Why the Federal Government Wants to Get into Rating Colleges

Sep 10, 2013

Why the Federal Government Wants to Get into Rating Colleges

          After working out a bipartisan compromise to keep interest rates on student loans from doubling, President Obama startled many by proceeding to launch a significant White House college funding initiative. That initiative seeks to constrain the growth in the cost of a college education and the burden of student loans on those who have graduated or left school. As part of this, President Obama ordered the Department of Education to prepare a rating system for all colleges that would tell potential students and their parents how cost-effective an education at each college actually was. The idea was to publish information on the “bang for the buck” that students would get from investing in an education at each school.

          The President was not just trying to provide more reliable information to students and their families about the actual value of an education from each school. The President also wanted to use that information to reward schools that provided a more cost-effective education and punish those colleges where costs were high but their educational results were poor. Federal financial aid to colleges and their students would vary depending on the schools’ different balances of costs and educational achievement.

          That of course has lots of people up in arms, and they are not all conservatives suspicious of a further extension of federal government authority into state government and private educational realms. Liberal academic leaders also object to the very idea of rating colleges’ success in financial terms. They see that as the ultimate corporate corruption of the purpose of higher education and the broad liberal arts training that those colleges traditionally provided.

          The federal rating system, as briefly outlined by the President, would look at the cost of enrolling at a particular college and the likelihood that the student would graduate and what the annual income received by former students was after they left that college. That sounds like a very narrow way of evaluating any education.

          The measure of the “cost” of the education would not just look at tuition levels but also at the financial aid provided and how accessible the college was to lower income households. The “output” that would be measured, however, would be in terms of the time it takes a student to get a degree and their pay levels once out of school. That is a purely commercial model of what higher education is all about.  Expect strong resistance to Obama’s proposals from both conservatives and liberals.

          The President was driven into proposing such a federal college rating and funding system because of a serious problem that has developed as a result of the federal student loan program. With almost no limits on how much can be lent and who can borrow, this method of funding student access to college has led to the proliferation of for-profit post-secondary educational institutions. With that large spigot of federal money flowing, private businesses have seen profitable opportunities associated with recruiting students and having them borrow the full cost of the education these businesses promise. These educational businesses get the federal money free and clear from the students and the federal government is left hoping to recover the money from students at some point in the future.

          The result has been for-profit schools funding their operations almost 100 percent from federal student loans. The result has also be incredibly high default rates by previous students on these loans. The education offered is often simply a scam. The for-profit schools have the incentive to take all of the students they can possibly recruit and pay very little attention to whether the educational program offered is useful to students or even mastered by students. One of the reasons that broad education has remained almost exclusively in the government or non-profit sector is the problem of the commercial incentives to sell grades and diplomas to whoever will pay for them.  How does one maintain credible standards in that commercial setting?

          In the past, colleges themselves have banded together to set up theoretically third-party groups to set and enforce educational standards. The process is called “accreditation.” Respected educators visit a college every five years or so and scrutinize how rigorous the education provided actually is. That sounds good, but since it is the colleges that set up and staff the system, accrediting agencies often turn out to be advocacy groups for better funding for academic programs. It is also possible to set up a new accreditation organization to serve as a cover for new schools.

          In some ways the problem here is the same one that the Wall Street financial ratings firms faced when they had to rate the financial instruments marketed by their own parent company. That is how sub-prime mortgages and other complex and risky financial instruments got rated as “safe” when they were about to turn worthless and almost pull down the American and world economies.

          So there is a problem that needs to be solved here. Just as some financial companies exploited low income households with the sub-prime mortgage scam, some for-profit educational businesses are doing the same with student loans. How do we keep these businesses from exploiting students and their families by piling huge amounts of debt on students for a worthless set of less than educational experiences?

          Obviously the federal government has to impose some sort of standards on how federally underwritten student loans are used. We do not want to limit the access of middle and lower income students to a real college education. We also do not want to discourage new approaches to post-secondary education or new schools. But we have to stop pouring federal money into scams that leave our young people crushed by debt even before they enter the workforce.