Another shoe has dropped. Readers of this blog know the Obama administration's decision to crack down on college tuition hikes has been long in the making. Our deeply flawed student aid model has pushed tuitions so high that the bubble is about to burst. In his last State of the Union address, the president warned that tuition increases must stop. At the University of New York at Buffalo, he stepped on the brakes harder.
The president announced a ranking system to compare colleges by tuition, graduation rates, debt and earnings of graduates and the percentage of lower-income students who attend. Pending Congressional approval, colleges which do a superior job will see the availability of financial aid increase. Those that do poorly will have their aid decreased. If Congress does not go along with the president, he can still use the ranking system to jawbone (and embarrass) colleges to do what he says.
This matters because colleges are highly dependent on financial aid to pay their costs. State colleges receive more than half of their tuition income from government student loan transfers, while private colleges receive 31 percent, still a dangerous level of dependency.
It's strange that colleges show little concern or even awareness of how dependent they are. Their advocate in Washington, the Association of American Universities (AAU), spews out memo after memo claiming the problem of student debt is largely exaggerated. Most colleges have a range of policies to reduce costs such as greater use of technology, but they don't seem to be in a particular hurry.
Yet if the government puts teeth into its ranking system it could have a big effect. Colleges have been conditioned to respond to rankings -- they slavishly seek to surpass their peers in the categories established by U.S. News and World Report.
Lower tuitions must be met with higher savings to make colleges affordable. The "golden mean" would be if the savings rate rose higher than the tuition increases. The government needs to do much more to encourage savings. One idea would be to add a savings feature to the Pell Grant, which last year provided $33 billion in aid to students. A student can receive a maximum of $5500. Why not reward his family with an extra $2,500 if they save $2,500? If announced to families when their children are in early grades, it will allow even the poorest families to reach the goal in time.
Once tuition amounts are brought down to attainable levels, the floodgates of college savings could open. These monies would come at a critical time for colleges. If the tuition bubble breaks today, colleges would face the perils of closures or mergers. For the communities that depend on colleges for employment, this scenario would be dark indeed. Let's listen to the president and try for a soft landing.