Editor's note: Beth Akers testifies before the U.S. House Education and Labor Committee in a hearing entitled, "The Cost of College: Student Centered Reforms to Bring Higher Education Within Reach."
Good morning, Chairman Scott, Ranking Members Foxx and members of the committee. My name is Beth Akers and I’m a Senior Fellow at the Manhattan Institute where I conduct research on higher education in the United States with a focus on finance. I’ve now worked in this space for over a decade, first in my position as Staff Economist at the Council of Economic Advisors and then at the Brookings Institution as a Fellow in both Governance and Economic Studies.
Thank you for the opportunity to share my testimony here today.
College is expensive and getting more so every year. This inflation, combined with growing enrollment among less well-off students, is driving student borrowing to tick up year after year. The current outstanding balance of $1.5 trillion is the highest level in history.
But it’s important to remember that spending on higher education is, on average, worth it. The increase in earnings that comes from having a college degree tends to outweigh the upfront cost of enrollment. This makes debt a reasonable mechanism for helping students to pay for college. For those who do go on to see a positive return on their spending, the problem of affordability is an issue of liquidity, or being able to borrow from their future earnings, and not an issue of price.
This notion is borne out by the statistics. While the popular media has frequently told the stories of borrowers struggling with repayment – like the dental student who managed to amass one million dollars in student debt – the vast majority of borrowers have small balances, reasonable payments relative to their income and are eligible to take advantage of safety nets that will reduce or stop their payments in times of financial hardship [link].
The reality is that few borrowers have astronomical balances. As of 2015, just 5 percent of borrowers had outstanding balances in excess of $100,000 [link]. And many of those borrowers had completed graduate or professional programs that would lead to high-paying careers.
While it is the responsibility of the media to cover the dire circumstances of the few, I’m afraid that this has distorted our collective impression of the magnitude of our college cost problem.
But knowing they are in the minority will provide little comfort to borrowers who find themselves underwater on their educational spending. Nor should the infrequency of this problem cause policy makers to turn a blind eye. Sadly, many students are spending on college only to end up worse-off financially then if they hadn’t gone in the first place.
College is risky. And it is this risk, not the price of college, that is untenable.
The system of higher education finance that we have in place today is not fundamentally out of sync with the challenges we face, but a small number of important policy changes could bring it closer in line with our collective objectives.
First, we need to sure-up the safety net for borrowers and redesign it so that it operates effectively and is fiscally sustainable. It should be simple in design and fool-proof to utilize such that all students, not just those who are intensely financially savvy, can factor its existence into their enrollment and spending decisions.
To accomplish this, we need to replace the existing system of federal student lending with a single loan program that collects loan repayment through a plan that ties monthly payments to a borrower’s income.
There will always be a tension between providing a safety net and diminishing the incentive for people to be self-sufficient. Moral hazard is inevitable, but smart program design can ensure that safety nets are as efficient as possible and do not create incentives for perverse behavior, like those that exist in the current system.
We also need to work to mitigate the financial risk of college enrollment by empowering consumers with better information. The introduction of the College Scorecard during the Obama administration was a tremendous step forward. We should continue these efforts by improving and expanding the information that is available to students.
And before we consider increased spending on subsidies, we need to make our current spending work harder for students and taxpayers by moving dollars from hidden and inefficient channels – like tax benefits and interest rate subsidies - to places they will do the most good. All federal subsidies to higher education enrollment should be delivered through a single, means-tested grant program that delivers to the most aid to the least well-off students.
With these primary changes in place, we should also look for ways to support new, low cost business models that can put downward pressure on prices at all institutions. Innovation in the higher education marketplace is currently limited by the constraints on access to federal financial aid. It is challenging for innovative start-ups to compete with traditional institutions when their students cannot access federal grants or subsidized student loans. We should continue the work started with Educational Quality through Innovative Partnerships (EQUIP) under the Experimental Sites Initiative to explore how best to extend federal student aid dollars to new, low-cost providers.
Lastly, I urge you to reject the growing demand to make college “free.” Universality would be justified if there were fundamental barriers to a functioning marketplace for higher education. But no market failure exists that isn’t rectifiable through subsidies, provision of credit and appropriate regulation. Embracing universality in post-secondary education would come at tremendous financial cost but would also rob us of the byproducts of a competitive marketplace - innovation, quality and adequacy of supply.
Thank you again for the opportunity to be here today. I look forward to answering your questions.