Section 5: Improve Competition

Chapter 21: Ease the Transfer Process among Public Institutions

Abstract: Americans are a nation of movers, and inter-institutional academic migration is commonplace. In many cases it makes great sense: students save money by transferring to a cheaper school; students transfer to schools better suited to their changing interests; or students transfer to a less rigorous school if they are in danger of flunking out. In other cases, students simply complete a two-year program and transfer to a four-year school.

As mentioned earlier, colleges have historically put up obstacles to transfer, most importantly by denying a good deal of the academic credit earned at the previous institution. Most of the attention has been place upon transfers from two-year community colleges to four-year baccalaureate schools. Nearly as important numerically are the transfers within the respective categories of two and four-year schools. Pressures are increasing to ease credit transfer, in some cases prodded by legislative mandates requiring state institutions to accept credits from other institutions in the same state.

Bilateral “articulation agreements” between two schools, typically a community college and a four-year institution, have occurred a good deal over the years. Additionally, credit transfers can be made by multilateral agreements of all schools in a state, or a large portion of them. For example, North Carolina in 1995 mandated by legislation what is now called the Comprehensive Articulation Agreement to ease transfer of students from any state community college to a campus of the University of North Carolina. Some states have moved to trying to develop a common core curriculum that is widely accepted at many institutions, easing credit transfer issues for those courses. Still another approach is to adopt a common course numbering system, for example, the beginning course in microeconomics will be called “Economics 101” at all state institutions.

In addition to increasing competition between schools, the easing of the transfer process probably also reduces on balance the drop-out rates while increasing the rate of completion. Yet the issue is not entirely problem-free. There are qualitative issues, and it is common for community college transfers to drop out of four-year colleges at a greater rate than students already enrolled. Programmatic diversity potentially could be reduced if, in the name of ease of transfer, college curricula become standardized at a high level around the state, robbing institutions of their autonomy and perhaps their unique identity. Nonetheless, the benefits of low-cost transfer are sufficiently great that the move towards easing credit transfer needs to be continued.
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Chapter 22: Reform Financial Aid

Abstract: In its 2006 report, the Spellings Commission on the Future of Higher Education concluded, “The entire financial aid system—including federal, state, institutional and private programs—is confusing, complex, inefficient, duplicative and frequently does not direct aid to students who truly need it.”

The Spellings Commission had it right. There is a bewildering array of financial assistance programs—loan programs, grants, tax free savings plans, tuition tax credits, etc.—each with their attendant problems. Even a reasonably informed student or parent has difficulty knowing more than a small portion of the nuances of the system, and swamped guidance counselors often do not have the time to advise families about all the options. Additionally, there is a huge timing issue. Students typically submit college applications before having any real indication of the amount of expected financial aid. They are applying without really knowing the cost of the program that they would like to participate in.

Additionally, some of the programs encourage cost increases by the college themselves. Tuition tax credits, for example, provide tax savings only if students attend college, increasing the demand for college and thus college prices, defeating some of the benefit of the tax credit.  Student loan subsidies in effect vary with the tuition of the school attended, so the government rewards both the schools who increase fees as well as the students who attend them. Each year, tuition fees nationally rise by, say, six percent, so student loan grants for the following year rise by that amount or more. It is probably true to say that the vast increase in student loans is as much a cause as a consequence of the tuition price explosion in modern times.

Much of today’s financial assistance is a form of price discrimination –charging customers differing amounts for the same service. Net tuition prices vary substantially from the published “sticker price.” While price discrimination actually serves some useful economic purposes, it also causes problems, particularly when students do not know their likely “scholarship” aid at time of application, forcing them to rely heavily on sticker prices. The differential between the sticker and the actual price, as well as the large variation in that differential between individuals, causes student uncertainty and may lead to inappropriate student choices.

Reform of student aid would involve vast reduction in the multiplicity of federal programs, the simplification of the FAFSA form (discussed above), a reintroduction of private competitive servicing of student loans, and  moving to vouchering student assistance instead of institutional subsidies (see below). States need to consider when all-merit based award systems that include very high income students are appropriate, given limited resources.
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Chapter 23: Reform Accreditation to Reduce Barriers to Entry

Abstract: Accreditation is an information device. Schools that are “accredited” meet at least minimal standards of quality. Unaccredited schools likely have weak academic standards, and some might even be diploma mills that simply give away degrees in return for a cash payment.  It is widely accepted that the certification of minimal standards is a generally good idea, but there are legitimate concerns that the existing system of accreditation is far from optimal.

There are two major types of accreditation organizations –regional accreditors that evaluate entire institutions, and subject specific accreditors.  Strong arguments can be made that the current organizational structure of accrediting agencies is flawed (as in having seven regional accreditors instead of one national one, for example). Historically, these agencies have focused on inputs, not outcomes. Because federal financial assistance is tied to accreditation, the accrediting agencies are gatekeepers as to who can offer higher educational services. The cost of achieving accreditation is often high, a big barrier to entry to new, smaller schools. The organizations also may suffer from major inherent conflicts of interest, with their governing boards often made up largely of representatives of organizations that they accredit. This may explain why new approaches to educational service delivery have trouble winning accreditation (the firm StraighterLine comes to mind). Accreditation also provides very limited information—schools are either acceptable or unacceptable, with no graduations in between. Their operations are highly secretive and non-transparent, with details of accrediting reports not available to the general public.

A good accreditation system would provide vastly more information to the public. It would require the accrediting organizations be governed by those without any vested interest in the results. It would be outcome-based, not input-oriented. We do not “accredit” auto makers, house-builders, or appliance makers, because there is adequate information on the quality of their products provided by independent third parties. The system works well for them. Maybe conventional accreditation needs to be replaced with a vast information system giving consumers, taxpayers, and donors information that would allow for more intelligent decisions.
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Chapter 24: Subsidize Students, not Schools

Abstract: Markets do a marvelously effective job of allocating most goods or services because the consequences of decisions to buy and sell goods largely impact those doing the buying and selling—customers benefit from getting goods they like at low prices, and producers benefit from getting more for their product than it cost to make it.  Higher education suffers because the consumer–students—often pay only a small portion of the cost while avoiding the consequences of bad decisions. Government subsidies to institutions reduce the role of consumers in resolving classic economic questions: What should be produced, in what quantities, in what manner, and for whom?

A step in the direction of introducing more efficient market power into higher education would be to end institutional subsidies and increase subsidies to students in the form of vouchers or scholarships. This has been discussed above, but the advantages bear repeating:

  • Market forces likely would force greater cost consciousness amongst public institutions losing subsidies and relying on student enrollment for revenues.
  • Schools will become more student-centered, depending on student support and spending more on pleasing students and less on lobbyists.
  • Subsidies can be targeted to meet other objectives, such as promoting attendance by lower-income students, improving student academic performance, and graduating in a timely manner.
  • Vouchers will refocus general support on teaching and instruction.
  • Costs can be contained by limiting voucher increases to the rate of inflation.
  • Students are not rewarded extra grants for attending expensive schools (as with student loan subsidies).

Vouchers have had strong political opposition at the K-12 level, led by labor unions. Unions are far less heavily involved in higher education, and the use of vouchers to achieve egalitarian objectives might bring support for them from individuals historically wary of the concept. Programs such as the GI Bill, Pell Grants, Georgia’s HOPE scholarships, and the Colorado College Opportunity Fund are similar to vouchers in many respects, providing a precedent for expansion of this approach to higher education funding.
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Chapter 25: Promote Competition Based on Value, Not Reputation

Abstract: In most areas of human economic endeavor, competition manifests itself in lower prices. If company A has competition from companies B, C, and D in selling a good or service, the competition will lead A to lower prices to fend off loss of sales to B, C, and D. In higher education, however, it seems as if competition leads to higher prices, as schools seemingly “compete” to spend greater sums of money. There seems to be an academic “arms race” resulting in vast increases in spending on, for example, luxurious student recreational facilities, expensive superstar professors, or football coaches.

Schools largely compete on reputation, quintessentially measured by the U.S. News & World Report college rankings. Spending more money can lead to higher rankings. To get more money, schools raise tuition rates and engage in incessant searches for grants and gifts. Since third parties fund a large portion of the bills, students are relatively insensitive to price. Very little college advertising speaks of being “the low cost alternative” or the “best bang for the buck,” unlike with, say, automobile advertising.

A fundamental problem is the lack of information—quality and value are related to results, and colleges are secretive and sometimes even ignorant about their success in educating students or preparing them for a vocational future. A second problem is that third-party funding and the non-profit nature of most institutions dull the incentives for colleges to try to minimize the price of their services. The FAFSA form enables colleges to price discriminate, choosing sticker prices higher than they would be in the absence of such information.

The most critical element in any solution is the obtaining of value-added measures of what students gain from college, both in terms of knowledge and in terms of other attributes, such as critical learning skills. This requires nudging colleges to provide more information in a useful fashion. It requires that true cost to the student be made available accurately and early. It might depend on changing compensation systems for key employees to emphasize the value-cost relationship, rewarding officials who manage to keep costs down.
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