Recently, the University of Minnesota’s Carlson School of Management put forward a plan to charge more in tuition for undergraduates than the rest of the U. The plan, which would charge an extra $2,000 a year in order to recruit and retain more faculty members, would change the egalitarian tuition policy that the U has had for more than 20 years. Although I don’t have an opinion one way or the other on this policy, it does bring to light one issue that I think we should be discussing: the cost of a college education, or more specifically, the “egalitarian” tuition model that prices degrees similarly. I think that policy hurts more than it helps, and it’s time to change the price we pay for degrees.
Most people agree that college tuition is growing out of control. It has grown far faster than the rate of inflation and incomes in the past couple of decades. I saw this increase firsthand: between about 1997 and 2005 at the U of M, undergraduate tuition went up substantially, more than 50%. Funding this increase in tuition has been an increase in debt: almost $1 trillion, more than outstanding credit card debt. It’s a spiral that feeds upon itself.
What generally isn’t mentioned, though, is that this debt is incredibly easy to get. Since they are backed by the federal government, and can’t be discharged through bankruptcy, federal loans are pretty much available to anybody who applies for them. Federal loans won’t cover the full cost of expensive colleges, though, which is where private loans come in. Thanks to a change in the 2005 bankruptcy law, private loans were essentially made equivalent to federal loans in terms of being unable to discharge them in bankruptcy. Private lenders said this would allow them to offer loans to a broader spectrum of borrowers, which is undoubtedly true. However, it seems like the pendulum has swung too far in terms of easy money for students, especially considering that once you take it out, you can’t get rid of it. I was shocked at how simple it was to get a $30,000+ private loan for law school when I was planning on attending: a few minutes on an online website, and I had the money. Taking out a similar loan for a car, I think, would not be nearly as easy.
Easy credit and rising prices is something we’ve seen before, and many people see this as the next bubble. So what can we do about it? Like other bubbles, it’s going to take the tightening of credit to head this off. The question then becomes how.
I’m going to go out on a limb and argue that subsidized loans from the federal government need to go away. I’m all for opening up access to college for those without the means to attend, but I think that Pell Grants, which are grants and not loans, are the way to go. Giving people subsidized loans that tie them to large repayments for 10, 20, or 30 years is not terribly helpful.
Instead, I think we should go to a model where loans are priced in a free market based on a number of factors. The prime factor, I think, should be that degree. There is no reason that the cost of a degree in, say, Political Science (my undergrad degree) should cost the same as a degree in Chemical Engineering, but with egalitarian tuition and identical subsidized loans for everybody, this is what happens. By making some degrees cheaper than others, namely those that have lower interest rates because of better job prospects after graduation, higher salaries, and so forth, students will be nudged into degrees that employers are looking for.
This is a controversial idea, of course, and it would probably be fairly hard to put into practice. Lower overall borrowing costs for students in some majors could encourage colleges to raise tuition for those majors, erasing the benefits of the lower price. Other issues could also be priced into that loan, which could make it harder for people to finish college: for example, poor grades in during the first couple of years could drive up the rates for a student, making it more likely that the student would fail to graduate (the converse could also happen, though, rewarding strong students with lower rates).
I don’t know if this would be a workable solution in the end. It could simply have too many moving parts to be able to adequately implement. Nevertheless, I do think we need to start thinking about how we can reform how we pay for college while getting students into the majors that employers are looking for.