Tuesday, May 27, 2014

Obama's College Rating System: Why Do Something Simple and Effective When You Can Do Something Complicated and Futile?

President Obama Wants to Institute a College-Rating System to Help Bring Down the Cost of Higher Education. Is This a Good Idea?

President Obama wants to create a college-rating system to help prospective students make better choices about where to attend college.  Obama's proposed rating system will consider a number of factors--cost of tuition, graduates' average debt load,  post-graduate earnings, etc.--which will all be weighed with the goal of identifying which colleges provide the best value for students' tuition dollars.

University of Houston's Renu Khator: This woman needs a performance bonus!
According to a New York Times story, Obama's proposed rating system would not rank institutions numerically. Rather, colleges and universities would be given grades like "excellent," "good," "fair," or "poor."

Not surprisingly, many higher education leaders are opposed to President Obama's initiative. Most of them want nothing to do with a college-rating system designed by the U.S. Department of Education.  The New York Times quoted the reaction of several university presidents to Obama's college-rating proposal, who described it  variously as  "clueless," simplistic, and "wrongheaded."

Personally, I have no sympathy for the college presidents on this issue.  Colleges and universities have been jacking up tuition for years at twice the annual rate of inflation, and Americans have wracked up more than $1.2 trillion in outstanding college-loan debt. I commend President Obama for trying to reverse this trend.

But will a complicated, federally designed college-rating system do anything to stop the upward spiral of rising college costs? I doubt it. 

In a way, Obama's college-rating initiative is like the Clery Act, which Congress passed in 1990 to give parents and prospective students more information about crime activity in and around the nation's colleges and universities.  The Clery Act requires higher education institutions to collect and publicly report on various categories of crime in their campus communities.

Unfortunately, there is little evidence that the Clery Act has had much impact on college students' awareness of campus crime.  One study reported that only 10 percent of students considered campus crime statistics when making decisions about where to attend college.

Two authors who surveyed research and commentary on the Clery Act concluded: "It is clear that students remain unaware of the [Clery] Act"  and do not use the information contained in their institutions' annual campus crime reports (Gregory & Janosik, 2002, p. 46). It seems likely that more students choose their universities based on varsity-football rankings than on the crime statistics that higher education institutions are required by federal law to compile and publicize.

Why Not Attack College Costs and Rising Student Indebtedness Head On?

To his credit, President Obama recognizes that soaring tuition costs and rising student indebtedness have reached crisis proportions. As Cecilia Munoz, one of Obama's top advisers put it, "This is a system which perpetuates itself, and is moving in a direction which is unsustainable to the American people." 

Nevertheless, it seems unlikely that  President Obama's federal college-rating system will have any significant impact on rising college costs and rising student indebtedness. On the contrary, Obama's initiative will probably increase administrative costs at colleges and universities because they will be required to hire more bureaucrats to deal with the college-rating regulations.

Shut down the for-profit college industry. Instead of dealing with rising college costs and student indebtedness indirectly, why not tackle the problem head on? For example, we know that for-profit colleges have the highest tuition rates, the highest student-loan default rates and the highest dropout rates of any sector of the higher education industry.  Moreover, although they enroll only about 11 percent of all post-secondary students, they soak up a quarter of all the federal student-aid money.

Why not simply kick the for-profit colleges out of the federal student loan program altogether? The money saved--more than $30 billion annually--could be directed to public community colleges, which can offer post-secondary education at a far more reasonable price.

Shut down the private student-loan industry. We also know that rising tuition is made possible in part by a thriving private student-loan business.  Professional schools in particular could not set tuition rates at their current high levels if it were not for the fact that students have access to a private student-loan market to pay their tuition bills.

Why not shut down the private student-loan industry?  And how could that be done? Simply by repealing the 2005 revision to the U.S. Bankruptcy Code that makes private student loans almost impossible to discharge in bankruptcy.  If the banks knew that insolvent student-loan debtors could discharge their loans in bankruptcy as easily as they could discharge other unsecured loans, the private-loan industry would shut down almost overnight.

Force colleges and universities to cap tuition and executive compensation as a condition of participating in the federal student loan program.  Finally, all colleges and universities should be required to cap tuition, fees, and executive compensation at current levels as a condition of participating in the federal student loan program.

The value of capping college tuition and fees should be obvious. Telling colleges they must freeze tuition and fees at current levels in order to receive federal student-aid money would force higher education to immediately rein in costs.

And capping executive compensation is also important Let's face it, many college and university presidents make obscene amounts of money and their total compensation packages are often not publicly disclosed.  No institution participating in the federal student loan program should be allowed to do what New York University has done--give low-interest loans to favored employees to buy second homes or pay its president a "length of service" bonus of $2.5 million.

No institution that receives federal student aid money should do what the University of Houston did, which was to pay its Chancellor, Renu Khator, a salary of $700,000 a year plus an additional $200,000 a year in deferred compensation along with a $100,000 a year retention bonus and a contingent bonus of $50,000 a year dependent on performance. 

Don't you think that's ridiculous?  Chancellor Khator makes a million dollars a year in total compensation (plus free housing), and then she gets an additional $50,000 incentive for superior performance? So what's Ms. Khator telling the University of Houston? I'll do a pretty good job for a million bucks a year, but for an additional $50 grand performance bonus, I'll do a super job!

These three actions--shutting down the for-profit college industry, shutting down the private student-loan business, and forcing colleges and universities to cap tuition and executive compensation--would help stop the spiral of rising college costs and growing student indebtedness. All three actions would be simple to implement and all would have an immediate effect on the cost of higher education.

On the other hand, President Obama's proposed federal college-rating system will do absolutely nothing to rein in the cost of higher education or reverse the trend of rising student-loan indebtedness. The time for tinkering with this problem is over.  Only drastic action will restore fiscal sanity to American higher education.


Dennis E. Gregory & Steven M. Janosik. The Clery Act: How Effective Is It? Perceptions From the Field--The Current State of the Research and Recommendations for Improvement. Stetson Law Review, 32, 7-58 (2002).

Renee C. Lee. UH gives Khator big bucks to stay. Houston Chronicle, December 21, 2012. Available at: http://www.chron.com/news/houston-texas/houston/article/UH-gives-Khator-big-bucks-to-stay-4139696.php

Michael D. Shear. Colleges Rattled as Obama Presses Rating System. New York Times, May 26, 2014, p. 1.

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