Tuition Inflation...Blame it on Former Presidents

Here's my latest post on the CCAP blog: The Obama Administration likes to blame former President Bush for the growing national deficit, although the new administration has certainly not shown any restraint in combating this problem. Well, I've got some blame to place on former presidents myself - rapid tuition inflation over the past several decades can and should be attributed to former presidents, beginning with Jimmy Carter. In 1978, the Carter Administration passed the Middle Income Student Assistance Act (MISSA), which extended federal guaranteed loans to all students, regardless of financial need or income. Before this, federal loans were restricted based on income and need.

The above chart shows federal aid expenditures by program type, in constant 2008 dollars, between 1970-71 and 2008-09. As we can see, loans dollars began escalating rapidly a few years after MISSA was passed by President Carter. The sharp spike that we see again in 1992-93 marks the expansion of the Parent Loan (Plus) program and introduction of a new, unsubsidized loan option not restricted by financial need under the last year of the G.H. Bush Administration, and subsequent expansion of the Direct Loan program by newly elected President Clinton in 1993.

What these policy changes did, was increase the ability to pay for students from middle and high income families. My colleague Andrew Gillen, Robert Martin and others have explained this phenomenon quite well, so I won't go into much detail here.

Income Based Repayment

Please see my latest piece on Forbes.com, “New College Loan Rules Put Taxpayers at Risk.” In the article, I describe how the new Income-Based Student Repayment plan puts taxpayers at risk, will exacerbate the tuition bubble and sends the message that public sector work is good and will be rewarded.

Beating a Dead Horse

Here's my latest post on the CCAP blog.

(Career College Central also posted the piece)

Let's play a little game of education policy and research trivia. Read the below statements regarding the for-profit sector and try to guess when these statements were made.

Private career schools became a front-burner issue for postsecondary education policy about _______ (hint: timeframe)..., in terms of participation in federal programs and in broader discussions about consumer rights and abuses...The impetus...can be traced to one key indicator: rapid increases in the amounts defaulted by students participating in federally guaranteed student loan programs

The sudden interest in proprietary schools generated by the debate over default led to several subsequent policy discussions. One had to do with the level of debt appropriate for young people entering the labor market, another with the increasing proportion of overall federal funds for student assistance going to students in private career schools, and another with consumer rights and abuses related to admissions, advertising, and promises for employment

Now, you are probably familiar with the fact that the Obama Administration and the Department of Education are changing the cohort default rate rules to account for 3-year defaults in 2012, and that there have been discussions about tightening other regulations regarding the for-profit sector, such as the 90/10 rule and gainful employment. So it would be a great guess if you said that the above statements were made in 2009, but you would be way off because they were made during the 1980s and included in a paper by Lee and Merisotis (1990) that I recently came across.

That's right, we've been having the same policy discussion about student default rates and so-called consumer protections for around 25 years. Despite subsequent regulations including establishing limits on CDRs to maintain Title IV eligibility, the 90-10 and gainful employment rules, laws requiring career schools to publish their job placement and graduation rates, laws forbidding incentive compensation and a slew of other regulations being placed on the for-profit sector, not much has changed in terms of outcomes. It seems that all of this federal meddling has led to...an escalation of tuition and the closure of 1,000s of career schools. I'm not exactly sure this was the intended outcome.

Just to touch a bit more on CDRs, I don't find it surprising at all that research produced in the 1980s reveals the same findings that current research on default rates does, namely that:

Studies that examine the effect of institutional type on default have sometimes been viewed as controversial because, given the structure of the student loan system; institutions themselves have no direct control over the borrower to influence his or her repayment

...students from different cohorts and varying income levels showed a considerable variance in their propensity for defaulting, supporting the idea that sectoral differences in default rates may at least be partially explained by differences in borrower’s characteristics

Defaulters have, regardless of institutional sector, significantly lower family incomes at the time the loan is made

the disadvantaged socioeconomic status of students attending proprietary and two year schools was found to be most strongly correlated with the likelihood of default, and institutional practices were found to be of limited importance