Richard Vedder delivered the following remarks at a Washington, DC Brookings Institution event on October 3, “ Reimagining Aid Design & Delivery: Improving Federal Financial Aid for Students.”
Since 1971, federal student financial assistance programs have grown almost 10 percent a year, or 5.3 percent a year adjusting for inflation. In the last decade, the real growth rate has been even greater, roughly 6.7 percent. This is unsustainable. Moreover, the proportion of individuals from lower income backgrounds amongst recent college graduates is lower than when these programs were in their infancy. Egalitarian goals have not been met.
The undesirable unintended consequences of student financial aid programs are numerous. When the Feds expand aid programs, two things happen: state governments reduce college appropriations and universities raise tuition fees. Both work to reduce the intended benefits to students. I think a decent case can also be made that these programs have contributed to high dropout rates, mediocre levels of student work effort and academic performance, and the substantial but under-discussed problem of underemployment among college graduates —the emergence of more college retail-sales clerks with college degrees than soldiers in the U.S. Army, for example, or more janitors with college degrees than architects or chemists. I think we are probably over-invested, not under-invested, in higher education in the United States, creating a credential inflation arising from using degrees as an obscenely expensive screening device, one involving massive wastes of potentially highly productive human resources.
What should we do? I think most reform proposals are tinkering with a broken system and we would be better off phasing out federal aid over the next decade or so and force colleges and families to adapt to a new reality —an adaptation involving massive innovation, following Plato’s maxim that necessity is the mother of invention. But if we are going to keep federal aid programs, politically certain in the short run, we must above all correct two perverse incentives. First, there needs to be rewards for good academic performance and negative financial consequences for poor performance. Good students should get more money than poor students, other things equal, not the reverse as at present. Second, colleges should have skin in the game. Their inappropriate admissions decisions or inattention to floundering students massively contributes to loan defaults, yet they face no adverse consequences. That needs to change.
Beyond that, simplify the system, restricting aid to more affluent families, doing away with PLUS loans and tuition tax credits, in line with RADD recommendations. We also should convert Pell Grants into progressive performance vouchers. By “vouchers” I mean money should go to students, not to university financial aid offices, empowering students more and making colleges more attentive to their needs. By “progressive,” I mean vouchers should vary inversely with income, being generous for truly low-income recipients, but non-existent for those whose income reaches the median. By “performance” I think that good academic performance should have some reward. No full-time student should get money for more than five years. “A” students graduating in less than four years should get a small bonus for saving the government money and as a reward for high academic achievement.
Also, I think we should have a federal policy environment encouraging new private approaches to financing, especially equity financing, where students contract to forfeit part of post-graduate earnings in return for financial support of college—the human capital contract approach. This would provide market assessments of future market outcomes that potentially could immensely help allocate scarce educational resources more efficiently.
That said, I am delighted with the RADD findings as summarized by Beth Akers. My wife, a high school guidance counselor serving low-income students, tells me that the FAFSA is a major impediment to low-income college access, and it adds little information to what IRS data already provides. Increasing consumer information on employment outcomes is vital and long overdue. Summer Pell Grants are in principle a good idea. While I think aid should be partly tied to student performance, I also favor discriminating in favor of institutions with good outcomes, although the devil is in the details. The same applies with income-contingent debt repayment: this is a good idea in principle, but schemes involving de facto partial loan forgiveness for most borrowers would have huge undesired unintended consequences. The debate about the optimal amount of student borrowing has arisen because of the rising ratio of college costs to post-graduate income, and modest tinkering with the system is not going to decisively deal with that. Still, on the whole, this is a constructive report and the Gates Foundation should be commended for its support.
Thank you.
