Earlier this month,  the United States Department of Education proposed a regulatory framework to hold postsecondary educational institutions accountable for their students’ labor market and earnings outcomes.

Under the proposed rule, students risk losing eligibility for federal loans and, in some cases, Pell Grants, if they are enrolled in undergraduate programs whose graduates’ earnings fail to exceed those of a typical high school graduate. Graduate programs face similar consequences should their graduates earn less than the average bachelor’s degree holder. Though the benchmarks are modest, in the sense that most college programs will meet these criteria, some will not. And the consequences for college programs are severe, as most universities rely heavily on federally subsidized tuition dollars.

For-profit colleges already have a related form of accountability in place: the 90–10 rule requires them to derive at least 10% of their revenue from non-federal sources. This proposed legislation marks the first major step to holding public colleges accountable in a similar way. It remains to be seen whether this rule will become law, and if so, how it will shape institutional outcomes. But this new regulation could create better accountability for the use of taxpayer dollars in higher education.

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This same ambiguous outlook applies to the U.S. economy as a whole. On the one hand, data released by the Department of Commerce last week reveals that real gross domestic product (GDP)—the value of all goods and services produced by the US economy, adjusted for inflation—increased at a 2.4% pace in the second quarter, following 2% growth in the first quarter. If this pace continues—a big if—then the economy will have safely avoided recession territory, having rebounded modestly from the two quarters of negative GDP growth at the beginning of 2022.

But past is not prologue. The economy still faces multiple headwinds that leave the risk of recession—or at least a significant weakening of growth—very much on the table. For one thing, the effects of monetary policy (i.e., rate hikes) on the economy operate with a time lag. The primary mechanism through which rate hikes fight inflation is by making borrowing costlier, thereby discouraging the demand for spending and, with it, the pressure on prices. The medicine from earlier doses of rate hikes is already having an effect on the economy; headline CPI inflation fell to 3% year-over-year last month, down from a peak of over 9%. However, rate hikes from late spring have not yet fully reverberated throughout the U.S. economy. Even so, the recent GDP data indicate that consumer spending only grew by 1.6% in the second quarter, with durable goods spending only growing by 0.4%. This particular subset of spending is useful as a gauge because durable goods like washing machines and other expensive household items are often purchased using credit, which now commands higher interest rates because of the Fed’s actions.

Another headwind facing the economy is the impending resumption of student loan repayments this fall. Make no mistake: student loan repayments ought to resume. Bailing out student debt by transferring it from the people who are reaping the financial gains from their education to taxpayers is regressive, fiscally irresponsible, and inflationary. However, this reality does not take away from the fact that people will feel the sting of being required to pay debts that they have been shielded from during the past few years. Consequently, consumer spending growth is likely to slow further or even turn negative. Considering that consumer spending contributed 1%age point (out of the 2.4) to GDP growth in the second quarter, a hypothetical scenario where consumer spending growth flatlines would by itself reduce GDP growth to just 1.4%. Moreover, another important component of GDP—investment—is sensitive both to rates themselves as well as business expectations about future consumer demand. It is entirely plausible—maybe even likely—that investment growth will decline from its most recent rate of 5.7%, and if that happens, GDP growth could easily fall below 1%.

Still another important headwind is the fact that, for all the progress the Fed—and the Fed alone—has made in combatting inflation, it has not yet succeeded in achieving its 2% target. As shown in the figure below, headline inflation is down to 3%, but core inflation—a better measure of fundamental pricing pressures—is still nearly 5%. Moreover, because the inflation readings are year-over-year measures, and because the monthly numbers from July and August 2022 were very low, it is quite possible that the headline year-over-year inflation numbers may rise modestly over the next few months.

Lastly, and arguably most importantly, the U.S. economy has been facing a productivity crisis over the past two years. Productivity—that is, economic output per hour of labor—has decreased by nearly 2.5% since the second quarter of 2021, which is unprecedented. By comparison, productivity rose by nearly 5% from the first quarter of 2017 to the fourth quarter of 2019. Not coincidentally, that earlier period corresponded with household income rising by over $5,000 after inflation—meaning higher purchasing power—as compared with the recent decline in purchasing power of over $2,000. The figure below gives a stark visual reminder that prices have grown consistently faster than wages since the passage of the American Rescue Plan Act “stimulus” bill in early 2021, with price growth decreasing only in response to the Federal Reserve’s interest-rate-hiking campaign.

As speculation continues over the near-term trajectory of the U.S. economy, it is worth mentioning again the essential need to raise productivity—not just to avoid recession, but to lift the economy out of the doldrums of 1% to 2% growth and return to or exceed its historical norm of 3% growth. While these numbers may seem difficult to relate to, a rule-of-thumb may prove useful. The amount of time (in years) that it takes for the U.S. economy to double in size is roughly 70 divided by the growth rate. Thus, if an economy grows at 3% per year, it will take approximately 70/3 = 23.3 years to double in size. By contrast, if the economy grows at 2% per year, it will take 70/2 = 35 years to double, and it will take 70/1 = 70 years to double if growth is persistently only 1%. That would be a disaster for the U.S.’s potential to remain the leading economy in the world.

So how do we achieve growth liftoff? Answering this question is much too large for a single blog post, but the key is productivity, and one important point to remember is that raising productivity is not about squeezing more out of workers and making life at work more of an unpleasant grind. Quite to the contrary. The most effective way to increase productivity is to ensure that workers are equipped with the skills to succeed, unencumbered by regulations to find the best occupation and employer to realize their potential, and where both workers and employers are able to keep more of the fruits of their productive activity. That phrase—productive activity—is key to keep in mind. While public debate often focuses on spending, spending, spending, it’s time to shift our attention to producing.

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Neal McCluskey is the director of Cato’s Center for Educational Freedom. He is the author of the book Feds in the Classroom: How Big Government Corrupts, Cripples, and Compromises American Education and is coeditor of several volumes, including School Choice Myths: Setting the Record Straight on Education Freedom and Unprofitable Schooling: Examining Causes of, and Fixes for, America’s Broken Ivory Tower. McCluskey also maintains Cato’s Public Schooling Battle Map, an interactive database of values and identity‐​based conflicts in public schools, and oversees Cato’s Private Schooling Status Tracker.

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The Institute for Justice’s report examines the debt and dropout rate of cosmetology students across the country, and the numbers are pretty shocking. To receive a cosmetology license in Missouri, one must complete 1,500 educational hours from an accredited cosmetology program. From the 2011–12 school year to the 2016–17 school year, the average cosmetology program cost $14,629 and students took on an average of more than $7,700 in federal student loans.

That’s not pocket change, but it’s even worse when earnings are considered. In Missouri, the median annual wage of a licensed cosmetologist in 2019 was $23,760. That’s slightly lower than the national average of around $26,000 for licensed cosmetologists and slightly higher than yearly earnings from a full-time minimum wage job. (For reference, earning Missouri’s minimum wage of $10.30 for 40 hours per week and 52 weeks per year equates to yearly earnings of $21,424.) And more than two thirds of students do not graduate on time, increasing their debt burden even more.

So much money is spent to fulfill a state educational requirement, but is that requirement even necessary? Occupational licensing is intended to protect the health and safety of consumers, but recent research indicates that only 25 percent of cosmetology training is health and safety training.

Occupational licensing increases costs to consumers, but the other side of that coin is often overlooked. Licensing requirements dramatically increase costs for the workers who must obtain that license to earn a living. This is especially true in cosmetology, where the costs are directly tied to licensing requirements, but this is also true no matter the cost or resulting wages. It’s time for legislators to reconsider these requirements, regulations, and boards that have burdened workers and consumers for too long. A sunset provision for occupational licenses would be a great step toward reducing burdens and costs for consumers and workers.

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While starting your career with $25,000 plus in student loan debt can create challenges, these are somewhat offset by the higher earnings a college degree holder can expect. Yet, once again, student loan debt forgiveness is being floated as an economic policy. Let’s be clear: This relief is directed at the one in five Missourians who can expect significantly higher earnings over their lifetimes. Everyone else is left with nothing except picking up the tab. What about car loans? What about credit card debt?

This is a textbook example of a regressive tax; relief for higher earners at the expense of lower earners. Expensive government giveaways create bad precedent. They incentivize bad behaviors. And, like it or not, they have to be paid for at some point. Sorry to be a Grinch, but don’t ask Santa to forgive your student loans.

For more on this topic, click here to listen to our podcast with the Cato Institute’s Neal McCluskey:

The post What About the other 80 Percent of Missourians? appeared first on Show-Me Institute.

And while loan forgiveness would provide immediate relief to debt holders, it’s important to make the distinction between debt relief and actual education policy. Loan forgiveness would be a very costly policy that wouldn’t expand access to college. In fact, a recent analysis of the costs and benefits of several forms of “free college” found that only one didn’t create education benefits that exceeded the costs. And that was loan forgiveness. Why? Because in this case, those who qualify have already received their education. The benefit of that education is there whether their loans are forgiven or not. So the benefit stays the same, and the cost goes up.

If a student loan holder truly didn’t understand what they were signing up for, they should have a broad array of repayment options tied to their salary. If they were scammed by a loan processor or for-profit college that was selling snake oil, by all means they should have recourse. But a plan to take one point in time and forgive all debt for all holders, regardless of their occupation, income, or repayment status is being floated in order to make headlines by those who make a living spending other people’s money on other people.

We can do better.

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Currently, only four out of ten lower-income students who enter college are graduating within six years. What’s more, few additional students graduate after six years; according to the National Student Clearinghouse Research Center, only an additional 6.1 percent of all students entering college in 2009 graduated within eight years. Dropping out and being saddled with student loan debt makes it that much more difficult for these students to climb up the income ladder and access better-paying jobs that can help break cycles of poverty.

Here’s the data for first-time students in Missouri who started college full-time in the fall of 2011, per the Department of Education:

·         56.7 percent of those students graduated within six years, which is lower than the national average of 60.4 percent.

·         Students from the same group receiving Pell Grants from the federal government—most of which have family incomes below $30,000—have a six-year graduation rate in Missouri of only 40.6 percent, while students not receiving Pell Grants or a subsidized loan graduated at a rate of 68.3 percent.

These are startling numbers for Missouri. Not only are we behind the national average in terms of college completion, but a large number of those who fail to graduate appear to be low-income students. Those are exactly the kind of students who are least equipped to handle the burden of high student debt, especially without the benefit of a degree.

A 2013 report from the Department of Education estimated that in 2009 students who did not complete their degree had on average $9,300 of debt if they attended a public 4-year school and $10,400 if they attended a private, non-profit 4-year school. More recent data from Debt by Degree breaks down student loan debt by Pell status and individual schools; it showed Pell recipients attending Mizzou average $19,328 in federal loans.

Addressing the degree achievement gap must start at the K-12 level and, as I discussed before, competition through choice is necessary if we want better outcomes for low-income kids. But in the meantime, making changes at the college level can help lower-income students getting ready to go to college now or that are already there.

In “Creating Pathways for Self-Sufficiency,” I discuss a few ways colleges can boost graduation rates among low-income students. Retention grants or emergency scholarships can fill gaps in financial aid for low-income students who are on track to graduate but would otherwise have to drop out due to lack of funds. Providing supports like mentorships and enrollment or financial aid checklists have been effective in helping first generation college students be prepared.

Not included in my essay but also worth noting is data-based guidance counseling. Georgia State University’s predictive analytics system has helped students from all economic backgrounds graduate at higher rates by connecting students struggling academically with tutors sooner rather than later and making sure students are not taking unnecessary classes that cost extra time and money.

As taxpayers, we invest too many public dollars in education at every level to have results like these. Isn’t it time to move towards a system that better serves students of all economic backgrounds and ensures that those who go to college leave with a degree?

The post The Achievement Gap for Low-income Students Continues into College appeared first on Show-Me Institute.

THE SOLUTION: Higher education reform.

Reform in Missouri should focus on reduc­ing costs through innovation to attract more students. Universities could help reduce costs by encouraging competency-based education (CBE), which can reduce the time that students must spend in the classroom by granting ac­creditation when a student shows that she has mastered the subject matter. These programs allow students to pursue a degree while simul­taneously protecting them from excessive costs and loan defaults. At the same time, the state could promote income-share agreements (ISAs), which provide an alternative to student loans whereby a student agrees to pay a percentage of future income in exchange for present financial aid.

WHO ELSE DOES IT? Schools across the nation, such as Texas A&M, Purdue, University of Michigan, and University of Wisconsin, offer CBE degrees. Purdue has a self-funding ISA program in which it loans money to current students and then reinvests returns into future student borrowing.

THE OPPORTUNITY: Recent upheaval at Missouri’s largest university has given us a chance to step back and evaluate how best to improve the higher education environment and provide cost-effective options to students. The University of Missouri system made progress in protecting free speech this past summer; now it should focus on reducing costs to help draw more students to our public universities.

KEY POINTS

• Higher education can greatly increase a student’s financial prospects, but not everyone who spends money at a university comes out in the black.
• CBE programs can reduce tuition costs and the time a student must spend in class.
• By reinvesting earnings, ISAs can fund future de­grees.

SHOW-ME INSTITUTE RESOURCES

Essay: Stuck in the Middle with Mizzou: Examining the Effectiveness and Efficiency of the University of Missouri

Case Study: Moving Mizzou Forward: Reform Ideas from Around the Nation

Op-Ed: Reaping the Whirlwind in Columbia

Blog Post: Mizzou Enrollment Shrinks to a New Low

For a printable version of this article, click on the link below. You can also view the entire 2018 Missouri Blueprint online.

The post 2018 Blueprint: Higher Education appeared first on Show-Me Institute.

If there is any consolation, it’s in knowing I’m not alone. In fact, more than one-fifth of borrowers have proved to be less-than-savvy higher education investors—22% have loans in default or forbearance. The consequences of default are serious, including wage garnishment and a severe hit to credit scores.

Last month, the Department of Education released data on the default rates for colleges and universities in all fifty states and abroad. Before getting into what solutions policy leaders have proposed to lessen the burden of student debt, let’s look at student loan default rates in Missouri.

The table below shows the percentage of students by type of institution who entered repayment in fiscal 2012 and had defaulted by December 2014. The default rate for public two-year institutions or community colleges was more than double that of public four-year and private four-year universities. Private four-year universities had a lower default rate than public four-year universities by 1 percentage point. Special-focus colleges like St. Louis College of Pharmacy had the lowest default rates (with the exception of the Kansas City Art Institute, which had a default rate of 10.2 percent*). To view default rates for most colleges and universities in Missouri, click here. 

The pie chart below breaks down the students in default in 2014 according to the types of institutions they attended. This figure shows that public two-year colleges produce the most student loan defaults in Missouri (this trend is also apparent nationwide).

Why? The most common defaulters are students who attend college but do not graduate. These students  incur the debt, but don’t see any of the benefit, making it harder for them to pay back their loans. According to one study, the completion rate for students who start at two-year universities in Missouri is less than 40 percent. That’s a lot of students with debt and no degree. It’s a recipe for default. 

To combat default, some policy leaders, including President Barack Obama, have proposed further subsidizing higher education, but that skirts the real issue. What we should really talk about is how to make college less expensive in the first place and how to help more students graduate. The state could take several steps to do that.

First, it could work with schools to promote low-cost options. States like Texas and Florida have explored ways of reducing total costs to as low as $10,000. Inexpensive degrees that students successfully complete are an antidote to default; loans (if they are even necessary) have very low payments and degrees have high benefits.

Second, the state could make both costs and benefits more transparent to potential students so they can make informed decisions and exert pressure to keep prices down. The Department of Education created the college scorecard to help students make better choices about “where to study and how to maximize their investment.” The graphs below highlight four universities in Missouri, displaying the average annual cost of attending, graduation rate, and salary after attending. The Student Right to Know Before You Go Act of 2015, an update to the Higher Education Act of 1965, was referred to a congressional committee in May and requires universities to provide more accurate and complete data.

Finally, states could force colleges to have some “skin in the game.” Under such a plan, schools would be required to pay a portion of any defaulted government loans. This would push universities to accept only students who they thought would be successful, to work with students to make it through their studies, and to help place students in jobs that will earn enough to pay back their loans.

Lower-cost options, better information, and institutions with an interest in preventing loan defaults could go a long way to helping curb debt, defaults, and the $1.3 trillion problem they create.

*The default rate for the Kansas City Art institute was originally posted as 17.1%, which was the rate reported for 2010. The 10.2% rate is correct for 2012.

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At its peak Corinthian Colleges had over 100 colleges throughout the United States and Canada, including Everest College campuses in Earth City, Kansas City, and Springfield. Last month Corinthian Colleges, Inc., a large for-profit post-secondary education company, announced it would cease operations in all remaining U.S. locations effective April 27, 2015. The closure of Corinthian has left 16,000 students in quite the predicament. Many have taken on burdensome student loans, and now their school is closed.

In response, the Department of Education (DOE) announced a plan to wipe the debt slate clean for all students that attended these schools, a move that potentially could cost taxpayers $3.6 billion. Secretary of Education Arne Duncan defended the plan saying, “You’d have to be made of stone not to feel for these students.”

While I agree wholeheartedly that it is more than a minor inconvenience to have your school close, this is the wrong course of action. Indeed, this plan is wrongheaded and will simply encourage more of the behavior that created this crisis in the first place.

First, there is no need to forgive loans for courses students have already completed. They did not spend their time at Corinthian schools in vain. These students are still eligible to transfer their credits to other schools and continue their educations. Countless universities have made it clear that they want to help and are willing to open their arms to students who take the initiative to transfer credits and continue their pathway toward a better life. Long Beach City College President Eloy Oakley summed it up perfectly back in April: “They have options and no matter what, at the end of the day, we want them to finish their education, stay in the community and become economic assets to the community.”

Unfortunately, one of the catches of the DOE’s plan is that closed-school debt relief is only available to students who have not transferred their credits to another university. This bailout encourages students to throw away the years they have dedicated to attaining a degree and bettering themselves.

Second, this is potentially the largest debt relief program the government has ever offered students, and it sets a bad precedent. Taxpayers should not be held accountable for the billions of dollars students borrow in full knowledge of the consequences. Most of these students never would have attended a Corinthian College if it were not for the government’s subsidization of college loans. This bailout essentially means students bear no risk when making college selections; they can easily obtain college loans, and the government will forgive them if things go badly.

The students of the now-defunct Corinthian Colleges certainly got a raw deal, but that is no reason to enact measures that will encourage the same type of behavior in the future.

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The friendliness and charity of our countrymen can always be relied upon to relieve their fellow citizens in misfortune. . . . Federal aid in such cases encourages the expectation of paternal care on the part of the government and weakens the sturdiness of our national character, while it prevents the indulgence among our people of that kindly sentiment and conduct which strengthens the bonds of a common brotherhood.

Although Cleveland was talking about federal aid during a drought, the lesson is applicable to our current situation: Charity should be preferred over taxes. After all, taxes do not lend themselves to a “kindly sentiment.” And is charity such a radical option? Don’t universities already receive such donations? It seems that if the state believes citizens want to support universities, the government should let the people voluntarily display their support.

But suppose charity falls short – what then? Tuition increases should be considered. After all, let’s not forget that students are the ones choosing to attend college. When the price of education goes up, there is nothing wrong with charging a higher fee. And for those who cannot afford the higher fee, there are alternatives: scholarships and student loans. If both those options do not work, there is the alternative of a less costly education at a community college. Finally, if all else fails, college can be deferred. I have known several individuals who have put off college in order to accumulate savings for it. All options should be exhausted before reaching into the public purse.

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The Young Entrepreneur Council is proposing a Youth Entrepreneurship Act that would address the barriers that he [Scott Gerber, founder of the YEC] says young entrepreneurs face. One element would be a program to forgive student loans and debt for young entrepreneurs, which he says would address a major hindrance to recent graduates who want to set up their own shop.

“Now more than ever, with young unemployment being so high, we have to be educating people that youth entrepreneurship is a viable career path and not some renegade choice,” Gerber said.

You know what would really be a renegade choice? Not requesting special legislation from the government.

In the interest of full disclosure, I used to work for the government and when I had a small business in the 1990s it had a few government agencies as clients. I make no claim to moral purity here, but just wanted to note how depressing it is that a group of young innovators and risk-takers (of all people) would adopt the nasty habit of seeking government handouts as their standard practice of doing business.

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