Attaching Some Strings to Student Loans

Michael Lux Blog, Student Loans 12 Comments

Its no secret that the cost of a college education has skyrocketed.  Its not a question of whether or not college has become incredibly expensive, the only issue up for debate is to what extent it has outpaced inflation.

Thinking about the rising cost of education, I am left with a question… what are we getting for all that extra money?  Is a graduate today any smarter than someone who graduated 30 years ago?  More importantly, is a graduate today any more likely to find a job than someone 30 years ago?

The High Cost of College Administration

Last year the Wall Street Journal did an in-depth analysis of the costs and expenditures of the University of Minnesota.  The results were staggering.  In 1975 a college student could work 6 hours a week at a minimum wage job and pay for tuition.  Today a student in a minimum wage job would have to work 32 hours a week to pay for tuition.

They found that much of the inflated cost was due to an increase the salary and amount of people working in college administration.  With some public University Presidents now making millions per year, the President of Minnesota made a seemingly more reasonable $610,000 according to the study.  Yet the Governor of Minnesota is only paid $120,000 per year.  Why does the person who runs the state’s flagship university get paid five times more than the person who runs the entire state?

One anecdote that seems to articulate the absurdity of the growing college bureaucracy dealt with a professor who sought reimbursement for a $12 parking bill.  After following the series of steps and chain of command required for approval of the bill, it was estimated that the University spent $75 dollars to approve the $12 parking bill.

How does this happen?

The increase in student aid, in the form of both grants and student loans, has allowed colleges to increase the cost of education.  With the prevailing myth that student loan debt is good debt, students continue to sign for large amounts of money.  Most seemingly have no appreciation for where their tuition dollars go, whether they are getting value for their dollar, and whether or not they will be able to pay this debt back.

The Solution

Some would argue that the only solution is to cut off or lower government funding for higher education.  Such a measure would substantially limit access to college for many Americans and should be viewed as a last resort.  Instead, lets put some strings on the money that gets spent by these colleges.

For every federal dollar that is spent by any college, at least 50 cents should be spent on full time professors.  The point here is not that exactly 50 percent of the money should be spent on professors, obviously this number will require far more analysis before it becomes final.  The point is that the federal government is the main source of income for most if not all colleges.  If the government says, you are spending too much on administration or building dorms, and not enough on teaching, the colleges will have to comply.

In an ideal world, if this requirement was put into place, the price of college would come down because schools would be forced to find a way to lower administrative costs.  Unfortunately, the higher education world is far from ideal.  Enacting such a limitation could result in administrators just giving more professors tenure and higher salaries, and the cost of education would just go up more.

Federal funding should also be contingent upon job placement, and students getting value for their education dollar.  While at first glace it would complicated to determine what schools are proper value and what ones are not, there is one easy measure that would factor in things like actual job placement, real salaries, and value of education: the delinquency rate.

The Federal Government and the Department of Education need to come up with a set of standards for acceptable student loan delinquency rates.  If schools can’t meet these standards, their government funds will be reduced or cut off.  Schools would have a huge economic incentive to make sure their students get a great education and find high paying jobs.  They might be able to fudge employment statistics, but there is no way of faking whether or not students can pay back their student loans.  This would also have the benefit of increasing student loan repayment, and allowing the government to charge a lower interest rate on these loans.

Our tax dollars fund much of the cost of education at public and private schools across the country.  With each year that passes, schools get closer to treating this money like a blank check.  It is time we started demanding some results for our youth.

As a taxpayer, how would you feel about the government putting these restrictions on student funding?

  • I absolutely like the idea of accountability. While I think it can often be counter-productive to have too much bureaucracy and excess rules/regulation, sometimes it can be a good thing – like in this case. This area seems ripe for intervention.

    • I agree. The government has already chosen to get involved… if they are going to be such a major market participant, they ought to be smart about it.

  • I like the idea of making universities accountable for explaining the way they spend their money. Especially public universities that receive state and federal funding. I wouldn’t necessarily care if 50% of the funding goes to full-time professors (many of my best professors were adjuncts), but the general idea of less administrative costs is great.

    • Great point about the adjunct professors. Many of them are fantastic and add a lot to the college experience. The goal is definitely to lower the massive administrative overhead.

  • I’ll all for making the schools more accountable, but I think anytime you implement this type of proposal…the universities will find a way to get around it and it might also have unintended consequences. One thing that popped into my head is that while I like specifying where funding should go to, it is somewhat unfair. I don’t want universities wasting money on things that have nothing to do with teaching, but this really ties the hands of administrators if the money really is needed to update or renovate their facilities.

    • Facility improvement is definitely a concern that should be factored in if strings are going to be attached. Your concern about unintended consequences is definitely a good one, but because the government got so involved with student loans we are already seeing many unintended consequences (such as the higher price of education). Further changes do have that risk, but I think it is time to act.

  • These are some great points. I would love for federal funding to be tied to how well the schools are placing their students. It shifts the focus more on treating students/alumni right instead of just making sure they get paid. I think it will take a long time for some real, good change to occur, though. Hopefully something happens before my future kids get to that age!

    • I hope things improve long before your future kids are college age.

  • Yes, definitely a good idea to audit their spending and run a lean operation especially in times like this.

    • Right now colleges have no incentive to go lean… it is time we gave them one.

  • I’m not sure I like the idea of schools being “graded” on the job placement of its graduates. In theory it’s a good idea but its ultimately up to the student. If they don’t work hard to find a job the college shouldn’t suffer. Likewise, if things are based on compensation, you could run into colleges cutting programs that don’t have high starting salaries or “encouraging” students to switch majors.

    • Great points Jon. I think you would see colleges cutting certain programs, but I would argue that it is a good thing. It would shift more college students into more marketable careers. Those that truly had a passion for a specific area of study would still be able to pursue it, they might just have to look a little harder.

      As for students not getting a job after they graduate, I think some of that may fall on individual students, but overall, job placement and salary stats are a pretty good reflection of the value of the education. If graduates are not working hard, doesn’t that mean the college failed in some measure?