The way we value higher education and go about financing its cost is all messed up.
According to the National Center for Education Statistics, the average annual tuition at two- and four- year public institutions is roughly $9,000 and $17,000 respectively, and $24,000 and $34,000 at private colleges (not-for-profit and for-profit).
No wonder total student loan debt is approaching the $1.3 trillion mark, and roughly half of all the loans that are currently in repayment are either delinquent, in default or some place in-between; the other half are still in deferment.
Of course, at the other end of the spectrum are those who’ve successfully paid off their debts and expect others to do the same, and folks who are ideologically opposed to any governmental involvement in education, let alone a stake in underwriting its financing.
So it comes as no surprise that when President Obama announced his administration’s intention to make community college cost-free to students who meet certain eligibility requirements, the news was met with as many jeers as there were cheers.
But have we missed the real news story behind the headline—that there’s a willingness to have an honest-to-goodness grown-up conversation about equating tertiary education (including two- and four-year colleges and universities, and technical training institutes) with that of the primary and secondary we all take for granted?
If so, this first effort is disappointing. I say that because the administration has chosen the least common denominator—enrollment in two-year community colleges—to make its case when the means to accommodate so much more is readily available without additional taxation.
Funding Tuition-Free College
In its most recent fiscal year, the federal government budgeted $30 billion in grants (Pell, Supplemental Education Opportunity and others), $37 billion in tax benefits (in the form of credits, deductions and exemptions) and approximately $40 billion in expenditures that cover first-year costs (including loan-portfolio servicing) for the loans the Education Department originates, for a total of $107 billion worth of annual support for higher education—$4 billion more than the total amount of loans the ED expects to make in 2015.
If one were to divide that $107 billion by the approximately 12.7 million of 18- to 24-year-olds (also per National Center for Education Statistics data) who are currently enrolled in two- and four-year degree-granting institutions, approximately $8,400 a year could be made available to each of them, without regard for their choice of schools.
This idea, however, is not without its problems.
Is That Enough?
For example, under this plan, government loans would no longer be available. Yet, $8,400 doesn’t cover the average price of tuition at a public two-year institution, let alone that for a four-year school.
However, here’s why this approach still makes sense. Companies charge as much for their products and services as the market will bear, to the point when they are no longer competitive. Those that wind up in that predicament have two choices: rethink cost structure or exit the market.
So if funding limits are indeed a future potential for higher education, this would be a good time for the schools to make some tough decisions of their own. They might start by choosing among the competing three lines of business in which many seem to be engaged: education versus hospitality versus entertainment. That should prompt a secondary discussion on how to reinvest the capital the institutions stand to reclaim upon the divestiture of what are deemed to be noncore activities. The most forward-thinking schools may even choose to take advantage of the operational efficiencies that would come from combining with like-minded institutions nearby.
Revising the bankruptcy code would also help to move along this concept. That’s because if student loans were to once again become eligible for discharge, private lenders will be apt to think twice before rushing in to fill a market void the government will create when it discontinues its various financing programs. Given that roughly two-thirds of all undergraduates borrow to pay for their education, the schools would have no other choice but to act.
Another problem with this idea would be the regressive nature of an across-the-board approach that treats students of means no differently from those who haven’t got a dime. So one way to address that would be to phase out funding above a household-income threshold, which would in turn increase the value of the tuition benefit for those who fall below that level. It may also make sense to limit this arrangement to the comparatively lower-cost public institutions, which should also encourage the private schools to adjust their tuition prices in an effort to remain competitive.
Dealing With Other Expenses… & Unfinished Business
Germany recently made college tuition free to those who qualify to attend its public universities. Housing, food, health insurance and health club privileges, however, are à la carte. Consequently, many students choose to attend schools close to home while others set off on their own by taking part-time jobs and sharing living expenses. This is not an unfamiliar concept to those of us who worked our way through college.
And finally, what about the millions of current and former students who’ve racked up that $1.3 trillion in education-related debt, not to mention those who’ve repaid their loans?
That’s a tough one. After paying for my own college and grad school, and parting with a substantial amount of after-tax dollars in the course of educating my kids, sure, I’d love to have some of that back. Unfortunately, that’s not how the world works. But that doesn’t mean we should ignore the plight of those who are struggling to repay their debts, particularly when we as taxpayers are on the hook for the money if they don’t.
That’s why it would be a mistake to implement a plan of this scope without simultaneously restructuring the existing student-loan portfolio—without regard for loan type, origination date or payment-delinquency status—so that the loans are more likely to be repaid. Monthly payments can be made more affordable when loan durations are extended and higher-than-current-market interest rates are lowered.
Look, there are plenty of areas to pick apart in the president’s proposal and the counterproposals being put forth—this one included. What matters more, though, is that a very important conversation has at long last begun.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.
More on Student Loans:
- How Student Loans Can Impact Your Credit
- Can You Get Your Student Loans Forgiven?
- How to Pay for College Without Building a Mountain of Debt