The Economics of Hillary Clinton’s Higher Education Plan

Hillary Clinton yesterday announced her “New College Compact,” the higher education plan central to her presidential campaign. While the plan is designed to address many issues associated with the cost and quality of higher education in the U.S. today, its policy proposals can be boiled down to the four primary themes identified below, which we discuss in terms of their likely economic impact.

October 2015 | by David Delaney

The Clinton plan promises to increase subsidies to higher education by creating a system in which states are eligible to receive federal grant money if they commit to providing students with affordable post-secondary opportunities. It vows to make enrollment at community colleges free and affordable without loans at four-year public institutions if students contribute the equivalent of wages from a 10 hour per-week job and families make the contribution prescribed by the aid eligibility formulas.

It isn’t clear from the plan how these affordability benchmarks will be measured exactly, but we can presume that institutions that meet these standards will be the beneficiaries of the federal funds. Of course, the concern with this portion of the plan is that it rewards affordability without an eye for quality. The easiest way for institutions to meet these, somewhat arbitrary standards of affordability, will be to cut corners when it comes to quality. However, another element of the Clinton plan related to institutional accountability (discussed below) may help mitigate this concern.      

While the plan calls for a dramatic increase in subsidies and promises “debt free tuition,” it falls short of promising debt free college, even at public institutions. The guidelines for affordability laid out in this plan demand that students and their families cover some of the expense of attendance out of current income or savings and do not cover expenses beyond tuition. Since tuition and fees account for only thirty percent of the overall cost of attendance (which includes tuition and fees and well as room and board) at two-year public colleges and 48 percent at four-year public colleges, this keeps students on the hook financially. Students may choose to use personal or family savings, earnings from a job, or loans to pay for non-tuition expenses.

Institutional Accountability

Clinton proposes that institutions be held accountable for producing graduates who don’t succeed in repaying debt with two specific proposals. First, she calls for a revision of the current eligibility criteria for the federal aid system, a principle recently proposed in the bipartisan Student Protection and Success Act introduced by Senators Orrin Hatch and Jeanne Shaheen. The new criteria will hold institutions to a higher standard when it comes to measuring how many of their former students are successfully repaying their loans.

More notably, Clinton’s plan embraces the idea of institutional risk-sharing. Under a risk-sharing program, schools whose former students (graduates or non-completers) are failing to successfully repay their debts will have to pay a fee in the form of a contribution to a fund to support institutions that serve a high percentage of low- and moderate-income students, thus creating a financial incentive for institutions to help students succeed.

The advantage of risk-sharing is that it aligns incentives, making more salient the motivation for institutions to invest in student success. But there are two potential downsides of a risk-sharing plan. First, risk-sharing is likely to drive up costs. In order to produce better outcomes for students, institutions may wish to invest more in their students, which will ultimately be passed on to students in the form of higher costs. The second potential downside is that it works against ensuring access for disadvantaged populations. Instead of improving quality to ensure good student outcomes, institutions may also respond to this incentive by simply choosing to enroll students that have a high likelihood of success. At the same time, however, such actions on the part of colleges and universities might protect some students from taking on debt for schooling that isn’t likely to pay off. If an institution isn’t willing to take a risk on a students, that might be a good indicator that the student would be better off avoiding enrollment at that particular school. 

Conclusion

Ultimately, Clinton’s proposal addresses affordability concerns, demands accountability at the institution and state level, and shores up safety nets in an appropriate manner; unfortunately it also wastes money on solving a non-existent macro crisis in student lending rather than targeting relief to the borrowers who need it the most. Dropping the refinancing provision might make it possible for the plan to come in under the $350 billion price tag that other analysts have already begun criticizing as unrealistic.  

 

Executive Editor

 Ms Anna Sullivan

Ms Anna Sullivan