Part 3 of 4

What really ails college, then?  What root cause leads to the visible problems of American colleges? On this question, we want to be clear.  

U.S. higher education is struggling because of the public policy that has shaped the sector for the last 50 years. 

American colleges are a protected, largely unchanging group of favored institutions.  By way of dense law, hardened special interest politics, and a powerful system of private accreditation, they form a closed, protected sector. 

That prices have been rising and quality has been falling for decades in America’s college sector is neither an accident, nor mysterious. It should surprise nobody. 

It is what happens when our government creates, underwrites, and protects a favored group of colleges – one shielded from almost all forms of competition, excused from meaningful public accountability, and financed heavily with public subsidies.  

When that happens — when a publicly financed and legally protected sector arises — prices go up, quality goes down, and innovation stalls.  And America’s college students lose.

A Sector Protected from New Entry

Over the last 50 years, the number of American colleges has remained almost constant, even as college enrollment and revenue have sky-rocketed.

That American colleges are a permanent, changeless group is because of the behavior and incentives of U.S. college accreditors.  

College accreditors are private trade associations of colleges.  Their mission is to monitor colleges for quality, to help colleges improve, and to review applications for new or expanded colleges. 

Without accreditation, a college cannot accept federal financial aid from students.  As a result, accreditors are truly powerful.  They are gatekeepers to vast public spending in higher education.

Here is the rub.

Accreditors are comprised in their memberships of the very colleges they oversee, depend on dues paid by their member colleges, and are often staffed and led by former employees of the colleges they oversee. In this arrangement, predictably, new colleges are almost never approved.  Accreditors create impossibly high bureaucratic hurdles for new colleges to qualify for accreditation.

The ability of the accreditors to lock out new entrants is almost total.  In the last two decades, America’s six major accreditors, which oversee a large majority of  America’s colleges, have approved only 159 startup colleges. This smattering of new colleges, most of which are specialized and small, enrolls a miniscule 3% of U.S. college students.

The lack of new entry in higher education encourages entitlement and stasis among incumbent colleges, and it strips the sector over time of the unique and powerful focus that clever nonprofit college startups would bring to design innovation, cost containment, and quality improvement.

A Sector Shielded from Accountability

U.S. colleges not only operate free of pressure from new entrants. They also operate with a free pass on quality from the governments that fund them and from the accreditors that monitor them. 

  • Accreditor Indifference to Quality. Accreditors see their role as arbiters of college quality. In practice, though, they rarely discipline – or even review — colleges for poor academics or post-college jobs outcomes.

    A vanishingly small portion of administrative activity and formal oversight actions by accreditors is related to academic quality, and a miniscule percent of colleges (we estimate it to be 1%) ever receive a warning or a hard-nosed inquiry from an accreditor about academic quality.

    Accreditors could wield enormous power, were they so inclined, to police college quality since their approval is a condition of the public funding on which almost all colleges depend.   
  • Impossible Politics of Disciplining Bad Colleges. Our state and federal governments are no more inclined than accreditors to police college quality.

    Elected officials – state and federal, legislative and executive – are willing to fund colleges generously, but they almost never favor laws or agency action to shutter or sanction the worst among them.

    Elected officials give colleges a pass on quality because confronting  colleges – even struggling ones — is invariably bad politics and bad career management for politicians.  All colleges, no matter their quality, have highly motivated supporters in their faculty and alumni ranks and in their communities. Further, higher education as a sector is tightly and powerfully organized politically. As a matter of self-preservation, most politicians know better than to tangle with the higher education lobby.

A Sector Enriched with Public Subsidies

Shielded from new entrants and from accountability, the college sector is also underwritten with public aid.  College is arguably among the most subsidized good in American society.

State and federal governments spend $175-200 billion annually on direct subsidies to higher education, mainly in the form of state aid directly to public colleges and of federal tuition grants to students. 

The degree to which US colleges are tethered to the public dole is hard to overstate. For example, 79% of revenues in 2-year colleges come directly from public support.

In addition to directly subsidizing colleges, our federal government enriches them by lending enormous sums, on discounted terms, to college-going students and their families. 

The federal government currently holds a mind-bending $1.7 trillion in college debt, and it issues approximately $100 billion in new college debt each year, much of which eventually makes its way to the coffers of the cartel. The true cost of this debt to the tax-paying public is hard to estimate, as it is highly sensitive to hard-to-predict default rates by students and to equally hard-to-predict choices of politicians in DC about how much debt to forgive.

A Sector Immobilized

Lastly, the college sector — funded publicly and shielded from oversight and competition — struggles with true innovation. U.S. colleges are largely immobilized by fixed costs and wedded financially to the high prices of their existing designs.

Even if policy makers began to hold colleges accountable and to prod them in a serious way to improve and innovate, they would not respond.

  • Mired in Fixed Costs.  A typical American college has become too bogged down in real estate and entrenched salary obligations to cut or redeploy resources in a meaningful, ground-breaking way.  Turning over staff, selling buildings to reinvest in technology, and funding new modes of academic support are all required options in any search for faster, better, and cheaper college models.  They are not options for most U.S. colleges.
  • Low on Cash and Protective of High Prices.  Most incumbent colleges have few cash reserves and live payroll-to-payroll on their tuition collections.  Most U.S. colleges teeter on insolvency and stretch constantly to feed their cost structure.

    As a result, most existing colleges are barred from investing in the one-time losses that invariably accompany innovation.  Relatedly, because they are cash strapped, most incumbent colleges loathe new designs that might cannibalize their existing,  high-priced offerings.

At its core, the U.S. college sector is paralyzed. It is mired in its fixed costs and protective of its high prices. It has neither the inclination nor the capacity to break itself down and rebuild. It will not truly innovate. It will keep doing what it does.

The Importance of Correct Diagnosis

Good policy requires good diagnosis.  Until the misguided public policy design of U.S. higher education is established as the root cause of the visible breakdown of college in America, policy remedies will lose their way.

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Notes
  1. Unless otherwise noted, data in this document is available publicly from the College Board and from various federal sources, notably the Integrated Postsecondary Education Data System (IPEDS) and other data files within the National Center for Education Statistics (NCES), the College Scorecard, the Database of Accredited Postsecondary Institutions and Programs (DAPIP), and the National Advisory Committee on Institutional Quality and Integrity (NACIQI).
  1. Throughout this document and unless otherwise noted, for-profit colleges are excluded from our analysis for the sake of brevity and simplicity.  For profit colleges, while controversial, enroll a small and shrinking fraction (currently 5%) of U.S. college students.
  1. Figure 9: College Count and Enrollment includes for-profit students and graduate students in enrollment totals, and it excludes for-profit colleges in institutional counts.
  1. Data in Figure 10: Accreditor Oversight of Academic Quality and data throughout on the administrative behaviour of U.S. accreditors (including the rate at which they approve new colleges and the likelihood that they will review a college for academic quality) are from proprietary College101 analysis of NACIQI data on accreditor administrative actions. NACIQI data includes for-profit colleges.
  1. In Figure 11: Public Subsidies for Colleges, federal Pell Grants and state aid to colleges are the primary sources of direct revenue subsidies for colleges. Examples of non-subsidized college revenue are tuition payments from household income and borrowing (both public and private), private gifts to colleges, and investment returns.