#Obama addresses information asymmetry in #college education markets

President Obama has been on a bus tour through New York and Pennsylvania touting a rating system for the nation’s colleges and universities.  The social goal behind this latest public policy proposal is to help make college education more affordable.

Looking at the loans I need to pay back, I would drop the “more” and just say affordable.

The intent of the rating system is to evaluate colleges on affordability, average tuition and student loan debt, graduation and transfer rates, and the average earning of graduates.  In addition, the rating system would:

1. Give students attending highly-rated schools larger grants and more affordable student loans.

2. Encourage colleges to expand offerings, including three-year accelerated degrees and online courses.

3. Require colleges with high dropout rates to disburse student aid over the course of a semester rather than in a lump sum, ensuring that students who drop out do not receive funds for time they are not in school.

4. Start a“pay-as-you-earn”program that caps student loan repayment at 10 percent of monthly income.

5. Give colleges a“bonus”based on the number of graduates who received Pell Grants to encourage enrollment of low- and moderate-income students.

6. Expand“Race to the Top”competition with a $1 billion prize for states that make significant changes in higher education policies while also keeping tuition costs low.

I’m usually hesitant about government interference in markets although I don’t have a problem with government playing information clearinghouse.  Providing demographic, cost, and pricing information to producers and consumers helps add transparency to market transactions, increasing the level of efficiency on both sides of a trade.

There are alternative sources for this type of information.  The Princeton Review comes to mind, but based on the President’s proposal, private sources may not have the coverage or granularity of a government ratings system.

But will colleges and universities adjust their rates based on information consumers receive from these ratings?  I don’t think so.  You have to look at what drives the costs for colleges and universities to deliver educational services.  Just looking at one side of the market, the consumer side, will not get us to solving the problem of high tuition rates for college students.

For example, the incentives that private sector entities have for reducing prices may not exist for colleges and universities.  In a piece for CNN.com in 2011, Richard Vedder, economics professor at Ohio University, noted that a successful university president does not consider the paying customer, the student, as his primary constituent.  Rather, it’s the board of trustees, important alumni, and faculty that he tries to satisfy.  The university president pleases them by raising and spending lots of money, with plenty of this money coming off the backs of students.

Also throw in the third-party element, namely lenders, endowments, and state government support and you have students who are less mindful of the true costs of their educations because they are not paying the full ride.

So how can we get the cost of college educations, a cost that is increasing at a pace greater than our incomes, under control?  Information, innovation, and incentives, says Professor Vedder.  Regarding information, the area the President’s proposal appears to be targeting, Professor Vedder says the following:

“Customers are ignorant of college outcomes because we do not measure in any coherent and consistent manner what students actually learn, how well they do after graduation or whether they think better in a critical manner as a result of the college experience. Even basic financial information on how colleges spend money is often not fully shared with trustees or key politicians who help fund or oversee college operations.”

If Mr. Obama’s proposal incentivizes students to obtain more information about the quality of education a school delivers based on available data while encouraging colleges and universities to seek out and provide more data on outcomes, there may be some upside to his proposal.

About Alton Drew

Alton Drew brings a straight forward and insightful brand of political market intelligence. Alton Drew graduated from the Florida State University with a Bachelor of Science in economics and political science (1984); a Master of Public Administration (1993); and a Juris Doctor (1999). You can also follow Alton Drew on Twitter @altondrew.
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One Response to #Obama addresses information asymmetry in #college education markets

  1. Ken Ciszewski says:

    ” In a piece for CNN.com in 2011, Richard Vedder, economics professor at Ohio University, noted that a successful university president does not consider the paying customer, the student, as his primary constituent. Rather, it’s the board of trustees, important alumni, and faculty that he tries to satisfy. The university president pleases them by raising and spending lots of money, with plenty of this money coming off the backs of students.”

    It’s not too different from commercial public corporations, whose CEOs think the Board of Trustees and the stock holders and Wall Street analysts are more important than both employees and customers. The results of this approach are sometimes horrendous.

    Having been to college, I agree that students are not that great a priority, unfortunately. This also leads to less than optimum results for students.

    “If Mr. Obama’s proposal incentivizes students to obtain more information about the quality of education a school delivers based on available data while encouraging colleges and universities to seek out and provide more data on outcomes, there may be some upside to his proposal.”

    True, but students don’t have much economic power, or any other power, so it’s not likely to change things much.

    We have a large Catholic university in St. Louis, MO who has been run by a priest as its president for some years. The students aren’t too fond of him or his policies because he’s mostly interested in his image first, the University’s somewhere after that, and students’ concerns about 100,000 miles after that. He’s as arrogant as they come. The faculty doesn’t like him much either, according to published reports. He will finally retire shortly (pushed out? perhaps), after years of complaints and demonstrations. Why? I guess the University’s board likes him, at least up to now. If students had any real power, he would have been out years ago. No, universities are not “student-centric”. They are more about research, successful alumni who donate money back to them, new buildings, post-graduate education, research that they can trumpet to the world as helpful or groundbreaking, and any medical schools that are associated with them. Undergraduate education is just a hobby.

    Colleges are fairly “ivory tower” in the way they approach education and the world, and it will take more than a rating system to shake them and get them into the real world. After the diplomas are given, the colleges are done, until they want contributions from the alumni. Check your mail for a donation request from your alma mater.

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