Stamatakis: Increasing federal aid makes college less affordable in the long run

Blanket increases to federal aid problems may do more harm than goodI am pretty confident that if I walked around campus today and offered students free money for tuition, the response would be overwhelmingly positive.

Attending college is expensive, after all. Increasing Pell Grants, Stafford or Perkins Loans would make millions of students today much better off.

But before we dole out free cash, remember why people need money in the first place: The resources required to run a university — the faculty, the buildings, the information technology — keep getting more expensive. To produce one educated student today costs more than it did ten years ago.

Thus, to make college more affordable, we have to make college more efficient. We have to educate better for less. And this is why blanket increases in funding for students are a bad idea. They are great for making things more affordable for a bit, but on the basis of making college more efficient, they fail miserably.

In fact, the explosion of Pell Grants, low interest rate loans and other aid programs might be responsible for the affordability crises we face today.

Consider the decision thousands of colleges face when offered federal aid. Ideally, an increase of $500 per student makes tuition $500 cheaper. And for the first year, it might.

But flooded with cash, universities quickly make investments in new buildings and programs. Suddenly, they have invested that $500, and the student price is the same, not cheaper.

Most importantly, the efficiency of the institution has decreased, and a single student’s education now uses more resources. Eventually this efficiency loss catches up to the school, and tuition has to expand, leading to more aid requirements and continuing the cycle.

Now all institutions, education-related or not, need to make investments to improve capabilities and grow: Factories invest in new assembly lines, and Apple invests in new technology for a reason.

All these investments reap return. But there is a self-imposed limit to the number of possible investments when projects are financed through typical channels. To justify a small price increase or lack of price decrease in a private company, touch-screen technology or new factory capacity has to pay off quickly.

But at a university level, no investment needs to pay for itself. Five hundred dollars in Pell Grant money can go toward programs that only bring $200 in student benefit. Students won’t get upset at the $300 difference — they aren’t paying for it, at least now. The school has simply become $200 more valuable.

Competent university administrators make uneconomic decisions, simply because their incentive is to make lesser-quality investments rather than no investments at all. For a president or provost to not take money would be foolish — every other school is taking the money, and they have to compete with other school’s $200 projects.

This cycle of aid and cost expansion is a better explanation for increased costs than the claim that government funding has just been cut off — mainly because the government spends more today than ever. While states are pulling back, the feds have stepped in, especially in financial aid, now supporting 71 percent of spending — up 10 percent from a decade ago. Most increased are low-interest federal loans, which provide time-adjusted free money: The federal government supports $400 billion more in student debt than in 2008.

Thus, we have today’s situation. Average tuition has risen 15 percent between 2008 and 2010, with two-thirds of the cost being absorbed by those with higher incomes and the government, according to the U.S. Department of Education. More alarmingly, colleges are less efficient: There is no evidence this 15-percent increase has improved outcomes by 15 percent. Students and taxpayers are simply saddled with the debt and required to take part in a bloated system.

There is no simple solution to this problem, but there are ways to move forward without completely ending aid. Lower and middle-class families can still have access to loans and grants without placing upward pressure on the cost of college, but the formula for aid must drastically change first.

Currently, aid is awarded based on a calculation of estimated possible family contribution subtracted from the cost to attend a school. A student at a high-cost school generally receives more than a student at a low-cost school; the government makes up some of the difference.

Instead, financial reward should be a block grant that stays with the student, remaining unchanged regardless of the price of the school. The education would still be subsidized, but students would be more vulnerable to cost increases.

While this sounds terrifying, it would for the first time give universities a real incentive to stop tuition increases. Instead of attracting people with $200 investments in gyms, dorms and unprofitable programs, universities could attract people by saying their tuition dropped by $500. To attract better minds, schools could offer no-increase guarantees to students worried their tuition might jump after sophomore year. Costs would grow more slowly.

The quality of investments would increase too. Increased spending in a math center would need to lead to better student outcomes at graduation because these new costs would be directly felt in tuition. And if it turns out effective students truly do require $50,000 worth of investment, traditional private lenders can still provide loans, just with a higher level of confidence that they’ll get their money back.

Higher education pays off: Those with degrees have better job prospects than those without degrees on average. But just because it pays off, doesn’t mean more of student’s education should be subsidized without pause; reforms in financial aid mechanisms are needed to stop tuition’s eternal march upward.