In our era of extreme political dysfunction, we have rightly come to expect very little from Congress. Last year’s One Big Beautiful Bill Act (OBBB) stood out for defying this expectation, at least in part: Its higher education provisions are sweeping and provide a framework for substantive reform that better serves taxpayers and students.
Following the end of the Second World War, higher education became a ticket to the middle class for anyone willing to put up the money and put in the time. If you asked almost any American during the second half of the 20th century if a college education was worth the cost, their unflinching answer would be “yes.” Higher education’s contract with the American people was straightforward: Give us your money and we will enable you to achieve economic independence and productively contribute to society and the tax base.
Today, this contract is fraying. Higher education is the most unpopular it’s been since accurate polling has existed, and for good reason: In far too many cases, it doesn’t pay off. According to a recent study, nearly a quarter of bachelor’s degrees have a net negative return on investment for students. Graduate programs are even worse, with almost 50% of master’s degrees coming up short. Far from an automatic ticket to prosperity, higher education has become an economic burden for a growing share of students; one greased and oiled by oodles of federal subsidies. This is not a story of runaway corporate greed. It’s a story of bad government and misaligned incentives.
All the Wrong Incentives
Federal student aid subsidizes institutions of higher education to the tune of over $100 billion every year, including loans and grants. Indeed, about one third of federal student loan and Pell Grant dollars pay for programs with a negative return on investment. These dollars are doled out irrespective of a given institution or degree program’s economic viability, meaning that students can take out the same amount of money, with the same interest rate, for engineering at MIT as they would for underwater basket weaving at the University of Phoenix.
As any economist will tell you, incentives matter. For a very long time, the incentive has been for colleges and universities to create a degree program—any degree program—and rake in federal dollars up front. Outcomes are a secondary consideration at best. Moreover, the federal student loan program is now a net liability for American taxpayers, costing us nearly $400 billion over the course of ten years. Leave it to the federal government to lose money on a loan program.
Here’s where Congress’ latest reforms come in.
Since 2006, prospective students have been able to borrow an unlimited amount of money via the Grad PLUS program to finance their graduate education. That’s right, unlimited. Predictably, universities have created a mountain of new graduate programs since 2006. Research now suggests that Grad PLUS has not only increased the number of impractical graduate programs and contributed to tuition inflation; it’s also done nothing to increase access to higher education—a key component of the program’s original intent.
What Congress Accomplished
The OBBB boldly abolished Grad PLUS and placed limits on federal lending for professional degrees, such as JDs and MDs. This reform is particularly welcome given that despite making up only 21% of students in American higher education, graduates make up nearly 50% of all federal student loans disbursed. Expect a plethora of graduate programs with low return on investment to shut down or merge in the years to come—and fewer students to get suckered into expensive degrees with no upside.
Perhaps more sweeping than the rollback of Grad PLUS is the new earnings test Congress placed on institutions eligible for federal student aid. The test, dubbed “Do No Harm,” ensures that the average earnings of a program’s students four years after graduation are greater than the average earnings of comparable high school graduates. Programs unable to meet this benchmark for at least two of three years are barred from access to federal student loans. This test will apply meaningful pressure on institutions of higher education to do away with programs, particularly certificates, which have become profligate and often deliver little return on investment for students. While most programs will pass, early estimates show that a decent number are currently in trouble.
These measures mark a new era in higher education policymaking. “Access”—once the buzzword-de-jour in higher education circles—is being replaced with “accountability.” In this new paradigm, access, insofar as taxpayer dollars are concerned, will only matter if students are accessing financial stability and upward mobility.
Shortcomings and Limitations
Congress’ recent steps on higher education are significant and represent a change of pace in Washington, but they must be understood as the beginning, not the end, of a national movement to reorient our education system toward outcomes. The simplicity of the OBBB’s Do No Harm test made the bill more palatable for lawmakers and will likely make it easier for federal regulators to faithfully implement, but it does come at a cost. As higher education experts Beth Akers and Bob Shireman point out:
“The new accountability system measures one side of the value equation—how much graduates earn—while ignoring the other side—how much they paid to get there. That omission matters. A program whose graduates earn $60,000 might look great on paper, but not if students borrowed $80,000 to complete it. Conversely, a low-cost community-college program that produces graduates earning $40,000 in steady employment could be an excellent investment, even if those earnings fall short of the federal benchmark.”
Thankfully, fixing this is a small hurdle (insofar as an act of Congress can be classified as a “small hurdle”):
“The foundation laid by the new law is solid. Lawmakers could build on it by incorporating price or borrowing data into the accountability framework. For example, programs might be assessed based on the ratio of graduate earnings to typical debt, or relative to the total cost of attendance.”
Beyond this fix, state governments and institutions themselves have a lot of work to do to improve higher education’s value proposition. To start, states can better integrate existing education and labor data by tracking student wage data after they’ve started their postsecondary journey. This data will enable state leaders and regulators to track outcomes at the institution and program levels. Colleges and universities can use this data to inform their decisions to shrink or grow programs, responding to market demand. Visionary institution leaders can also focus on putting incentives in place to ensure their institution is oriented toward student outcomes in the long term, such as working with state leaders to tie their state-level public funding to student economic returns.
How states and institutions rebuild their social contract with Americans will vary by state, school type, and a host of other variables. But to survive and thrive in an increasingly competitive higher education marketplace, a dogged focus on outcomes and clear communication of this value to prospective students should be at the core of every institution’s strategy. It’s easy to chalk up institutional distrust to misinformation. It’s much harder, but much more rewarding, to recognize that distrust is often fomented by dysfunction, and that trust is regained by doing good work and following through on promises. Public relations campaigns can only do so much.
American higher education, long acquainted with lavish subsidy and unquestioned public imprimatur, faces a reckoning. Students will be better off for it.
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