Published on 2013/09/11

The Federal Government’s Obligation to Fix, Fund and Facilitate

The Federal Government’s Obligation to Fix, Fund and Facilitate
Higher education prices do not reflect the costs of producing the product, but rather the revenue that an institution would like to generate from the product.

There are two fundamental steps in how the federal government seeks to regulate, as well as help fund, higher education. The first is to establish a federal regulatory environment distinct from accreditation to oversee federal student aid. The basic questions the federal government needs to ask have little to do with the questions accreditors have traditionally asked in order to ensure that the institutions over which they have suzerainty meet minimum quality standards. Instead of focusing on the details of the curriculum, the availability of educational resources, the qualifications of the teaching faculty, or whether the institution is committed to shared governance — all conditions of fundamental importance to the accreditation process — the federal government must regularly as well as forcefully ask: Does the institution practice “truth in pricing” and “truth in lending,” and does its advertising make false claims guaranteeing remunerative employment?

The stipulation and enforcement of definitions of full-time enrollment and gainful employment, and whatever other criteria the federal government puts in place regulating the awarding of federal student aid, ought to be the business of an independent federal regulatory agency. Turning the accreditors into compliance police is bad policy and worse practice. The six regional accrediting agencies, lacking both the requisite financial resources and the “gotcha” instinct sought by the federal government, are simply not equipped for the role of compliance monitors.

Required instead is a mini-federal agency, preferably one independent of the Department of Education, but combining elements of the revamped federal consumer protection agency and the regulatory perspectives of the Securities and Exchange Commission. This new agency would have substantial responsibilities: monitoring student loan default rates; ensuring compliance by proprietary institutions with the federal 90–10 rule governing the proportion of an institution’s revenues that must come from other than federal resources; determining whether specific degree and certificate programs lead to gainful employment; deciding what constitutes full-time study for purposes of distributing federal student financial aid; and, in the case of institutions awarding the associate’s and baccalaureate degree, ensuring that the awarding institution is accredited.

My second, and no doubt more radical proposal, is to end federal student aid altogether and replace it with a reimbursement program—again the responsibility of an independent agency—much like the reimbursement system that pays hospitals for the care they provide. Colleges and universities would submit invoices detailing the actual cost of instruction at a unit level, indicating what proportion of those costs could be reasonably assigned to the instruction received by students qualifying for federal assistance. If such a program could ever prove politically attractive enough to be enacted, some key problems would have to be tackled. First, colleges and universities must develop an activity-based cost accounting system of sufficient robustness to allow for the detailed segregation of costs by specific instructional activity.

The second problem that would have to be addressed is the variability of instructional costs reflected in Howard Bowen’s classic theorem that universities will raise all the money they can and spend all the money they raise. Across higher education, costs reflect not what things cost to produce, but rather how much revenue the institution is able to raise and then spend on the things important to it. To make workable the activity-based cost accounting being envisioned here, the federal government would have to establish minimum acceptable costs criteria not unlike the diagnosis-related groups (DRGs) that, with admittedly mixed results, were put in place to help standardize reimbursement rates across the health care industry. Putting in place such a system would become, in itself, a powerful tool for first understanding and then limiting the cost increases that have plagued higher education since the 1980s.

To control the federal outlays needed to fund a federal student aid program that reimbursed institutions for allowable costs, the reimbursement rates would have to reflect minimum necessary costs, on the one hand, and, on the other, the proportion of students at the institutions meeting the federal program’s eligibility requirements. The reimbursement rates for advanced courses could also reflect bounties or bonuses for moving disadvantaged learners from first-time, first-year enrollees to students with advanced standing about to graduate. The defining of these incentives and their actual specification would, no doubt, prove politically difficult, but be nonetheless necessary.

I am uncomfortably aware that catalogs of necessary changes, like the ones I have presented here and described in more detail in Checklist for Change, are often dismissed as being quixotic or impractical or simply too foolish to be taken seriously. I have confounded the problem by producing a checklist rather than a menu of possibilities. In my checklist the initiatives are not just linked, but interdependent.  The changes I have envisioned all require a federal government that understands that change is not possible unless Washington is prepared to fix what it has broken, take primary responsibility for monitoring compliance, and become the first mover in what must ultimately become a multifaceted, multi-year campaign to improve the nation’s higher education system.

This was an excerpt from Robert Zemsky’s “Checklist for Change: Making American Higher Education a Sustainable Enterprise” (Rutgers University Press, 2013). Click to learn more about Checklist for Change.

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Readers Comments

Linda McAdams 2013/09/11 at 11:16 am

These are some of the most original ideas I have seen in a long time about the way the federal government could provide some stucture and support to the overburdened and underperforming higher education system. These are also some of the most feasible.

I think someone in an important office somewhere needs to take a serious look at these recommendations, and maybe buy Zemsky’s book. Without some really outside the box thinking in regards to the future of higher education, and soon, we’re going to have a national emergency on our hands.

Daniele Thomas 2013/09/11 at 1:05 pm

I can see the need to have separate accrediting and monitoring agencies to ensure there are no conflicting interests. However, I’m wondering what would be the line between accreditation and monitoring? Presumably, in order to determine accreditation eligibility, one would have to monitor some of the factors discussed. I’m interested in how Zemsky envisions dividing the responsibilities between the two types of agencies so there is no repetition and, at the same time, no overlooked duties that create loopholes for institutions to operate through.

Ian Richardson 2013/09/11 at 10:05 pm

This is a good ‘think piece.’ While I don’t necessarily agree with the ideas being presented here, I think they’re important to discuss. Regarding the idea around reimbursement — I will definitely look more into this, but my initial opinion (formed with much less expertise and research than Zemsky’s, certainly) is this will only make institutions chase rewards (ie. aid) instead of results. Institutions would likely raise the cost-per-student for higher education (in order to be reimbursed the most) but that wouldn’t necessarily translate into better student outcomes, when it’s unclear what the money would be spent on.

Bill Clark 2014/04/09 at 9:01 am

I think you’re “spot on” in describing the need to understand university costs through some form of activity-based costing system. Your idea is not as far-fetched as one might think; Australian universities have 38 government-funded universities where ABC is a requirement. Imagine the transparency, cost understanding and competition that this fosters.

There is a glimmer of hope for American universities though. Several software companies are offering ABC solutions tailored to a university setting. Take a look at the Pilbara Group website (pilbaragroup.com); this company is Australian-based and has just begun expansion into US universities.

Given the federal government’s “slow” implementation of activtiy-based costing for its own fee-setting purposes, I believe there’s more hope in a private university solution, driven by competition, that forces costs down.

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