states still provide a significant portion of the operating funds for public colleges and universities. It is also the states that license private colleges (for-profit and nonprofit) to operate. States have the constitutional authority for education, and they make the central decisions, which vary quite drastically across the nation.

The federal government gives some money directly to institutions. But its dollars go mainly to help students pay the prices set by the states and by institutions. Through our research, we have accumulated quite a bit of evidence over the years about what makes federal student-aid programs most effective in increasing educational opportunities and educational attainment. We know that complexity is a barrier. Programs should have simple application processes and predictable amounts of aid. We know that lower-income students are more price-sensitive than more-affluent students, so tailoring subsidies to those with the least resources is efficient as well as fair.

We also know something about how students choose where to enroll. Most students attend public colleges, and they stay in the states in which they live because out-of-state tuition is much higher. Lower-income students are particularly likely to stay close to home.

The president's proposals don't pay close enough attention to these realities.

Is it feasible to create institutional ratings based on prices, accessibility for low-income students, and results?

Providing simple and meaningful information to students is a good idea. But the reality is that it's not easy to measure postsecondary outcomes. What students learn is not on the list, probably because of the measurement challenges. But surely it is at or near the top of the list of what we should care about. We want people to get good jobs when they finish school, but do we really want to suggest that maximizing earnings should be the primary goal? Should we value colleges that educate investment bankers more than we value colleges that educate teachers and social workers? Did the president waste his expensive Ivy League education when he went to work as a community organizer instead of heading to Wall Street?

Excessive student debt is a problem. But should we expect colleges with low-income populations to have levels of student debt as low as those with wealthy populations?

We can't expect a place that is accessible to almost all high-school graduates to match Harvard's graduation rate. We can compare only "similar" institutions, but that is not an easy task, and we should still put a floor under how low a graduation rate we can accept: If a college graduates almost no students, we must question how much it is improving its students' lives. We shouldn't leave it to students to avoid these colleges: States don't have to license them, and the federal government needn't make them eligible for student-aid funds.

So none of these factors are easy to measure. Surely combining all of them into one "rating" is even more problematic. And what about the differences in programs within institutions? Do we just average the ratings (based on such factors as graduation rates, earnings, debt) of future welders with those of English majors? The data and analytical demands of going program by program would be overwhelming.

If we had a rating system, would it be advisable to adjust the aid packages received by individual students to account for the ratings of the institutions at which they are enrolled?

This is the fundamental problem with the president's proposal. There is a huge difference between financing institutions based on their performance and adjusting the support for individual students based on the performance of their institutions. As the proposal stands, the penalty for a college that charges its students too much is to take away some of those students' Pell Grant dollars, making the unfortunate students who enroll there still worse off.

Perhaps the idea behind the proposal is that students will vote with their feet. They will avoid colleges that charge too much or don't have high enough graduation rates. In reality, students don't have that much flexibility. If a low-income student lives in a state with a poorly run public system, she's stuck, unable to afford out-of-state tuition or private alternatives. Cutting her Pell Grant just doesn't help.

And then there's the issue of complexity. Just as we are gaining consensus and momentum for making Pell Grant awards predictable, we will tell students and families that their awards depend on the rating their college gets on a complicated index that can change unpredictably from year to year.

Happily, there are other ideas on the president's list that hold greater promise.

Can we ease the problems some students have with repaying their loans?

In recent years, the government has built in some important safeguards for students who face repayment problems with their federal loans. For most students, there is an income-based-repayment (IBR) plan that prevents them from having to make payments exceeding a reasonable proportion of their discretionary incomes. But relatively few students take advantage of this option, and the president's idea of notifying students individually to help them navigate the system is excellent. It would be even better if IBR were the default option and borrowers didn't have to jump through any hoops to join the plan.

The president has also promised to fix the problem that, as currently designed, the program provides undue subsidies to some relatively high earners who borrow very heavily for graduate school and can get their loans forgiven even if they have reasonable earnings. This loophole needs to be closed quickly.

Is the focus on cost-cutting innovations appropriate?

Cost-cutting innovation is everyone's favorite solution to providing people with things they value but hate to pay for. Providing federal subsidies to states and institutions to find such innovations is an excellent role for the government. But we have little evidence at this point about some of the ideas highlighted by the president as "best practices." We don't know whether MOOCs have the potential to help students—particularly at-risk students—learn more while paying less. Nor do we have enough evidence about so-called competency-based degrees to know if they will increase meaningful educational opportunities or just let us count more people as having college degrees. These are great questions for research, but we don't yet know the answers.

This incentive program can and should be designed to allow for real, meaningful innovation.

The president is right to focus on college access and affordability. Assuring that postsecondary education contributes to reductions in social and economic inequality is vital. His focus on providing accessible data to inform student decisions and on creating incentives for institutions to provide quality education at a reasonable price to a diverse student population is appropriate. But this is not a problem the federal government can solve by itself or by trying to tune financial-aid policy to bend states and institutions to its will.

The federal government should recognize the limits of its role in micromanaging colleges and universities that it does not and, according to our Constitution, should not control. Our system of higher education is diverse by design, with lots of different types of institutions offering a wide variety of students many distinct opportunities. We have to improve the system and make it easier for students of all ages and from all backgrounds to benefit from it. But we should be wary of the unintended consequences of solutions that sound simple for problems that are very complex.

Sandy Baum is an independent higher-education-policy analyst and a senior fellow at the Urban Institute and the George Washington University Graduate School of Education and Human Development. Michael McPherson is president of the Spencer Foundation, an economist, and a former president of Macalester College.