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[Senate Hearing 106-515]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 106-515

 
  RISING COST OF COLLEGE TUITION AND THE EFFECTIVENESS OF GOVERNMENT 
                             FINANCIAL AID

=======================================================================

                                HEARINGS

                               BEFORE THE

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                        FEBRUARY 9 AND 10, 2000

                               __________

      Printed for the use of the Committee on Governmental Affairs

                               

                     U.S. GOVERNMENT PRINTING OFFICE
63-465 cc                    WASHINGTON : 2000

_______________________________________________________________________
For sale by the Superintendent of Documents, Congressional Sales Office
         U.S. Government Printing Office, Washington, DC 20402

                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   FRED THOMPSON, Tennessee, Chairman
WILLIAM V. ROTH, Jr., Delaware       JOSEPH I. LIEBERMAN, Connecticut
TED STEVENS, Alaska                  CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine              DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio            RICHARD J. DURBIN, Illinois
PETE V. DOMENICI, New Mexico         ROBERT G. TORRICELLI, New Jersey
THAD COCHRAN, Mississippi            MAX CLELAND, Georgia
ARLEN SPECTER, Pennsylvania          JOHN EDWARDS, North Carolina
JUDD GREGG, New Hampshire
             Hannah S. Sistare, Staff Director and Counsel
                        Robert J. Shea, Counsel
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
                   Kenneth R. Boley, Minority Counsel
                   Susan E. Propper, Minority Counsel
                 Darla D. Cassell, Administrative Clerk

                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Thompson.............................................  1,55
    Senator Lieberman............................................  2,56
    Senator Collins..............................................     5
    Senator Levin................................................     6
    Senator Voinovich............................................     7
    Senator Akaka................................................  8,75
    Senator Durbin...............................................    20

                               WITNESSES
                      Wednesday, February 9, 2000

Jamie Pueschel, United States Student Association................    11
Claire L. Gaudiani, Ph.D., President, Connecticut College........    21
William E. Troutt, Ph.D., President, Rhodes College, and 
  Chairman, National Commission on the Cost of Higher Education..    26
David W. Breneman, Ph.D., Dean, Curry School of Education, 
  University of Virginia.........................................    27
Caroline M. Hoxby, Ph.D., Associate Professor of Economics, 
  Harvard University.............................................    31
William F. Massy, Ph.D., President, Jackson Hole Higher Education 
  Group, Inc.....................................................    35

                      Thursday, February 10, 2000

Lawrence E. Gladieux, Executive Director for Policy Analysis, The 
  College Board..................................................    58
Michael S. McPherson, Ph.D., Professor of Economics and 
  President, Macalester College..................................    62
Patricia Somers, Ph.D., Associate Professor of Higher Education, 
  University of Missouri.........................................    78
Jerry S. Davis, Ed.D., Vice President for Research, USA Group 
  Foundation.....................................................    83
Mark Kantrowitz, Publisher, FinAid Page, L.L.C...................    86

                     Alphabetical List of Witnesses

Breneman, David W., Ph.D.:
    Testimony....................................................    27
    Prepared statement with an attachment........................   110
Davis, Jerry S., Ed.D.:
    Testimony....................................................    83
    Prepared statement with attachments..........................   260
Gaudiani, Claire L., Ph.D.:
    Testimony....................................................    21
    Prepared statement...........................................   100
Gladieux, Lawrence E.:
    Testimony....................................................    58
    Prepared statement with attachments..........................   138
Hoxby, Caroline M., Ph.D.:
    Testimony....................................................    31
    Prepared statement...........................................   120
Kantrowitz, Mark:
    Testimony....................................................    86
    Prepared statement...........................................   274
Massy, William F., Ph.D.:
    Testimony....................................................    35
    Prepared statement with supplement...........................   129
McPherson, Michael S., Ph.D.:
    Testimony....................................................    62
    Prepared statement by Dr. Michael McPherson and Dr. Morton 
      Schapiro with an attachment................................   159
Pueschel, Jamie:
    Testimony....................................................    11
    Prepared statement...........................................    95
Somers, Patricia, Ph.D.:
    Testimony....................................................    78
    Prepared statement by Dr. Patricia Somers and Dr. James Cofer   215
Troutt, William E., Ph.D.:
    Testimony....................................................    26
    Prepared statement...........................................   103

                                Appendix

Additional prepared statements for the record from:
    U.S. Department of Education.................................   276
    University of Illinois with attachments......................   290
    California Community Colleges................................   297
    Massachusetts Institute of Technology........................   299
    University of Hawaii.........................................   307
Letter from Edward O. Blews, Jr., President, Association of 
  Independent Colleges and Universities of Michigan, dated Feb. 
  8, 2000........................................................   309
Chart entitled ``Figure 6. Inflation-Adjusted Changes in Tuition, 
  Family Income, and Student Aid, 1988-89 to 1998-99 and 1980-81 
  to 1998-99''...................................................   310
Chart entitled ``Percent Share of Grants vs. Loans, 1980-81 to 
  1998-99''......................................................   311
Questions submitted for the record by Senator Akaka and responses 
  from:
    Claire L. Gaudiani, Ph.D.....................................   312
    David W. Breneman, Ph.D......................................   314
    William F. Massy, Ph.D.......................................   315
    Jerry S. Davis, Ed.D.........................................   316

  RISING COST OF COLLEGE TUITION AND THE EFFECTIVENESS OF GOVERNMENT 
                             FINANCIAL AID

                              ----------                              

                      WEDNESDAY, FEBRUARY 9, 2000

                                       U.S. Senate,
                         Committee on Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:11 a.m., in 
room SD-628, Dirksen Senate Office Building, Hon. Fred 
Thompson, Chairman of the Committee, presiding.
    Present: Senators Thompson, Collins, Voinovich, Lieberman, 
Levin, Akaka, and Durbin.

             OPENING STATEMENT OF CHAIRMAN THOMPSON

    Chairman Thompson. Let us come to order, please. Thank you 
all for being here today. I want to give special thanks to 
Senator Lieberman, whose idea it originally was to have this 
hearing, and the more I have gotten into it, the more important 
I think that it is.
    We are meeting to discuss an issue that is important to 
every family in America, the cost of college tuition. The 
problem of rising tuition is known to many of us, but it is 
worth restating for the record. From 1990 through 1996, average 
tuition for a full-time resident undergraduate student rose 
43.8 percent, but during the same time, the Consumer Price 
Index rose only 15.4 percent and median household income rose a 
mere 13.8 percent.
    In a recent report, the College Board wrote, ``Since 1980, 
college prices have been rising at twice and sometimes three 
times the CPI. Over the 10-year period ending in the year 2000, 
average public 4-year tuition and fees rose 51 percent compared 
to 34 percent for private 4-year colleges. Since 1981, both 
public and private 4-year college tuitions increased on an 
average of more than 110 percent over inflation. Private 
college tuition rose most sharply in the early and mid-1980's, 
while public tuition increased the most in the late 1980's and 
early 1990's.'' That is the end of their statement.
    I think we will learn today that certainly it is not 
uniform across the board, that tuition has actually dropped for 
many colleges and institutes, but, of course, there are several 
on the upper end that have risen astronomically, hence the 
averages that we mention here.
    The most puzzling thing about this problem, astronomically 
rising tuition, is that no one seems to have a handle on why 
this is occurring. The Congress, in its infinite wisdom, set up 
a commission to analyze the problem and made recommendations 
about how to address it, but even with the able leadership of 
William Troutt, the commission could not figure out the 
totality of the problem, either.
    In its final report, the commission wrote that, ``Academic 
institutions have made little effort, either on campus or off, 
to make themselves more transparent to explain their finances. 
As a result, there is no readily available information about 
college costs and prices, nor is there a common national 
reporting standard for either.''
    The commission recognized the irony and apologized that it 
``found itself in the discomforting position of acknowledging 
that the Nation's academic institutions--justly renowned for 
their ability to analyze practically every other major economic 
activity in the United States--have not devoted similar 
analytical attention to their own internal financial 
structures.'' Apparently, colleges and universities themselves 
do not have a good understanding of why tuition rates are 
rising in many cases so rapidly.
    As this Committee has found with government agencies, you 
have to know the nature of the problem before you can work to 
solve it. The Federal Government makes available to students 
over $41 billion every year in the form of grants and 
guaranteed loans. As the role of this Committee is to study the 
efficiency, economy, and effectiveness of the government's 
programs, it is incumbent on us to take a serious look at the 
effect of this government spending on tuition rates.
    But there are innumerable other factors that make up the 
cost and price of a college education--administrative costs, 
faculty salaries, technology, Federal regulation, endowment, 
State appropriations, and many, many more. This is clearly a 
case where not one single factor works in a vacuum to affect 
the costs and price of a college education. Just as not one 
single factor affects the cost and price of a college 
education, there is not one single answer to the problem, but 
hopefully by focusing on it here today, we can at least have a 
much better understanding than we do now.
    Colleges and universities must work to control their own 
costs. Public officials must ensure that public aid programs 
work to the public good, and we must all work together to 
ensure that purveyors of fraud do not take advantage of 
students and their families.
    Again, this is an important issue worthy of the Committee's 
attention and I want to thank Senator Lieberman, as I said, for 
suggesting this inquiry. We have some distinguished witnesses 
here to help us explore the myriad issues relating to this 
topic and I look forward to their testimony.
    Senator Lieberman.

             OPENING STATEMENT OF SENATOR LIEBERMAN

    Senator Lieberman. Thanks, Mr. Chairman. Good morning. 
Thanks so much for your responsiveness to our suggestion that 
this was a topic that was important for us and this Committee 
to get into. Our staffs have worked very well and very hard 
together, as you and I have, and I do believe that we have a 
couple of days of substantive and important hearings ahead of 
us.
    As you indicated, the high price of a college education is 
a matter of deep and growing concern for America's families. 
The numbers I have are 20-year numbers, but they mirror what 
you indicated. Over the past 20 years, tuition has more than 
doubled at both public and private colleges, rising, as you 
said, well above the rate of inflation. Yet subsidies to 
schools in the form of State appropriations or aid to students 
and their families have failed to keep pace with those 
increases.
    I have tuition increases at slightly over 110 percent over 
the last 2 decades. Aid is up 68 percent, and as we will find 
out here, importantly, more of the aid now than then is in 
loans as opposed to grants. And the median family income has 
increased 22 percent over the last 2 decades. Those numbers 
give a snapshot. I suppose one can overreact to them, but they 
show what is the bottom line here, which is that tuition has 
been rising, not only more than the rate of inflation, but more 
than the increase in median family income, and aid to fill that 
gap has not been rising proportionately.
    Parents are painfully familiar with these developments. I 
must tell you that everywhere I go in Connecticut, this seems 
to be just about the number one topic of concern. Families are 
anxious about how they and their kids are going to afford 
college. Last October, there was a poll in the Washington Post 
that reflected this nationally, and I must say, based on the 
anecdotal evidence that I have had in Connecticut, I did not 
find it surprising. Sixty-three percent of Americans with 
school-age kids said they worry a great deal about college 
costs.
    Maybe even more striking, a report by the American Council 
on Education found that 71 percent of the American people 
believe that a 4-year college education is not affordable for 
most Americans. The interesting fact is, as we will hear during 
the hearing, that, in fact, most people are somehow managing to 
afford it, although taking on great burdens. But the fact that 
71 percent think it is not affordable is corrosive.
    Sixty-five percent on this American Council on Education 
poll list the cost of college education as a top concern, 
ranking it among their concerns ahead of violent crimes against 
children, children's health care, and even the quality of 
public schools. So that gives us some measure of public anxiety 
about this issue.
    Now, I think the anxiety is a reflection of the importance 
that we have always attached to higher education in this 
country and that parents attach today. They are willing to 
shoulder just about any burden to give their children the help 
they need, but they fear that the burden is increasing to back-
breaking proportions and that their children will be priced out 
of higher education and thereby kept from realizing their own 
personal American dreams.
    The stress on individual students is only part of the 
story. There is also, of course, a powerful connection between 
our Nation's ability to provide higher education and our 
ability to maintain healthy economic growth. Growth in our time 
is dependent on innovation, the kind of innovation that comes 
from educated people. We also hear constantly from employers 
about America's shortage of skilled workers to help us compete 
globally.
    So if college becomes a luxury that an increasing 
percentage of our population cannot afford, it will not only be 
bad for those who cannot afford it and expand the economic 
divide between higher education haves and have-nots, it will 
come to stunt our economic growth and our national well-being.
    Today, we have an extraordinary group of witnesses, and 
tomorrow, as well, who we are going to ask some important 
questions, I think, that are important to America's families 
and to America's future.
    The bottom line is, why is college tuition so high? Schools 
tell us that they are providing an expensive and valuable 
product, an education that will mean thousands of dollars more 
in future earning power for graduates. But, of course, many 
parents are concerned that schools may not be using their 
tuition dollars as efficiently as they should be, that perhaps 
they are paying more for a college education than is really 
necessary. We are going to look at the component parts of 
tuition here, those costs incurred by institutions in providing 
an education and ask whether colleges and universities are 
doing everything they can to hold down their costs.
    From the student's perspective, the amount of aid he or she 
receives is, of course, as important as the sticker price of 
tuition. So we are going to look at the subsidies for higher 
education and ask whether aid to students and to schools is 
adequate.
    Before public universities, for instance, set tuition, 
State appropriations are enormously important offsets against 
those public school costs. It is important to remember that 
over three-fourths of undergraduates in our country go to 
public colleges and universities, so State and public 
appropriations are critically important to the cost of 
education.
    Many private schools can use their endowments to offset 
costs and lower tuition. So we are going to ask how many can 
afford to do that and are they doing it.
    And, of course, in addition, there are scores of Federal, 
State, and private grant and loan programs that assist students 
in tuition. Are they adequate to the task? Are they adequate to 
the need and the national interest in allowing every one of our 
children able to go to college to do so?
    We are also going to look into the growing and 
controversial use of something called merit aid, also referred 
to as tuition discounting, which can dramatically affect the 
price tag of a student's education. College applicants and 
their families should know that when a school gives a sticker 
price for tuition, apparently that may just be the beginning of 
a negotiation. Asking for a better price is an increasingly 
utilized and successful tactic, even for students who do not 
qualify for need-based programs, and what are the implications 
of that?
    We are going to try to assess the impact of education loan 
debt on students and this increasing proportion of school aid 
that is made up in loans as opposed to grants. Students are 
finding themselves obviously carrying a tremendous debt burden. 
What effect does that have on their education and on their life 
choices afterward?
    And finally, Mr. Chairman, I know we have worked with our 
staffs to try here to expose what might be called merchants of 
scholarship fraud. You can always count on somebody to try to 
take advantage of people's anxieties and needs. Apparently, 
scholarship fraud amounts to over $100 million annually that is 
taken without cause from vulnerable students and parents. The 
most common scams include a required up-front fee in exchange 
for guaranteed success in locating a scholarship. Also, there 
are sales pitches that are disguised as free financial aid 
seminars. Of course, families are already stressed out over 
exorbitant tuition fees and we hope that through these hearings 
we can make them aware of the illegal schemers who lay in wait 
for them.
    So, Mr. Chairman, again, I thank you. I hope that we can 
learn from these hearings whether our Nation is on track in 
providing access to all of our children to higher education and 
whether government is doing everything it can to ensure college 
affordability, whether the colleges and universities themselves 
are doing everything they can, and if not, what can we all do 
together to guarantee full access to higher education.
    I want to extend, finally, a special personal welcome to 
Dr. Claire Gaudiani, President of Connecticut College in New 
London, Connecticut. Today, we are going to hear from a great 
educator, a great success story in her own right as a person 
who was a student through scholarship aid, and, may I say, a 
wonderful citizen leader in Eastern Connecticut.
    So I thank you again, Mr. Chairman, for convening these 
hearings and I look forward to 2 very constructive days of 
testimony.
    Chairman Thompson. Thank you very much. Senator Collins.

              OPENING STATEMENT OF SENATOR COLLINS

    Senator Collins. Thank you very much, Mr. Chairman. I want 
to commend you and Senator Lieberman for your leadership in 
convening this morning's hearing to examine the effectiveness 
of Federal financial aid and its relationship to the rising 
costs of higher education. Having worked at a college in Maine 
prior to my election to the Senate, I have a special interest 
in this issue and I remember well the discussions that we would 
have on where and how we should set the tuition rates for the 
upcoming year.
    It is becoming more evident every day that some form of 
higher education is needed to participate fully in the economy 
of the future. More and more jobs require some sort of higher 
education, and indeed, even in traditional industries and 
manufacturing where a high school degree used to be adequate, 
things are changing.
    I visited two paper mills in Maine over the recess and 
talked with the managers, who told me that no longer will they 
hire someone with only a high school degree. Instead, they are 
now requiring at the paper mills in Maine a minimum of 2 years 
of higher education, either at a technical college or at the 
university. This is a considerable change.
    In addition, college graduates make, on average, $17,000 
more annually than do high school graduates. Thus, increasing 
educational opportunities is key to narrowing the widening gap 
in this country among income groups. It is for these reasons 
that I have consistently fought for an expansion of Federal 
financial aid programs, including Pell grants, student loans, 
and the new LEAP program.
    Nevertheless, as we do increase Federal aid, it is 
extremely important that we continue to assess the 
effectiveness of these efforts to improve access to higher 
education, particularly for our low- and middle-income 
students. Ideally, our goal should be that every qualified 
student should be able to attend college without facing 
insurmountable financial barriers.
    I have been concerned for some time that Congressional 
efforts to increase student aid may have been undermined by 
continuing tuition increases that are far above the level of 
inflation and far exceed the growth in family income. Senator 
Lieberman gave some statistics over the last 20 years, but even 
if you look at more recent years, you find that there still is 
a disparity between the increases in inflation versus tuition 
rates. For example, from 1990 through 1996, the average tuition 
rose by almost 44 percent compared with an increase of just a 
bit over 15 percent in the Consumer Price Index and about a 14 
percent increase in the median household income.
    My concern is that we appear to be pouring more money into 
the system only to have it mopped up by tuition increases, and 
if, in fact, that is the case, then we are not achieving our 
goal of expanding access.
    I am hopeful that these hearings will shed further light on 
this concern for, at the very least, the increased availability 
of Federal financial aid has made it easier for colleges to 
raise tuition without running into signs of consumer 
resistance. The suggestion that I have heard that Federal 
assistance is not a factor in tuition increases is, according 
to a report by the Council for Aid to Education, ``akin to 
arguing that the ready availability of home mortgages has no 
impact on the price of housing.''
    At the heart of these hearings are significant policy 
questions that I look forward to hearing addressed by our 
witnesses today. It has always been the objective of aid 
programs to broaden access and increase opportunity for 
students, but the question before us is has that objective been 
stymied by unrestrained tuition increases? How can we 
appropriately encourage colleges and universities and technical 
schools to hold down their charges without resorting to 
inappropriate controls and interference?
    These are the difficult questions that I hope our panelists 
will discuss today. I look forward to hearing their testimony, 
and again, I want to commend both the Chairman and the Ranking 
Minority Member for initiating this very important 
investigation.
    Thank you, Mr. Chairman.
    Chairman Thompson. Thank you very much.
    Senator Levin, do you have a comment.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Thank you very much, Mr. Chairman. Let me 
congratulate and commend both you and Senator Lieberman for 
your initiative in calling this hearing this morning.
    Access to higher education has been the principal reason 
for America's economic strength and for the persistence of our 
democratic values. It is essential. Access to higher education 
is absolutely essential to economic opportunity for more and 
more Americans.
    It seems to me that one of our goals in this Congress and 
in future Congresses has got to be what other Congresses before 
us have achieved, which is extending higher education 
opportunity to more and more Americans. Financial aid is the 
key that unlocks the doors to our colleges and our universities 
for millions of Americans, and the fact that tuition costs have 
gone up increases the importance of financial aid programs and 
the need to broaden the availability of those programs to more 
and more people.
    As you pointed out, Mr. Chairman, in your opening comments, 
there is a great variety of experiences between the States and 
within our States as to tuition cost increases. There is not 
one uniform tuition cost increase that applies across the 
board. We have had some real success in my home State of 
Michigan, both in some of our public universities and in our 
independent colleges and universities with keeping tuition 
costs down, and I would like, Mr. Chairman, if I might, to ask 
that a portion of a letter from the President of our 
Independent Colleges and Universities of Michigan, Edward 
Blews, be inserted in the record at this time which describes 
the success of our independent colleges in keeping tuition 
rates and increases down.\1\
---------------------------------------------------------------------------
    \1\ The letter from Mr. Blews appears in the Appendix on page 309.
---------------------------------------------------------------------------
    Chairman Thompson. It will be made a part of the record.
    Senator Levin. Thank you very much. One of the former 
presidents of one of those independent colleges, David 
Breneman, is one of the witnesses today. He is now at the 
University of Virginia, but we miss him very much in Michigan, 
and Kalamazoo remembers you very fondly, indeed. I cannot stay 
for your testimony, but I wanted to give you a special welcome 
here this morning.
    Thank you, Mr. Chairman.
    Chairman Thompson. Thank you. Senator Voinovich.

             OPENING STATEMENT OF SENATOR VOINOVICH

    Senator Voinovich. Thank you, Mr. Chairman. I am pleased 
that you and Senator Lieberman are holding these hearings on a 
very important issue of the rising cost of college tuition and 
the effectiveness of government financial aid.
    I believe that a quality education is the foundation of 
success for our Nation's young people. In an increasingly 
complex and technologically advanced world, higher education is 
more valuable than ever before. However, that value often comes 
at a formidable price. As tuition costs for most schools 
continue to outpace inflation by significant margins, the 
financial cost to families and the debt burden for students 
makes affording college a struggle for many.
    I recall a civics professor in high school who said that he 
defined a democracy as an equal opportunity to become unequal, 
and access to a quality, affordable education is one way that 
we give people an equal opportunity to become unequal.
    In my own case, I cannot but think of my dad, who was a 
first generation American, but for a Kroger scholarship to 
Carnegie Tech would not have had a chance for higher education. 
My own family, I think as many here, benefitted from 
scholarships. My daughter who went out to Stanford on a 2-year 
graduate program, benefitted. And my oldest son, it took him 6 
years to pay off his debts because he decided to go to a 
private law school. So I think a lot of us sitting here 
understand having three kids in college at the same time, the 
burden that is there.
    On the other hand, I am glad that Senator Lieberman 
mentioned that our public colleges are about 75 percent of the 
action. One of the things that I did as Governor, and I am only 
mentioning this today because I think it does prove that if you 
set your mind to trying to work harder and smarter and do more 
with less, there is a lot that can be achieved. What we did was 
set up a thing called Managing the Future and got some of the 
best people in the State together. Tier one was how we do a 
better job with our education system in the State, better 
coordination between the universities and leveraging their 
efficiencies. The second thing we did was to ask each 
university to do their own operations improvement task force. 
Were there things that they could do to bring down their costs?
    I cannot help but think of Cleveland State University. In 1 
year, the private sector people went to work and saved that 
university $8.5 million a year because they put private sector 
spectacles on to look at how that place could be better 
operated.
    As a result of going forward with that, we now have a 
program called Securing the Future of Education, and since 
1993, our universities have saved over $212 million, a savings 
that has been passed on to Ohio students through more 
reasonable tuition increases. This year, Ohio is going to spend 
$2.4 billion towards lowering the overall cost of higher 
education through financial aid, institutional support, and 
Ohio's Access Challenge Program.
    It is interesting to note, Mr. Chairman, that tuition in 
Ohio has fallen from a 5.1 percent increase in tuition in 1994-
95 to 4.8 percent in 1998-99, and this is going to be the first 
year that for our 2-year colleges, the tuition is going to be 
less than it was last year because of our Access Challenge 
Program.
    The point I am making is that as we look at these programs 
to see how we can do a better job of helping the young people 
in this country achieve this opportunity for their future, I 
think we also should talk about ways that we can do a better 
job of keeping the cost down. I think that I can tell you that 
when we started with this program, I caught a lot of you know 
what from a lot of the universities. But as time went on, many 
of the presidents came and said to me, ``I am glad, Governor, 
that you did go forward with this program, that we thought we 
were doing everything that we could, but you know what, we were 
not.''
    Chairman Thompson. Thank you very much. Senator Akaka.

               OPENING STATEMENT OF SENATOR AKAKA

    Senator Akaka. Thank you very much, Mr. Chairman. I, too, 
want to add my appreciation for you and Senator Lieberman's 
calling of this hearing on the rising costs of college tuition 
and the effectiveness of government financial aid. Thank you 
for providing this opportunity to talk about an issue that 
affects the lives of millions of students and families each 
year, the affordability of a college education.
    As a former teacher, vice principal, and principal, and 
also as a grandparent of 14 grandchildren, I have been involved 
in many sides of this issue. I tell you, even as a grandparent, 
you become part of the process here and help to pay for the 
costs.
    Right now, many high school students, seniors, are going 
through the exciting task of finishing up applications to the 
colleges of their choice. They are also rushing to file a 
FAFSA, or the Free Application for Federal Student Aid and to 
meet financial and aid deadlines imposed by colleges and 
universities, scholarships, loan programs, or the programs 
aiming to help them finance their way to a college degree.
    I have a long statement, Mr. Chairman, but I ask that my 
full statement be included in the record. I want to make one 
final point before I conclude.
    Many colleges and universities have worked diligently to 
ensure that the unique needs of minority students have been 
met. However, additional needs remain in minority communities, 
particularly in areas of high poverty in inner cities, rural 
areas, and certain island areas over which the United States 
maintains jurisdiction. Furthermore, tremendous variation in 
need exists within minority communities.
    In order to assess true need by race, we must strive to 
look at the data relevant to these communities disagregated in 
addition to as a whole. For instance, among Asian Americans and 
Pacific Islanders, the aggregated group may be doing well in 
terms of financial access to college. However, when separating 
the East Asian Americans, such as Chinese and Japanese, 
compared to Southeast Asian Americans, such as Vietnamese and 
Laotians, and Pacific Islander Americans, such as Chamorros and 
Samoans, East Asian Americans are doing better than other 
groups.
    I do not believe there is enough being said on the subject 
and I urge our panelists to take this issue back to their 
organizations, discuss it, and start coming out with applicable 
data on this.
    Mr. Chairman and Senator Lieberman, I thank you again for 
creating this opportunity to discuss a most important issue. I 
look forward to hearing the testimony that will be presented 
today. Thank you very much.
    Chairman Thompson. Thank you very much. Your statement will 
be made part of the record. And thanks for reminding me that I 
am still just a novice in the grandparenting business.
    [The prepared statement of Senator Akaka follows:]

                  PREPARED STATEMENT OF SENATOR AKAKA
    Thank you, Mr. Chairman and Senator Lieberman for providing an 
opportunity to talk about an issue that affects the lives of millions 
of students and families each year: The affordability of a college 
education. As a former teacher, vice principal, and principal, and also 
as a grandparent of 14 grandchildren, I have been involved in many 
sides of this issue.
    Right now, many high school seniors are going through the exciting 
task of finishing up applications to the colleges of their choice. They 
are also rushing to file the FAFSA--Free Application for Federal 
Student Aid--and to meet financial aid deadlines imposed by colleges 
and universities, scholarships, loan programs, or other programs aiming 
to help them finance their way to a college degree.
    Should these students receive Federal aid, the door to a college 
degree is opened. However, things are not completely rosy on the other 
side. A study released by the American Council on Education in 
November, 1999, states that regardless of race, economic status, or 
gender, most college students attend school part time and work long 
hours while enrolled. This jeopardizes their chances to complete a 
degree. The trend of rising costs for tuition, books and other 
associated expenses contributes negatively to this, because students' 
anxiety increases with rising costs. Many feel that they must work even 
more to cover the growing tab for their college degree, which further 
jeopardizes their attainment of that degree.
    Despite rising college costs, there is no question that a college 
degree makes a difference in an individual's earning potential. 
According to the U.S. Census Bureau, the average earnings of college 
graduates have risen over the last two decades, while wages for those 
with only a high school diploma or less have dropped.
    Between 1978 and 1998, average yearly wages for those without a 
high school diploma dropped from nearly $20,000 to nearly $16,000, and 
wages for high school graduates went down by roughly $1,000 to about 
$24,000. In contrast, those with bachelors' degrees were making an 
average of $44,740 in 1998, compared to about $39,000 in 1978. Clearly, 
the importance of a postsecondary degree cannot be understated. What we 
must continue to do is help individuals finance their college education 
and overcome rising costs.
    I am pleased that the Fiscal Year 2000 omnibus spending package 
included modest increases for Federal student financial aid programs. 
The increase in maximum Pell Grant award from $3,125 to $3,300 was 
needed. In addition, increases were approved in Supplemental 
Educational Opportunity Grants, Federal Work-Study, Leveraging 
Education Assistance Partnerships, and TRIO programs. I look forward to 
hearing about further funding needs in these Federal programs and their 
impact on college affordability.
    Many students in Hawaii rely heavily on these Federal programs, and 
they will probably need them even more in the coming years. The 
University of Hawaii is currently considering a 5-year tuition increase 
proposal for many reasons, including: Budget cuts in recent years, low 
tuition compared with other schools, decreasing enrollments, and 
Hawaii's poor economy, as reported in the Honolulu Star-Bulletin, 
February 5, 2000. Unfortunately, this could reduce enrollments even 
further, particularly of those who may be considering moving from 
community college to the university level.
    The University of Hawaii is not alone in considering tuition hikes. 
Therefore, even with increased funding for Federal financial aid 
programs in FY 2000, we have a lot to make up for. Education is often 
put on the back-burner when it comes to funding priorities. Instead, it 
should be a top priority because it is an investment in the future of 
this country. At this time, I would like to insert into the record a 
statement from University of Hawaii President Kenneth Mortimer.\1\
---------------------------------------------------------------------------
    \1\ The statement referred to appears in the Appendix on page 307.
---------------------------------------------------------------------------
    Finally, one aspect of this issue that I would be very interested 
to hear more about are differences among and within minority groups, 
particularly Asian Americans and Pacific Islanders. Many colleges and 
universities have worked diligently to ensure that the unique needs of 
minority students have been met. However, additional needs remain in 
minority communities, particularly in areas of high poverty in inner 
cities, rural areas, and certain island areas over which the U.S. 
maintains jurisdiction. Furthermore, tremendous variation in need 
exists within minority communities. In order to assess true need by 
race, we must strive to look at the data relevant to these communities 
disaggregated, in addition to as a whole.
    For instance, among Asian Americans and Pacific Islanders, the 
aggregated group may be doing well in terms of financial access to 
college. However, when separating out East Asian Americans such as 
Chinese and Japanese, compared to Southeast Asian Americans such as 
Vietnamese and Laotians, and Pacific Islander Americans, such as 
Chamorros and Samoans, East Asian Americans are doing better than the 
other groups. I do not believe there is enough being said on this 
subject, and I urge our panelists to take this issue back to their 
organizations, discuss it, and start coming out with applicable data.
    Mr. Chairman, and Senator Lieberman, thank you again for creating 
this opportunity to discuss this most important issue. I look forward 
to hearing the testimony that will be presented today.

    Chairman Thompson. I would like to recognize our first 
witness, Jamie Pueschel, Legislative Director for the United 
States Student Association. Ms. Pueschel is a recent graduate 
who will testify about the pressures put on students seeking 
financial aid.
    Thank you for being here with us today, Ms. Pueschel. Do 
you have a statement for us?

     TESTIMONY OF JAMIE PUESCHEL,\1\ UNITED STATES STUDENT 
                          ASSOCIATION

    Ms. Pueschel. Good morning, Mr. Chairman, Mr. Lieberman, 
and distinguished Members of the Committee. On behalf of the 
nearly 15 million students across the country, I thank the 
Committee for holding hearings on this most important issue, 
college costs.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Pueschel appears in the Appendix 
on page 95.
---------------------------------------------------------------------------
    As the country moves into a new millennium and a new 
economy, it becomes increasingly important for the country to 
invest in the education of our young people if we want to 
continue to compete globally. Young people are feeling the 
pressure to get a degree now more than ever so that they, too, 
can participate in the booming economy. Every year, though, 
achieving that college degree becomes more and more difficult 
and more and more costly for students and their families. 
Annually, tuitions rise and students take out more and more 
loans to pay for college. Tuition and fees only comprise part 
of the cost of going to college. Students have to pay for room 
and board, not to mention books and supplies.
    While graduating with a reasonable amount of debt is better 
than not having a degree and the opportunities that come with 
that degree, debt can affect the job a student takes, the place 
he or she lives, and the assets that student may or may not 
acquire. I am such a student.
    I graduated from Claremont McKenna College in Claremont, 
California, in May 1998. My parents are both teachers and 
recently started a 7th through 12th grade Episcopal school in 
Lawrence, Kansas. I have an older sister who graduated from 
Tufts University and is a teacher in Boston and a younger 
brother who just started his freshman year at the University of 
Kansas.
    I graduated with approximately $18,000 in Stafford loans 
and $1,000 in Perkins debt. While I was in school, I worked 15 
to 20 hours per week under the Federal work-study program to 
pay for living expenses such as groceries and books. My parents 
made just over $50,000 combined while I was in college. Just to 
pay for my education, they took out more than $22,000 in PLUS 
loans. They had taken more out to pay for my sister's 
education.
    I was lucky in that Claremont McKenna gave me between 
$10,000 and $15,000 in institutional grants every year, without 
which I would have accumulated even more debt or not been able 
to attend. Even with the grant aid, however, I could not have 
attended without these loans. Every month, I write a check for 
$208.32 to Sallie Mae and a check for $40 to Claremont McKenna. 
Nearly $250 of my monthly income is paid to student loans. I 
make $25,000 a year as Legislative Director of the United 
States Student Association, fighting to increase access to 
higher education for all students.
    In applying for jobs after graduation, the most important 
factor was salary and/or help with loan repayment. While USSA 
does not pay the highest salaries in Washington, it is livable 
because of such loan repayment. Luckily, USSA as part of our 
philosophy provides $150 a month in that repayment. I would not 
have been able to take this job without that help.
    Beyond just job choice, though, I have little ability to 
save money and have no idea when I will be able to afford a 
car, let alone buy a house. This level of debt has limited my 
ability to fully participate in this economy through saving and 
investing.
    This enormous burden students take on affects decisions 
this country must make, as well. Currently, this country is 
discussing the problem of teacher shortages and teacher 
quality. My family feels this problem acutely because my 
parents and sister are all teachers. As a Nation, we provide no 
incentives for our young people to go into teaching. Teacher 
credentials require a fifth, if not sixth year of school, 
therefore requiring the student to take on more debt, and then 
pay them meager wages in increasingly poor schools. My sister 
has an enormous amount of debt, has chosen to teach in low-
income schools, and received little or no support for that 
decision. Business leaders are also complaining that they have 
an unqualified workforce and they need assistance in developing 
a qualified college graduated workforce.
    My sister and I are merely representative of the education 
debt accumulation problem in this country. There are millions 
of students like me in this country and increasing numbers of 
such graduates. But let me tell you why, in spite of my debt, I 
am one of the lucky students. Not only did my parents go to 
college, they are both educators. They know the importance of a 
degree, but more important, they know how to get there. They 
know about applying to schools and how to fill out the FAFSA 
form. I understood taking on debt and paying it off. I knew 
that if I needed help from my parents, I could count on it. I 
went to a great high school that offered me a lot of support 
and counseling in applying for college. That high school gave 
me an education that prepared me for college. I am a 
traditional student. I do not have to worry about children or 
helping to support my family.
    Students have always actively opposed tuition increases. 
Just this year, students at the University of Wisconsin system 
organized and passed a tuition freeze when they faced a 
potential 10 percent tuition increase. Students at North 
Carolina are fighting a tuition increase, as well. What is most 
interesting now, though, is that in some States, they are 
passing tuition freezes or cuts because the States are running 
such large surpluses. California's Governor Gray Davis is 
proposing a tuition freeze, and Republicans in the State are 
proposing a 50 percent cut to tuition. Williams College in 
Massachusetts recently decided to freeze tuition for the next 
school year, as well.
    The College Cost Commission showed us that in financially 
difficult times, such as the late 1980's and early 1990's, when 
tuition increases were highest, States were cutting back on 
State support, thus increasing a family's percentage of income 
going to college. Now that the Federal Government and the 
States are seeing surpluses, tuition increases are low and, 
hopefully, State aid contributions will increase.
    It is crucial for the Federal Government's role to increase 
and to work with the States to make colleges more affordable 
for students. Both the States and Federal Government are 
experiencing unprecedented surpluses. Such surpluses provide an 
unprecedented opportunity for the Federal Government to make 
some choices and increase funding for programs that will truly 
help all students afford college and life after college.
    I think everyone would agree that education is the best 
investment our country can make in its young people and the 
economic future of our country. It is certainly an important 
investment for my brother, sister, and I. Unfortunately, we may 
not be able to make any other investments for our future.
    I thank you for allowing me to discuss with you my story of 
going to college and what steps would be useful in helping 
college students pay for school.
    Chairman Thompson. Thank you very much, Ms. Pueschel. That 
is very helpful testimony and it really gives us an insight 
that we need in talking to real people and real experiences, 
and you help us do that.
    I think I just have one question for you, but I think it is 
an important one, and that has to do with the attitude of young 
people as they are coming out of school, such as yourself. You 
have experience, not only your own experience, but you talk to 
other young people, so you would be a good witness on that.
    It seems to me that you have followed what is becoming a 
traditional path, and I guess maybe has been traditional, in 
that you have pieced together money from loans, your parents 
have helped some, your college obviously has helped some, and 
you wound up with a pretty substantial debt as you come out. 
Everybody wants to get more for less, obviously, but the 
question we all have to come away with is what is fair, what is 
right. I think probably a lot of us, I know when I left 
college, I had some debt, much, much lower than what young 
people today have, obviously. Some of my kids did, too, and 
most of us pieced together those various kinds of things. There 
are more programs out there today than there used to be, but 
there still were some in the old days.
    Just the fact that we are getting more into debt even in 
and of itself is not an indictment on the system. I just heard 
yesterday, for example, that I think the consumer debt, the 
average consumer debt in this country overall went up 7 to 8 
percent just last year alone. We are all borrowing more. We are 
all living more on credit cards. But we see the astronomical 
rise in some cases of these tuition prices.
    So balancing all that out, I am wondering, do American 
students believe they are getting fair value for the price that 
they pay for a college education? You are obviously getting 
something very important. You are paying a big price for it. Do 
you feel it is fair, and being as objective as you can, where 
are the shortfalls here in terms of how young people coming out 
of school today with some debt, but having a valuable 
commodity, how do you feel about it and how do you think most 
young people feel?
    Ms. Pueschel. I think you raise a couple of really good 
points. What is interesting now about a college education is 
that we are almost required to have it so that we can compete 
in this economy and get the jobs that are going to provide us a 
home and provide for our families. I think that is a difference 
from years ago, where you could get a job without a 4-year 
degree, maybe a 2-year degree, and still provide for your 
family. I think that that is not true anymore.
    Chairman Thompson. A high school education meant more then 
than it does now, that is for sure.
    Ms. Pueschel. Absolutely. I think this chart \1\ alone 
shows how little income has increased versus tuition, and I 
think we all see a value in what we get. I mean, certainly, I 
appreciate my education. I would not be here without it.
---------------------------------------------------------------------------
    \1\ Chart entitled ``Figure 6. Inflation-Adjusted Changes in 
Tuition, Family Income, and Student Aid, 1988-89 to 1998-99 and 1980-81 
to 1998-99,'' appears in the Appendix on page 310.
---------------------------------------------------------------------------
    Is there a way to balance the price of tuition or the price 
of college with affordability? I think so. I think that we as a 
country need to look at how much we value college education and 
decide what steps we are going to take to make it more 
affordable for students. Students obviously are willing to take 
on the debt and go to school because we have increasing numbers 
of kids in college. Is that affecting our decisions afterwards? 
I believe so. But I think that we can work together with----
    Chairman Thompson. You mentioned in terms of being a 
teacher or public service, from that standpoint, too----
    Ms. Pueschel. Absolutely.
    Chairman Thompson. In our Committee, we do a lot of work in 
the area of government performance and efficiency and economy, 
if that is not an oxymoron when it comes to the government, but 
we are increasingly concerned, even those of us who consider 
ourselves quite conservative as far as government is concerned, 
that we are losing out on bright young people coming into 
government to serve a little time--they do not have to spend 
their life there--because we are becoming more and more 
technologically dependent, for example. We talk about not only 
the technology we use, but the threats to our Nation from cyber 
terrorism and things of that nature. You really have to have 
good bright young, not necessarily young, but most of them in 
that area seem to be these days people coming in and spending 
some time and helping us with regard to that, and you see what 
they can do on the outside. So whether it is teachers, 
government service, whatever, what you are saying is that there 
are an awful lot of young people coming out with such a debt 
burden that it is making it difficult for them to make those 
choices.
    Ms. Pueschel. It is scary to come out of college with so 
much debt, especially for a low-income student. I was a middle-
class student. But coming from a low-income student's 
background, growing up in an area where people do not take out 
loans, that they do not ever own anything, and then looking at 
your future, not knowing if you are going to have a job when 
you graduate and looking at having to take out the maximum 
allowed loans in subsidized every year, which is what I did. 
Maxing out results in about $18,000 of Stafford loans.
    It is really scary to look at graduating with a lot of debt 
and not knowing what you are going to gain. Someone might say, 
``Well, I will take this $6 an hour job or whatever because it 
is keeping food on my table right now and that is safe,'' even 
though the country would be much better off putting more of our 
kids into college. And like Senator Akaka said, reaching into 
our minority populations that go to college at the lowest 
rates, helping them get into college and take the steps there.
    But I think you are absolutely right. I mean, look at 
Congressional staff salaries. We are not talking about a ton of 
money here.
    Chairman Thompson. Well, it seems pretty high to me. 
[Laughter.]
    Ms. Pueschel. I think I just made some friends.
    Chairman Thompson. Some of them are making more than we 
are. That is kind of a sensitive subject. [Laughter.]
    Ms. Pueschel. They are certainly making more than I do. But 
anyway, I think that you are right. I mean, you talk to some of 
the business leaders, there are real complaints that they are 
not having a qualified workforce to hire. If you are a techie 
now, you are going to do OK, but for how long is that going to 
last? I just think we need to make some concrete steps to make 
sure that we maintain our economy.
    Chairman Thompson. I get your point. I will just finish 
with you along the lines of the original question I asked. 
There was a Higher Education Nationwide Survey, out February 8 
of this year, that said 73 percent of Americans believe that 
securing a college education is very important in helping 
someone to succeed. On the other hand, nearly half, 47 percent, 
say that those in college are not getting good value for their 
education. Almost half the people feel that they are not 
getting good value. That is of concern, because ultimately, 
that will produce bad things of various sorts if we do not at 
least get more transparency in the system so that people 
understand, if costs have to be high, that people understand 
why they are high. We do not do that very well, and especially 
to our young people coming out after running up all these 
bills. Thank you very much.
    Senator Lieberman.
    Senator Lieberman. Thanks, Mr. Chairman. Thanks for your 
testimony, Ms. Pueschel, which has been very helpful both in 
terms of your personal story but also insofar as you're 
representing the United States Student Association. I thank you 
for that.
    I think your personal story reminds us of the pressure, not 
only on those who are lower-income, in finding a way to afford 
college, but on those who are not, in conventional terms as we 
understand it, poor as your folks, but nonetheless take on a 
tremendous burden and that you take on a tremendous burden 
financially, as well. I am struck by the fact that your Mom and 
Dad together make around $50,000 and they took on a loan 
indebtedness of $22,000 for your education. I may have missed 
this. Did you at any point get a scholarship grant from your 
college?
    Ms. Pueschel. Yes. The money I got was in the form of a 
grant.
    Senator Lieberman. It was? OK, then that was in addition to 
the loan indebtedness of the $18,000 that you took on and the 
$1,000 or $2,000 additional that you mentioned.
    That just points out, the Pell grant program, which is a 
wonderful program, obviously does not reach a family like 
yours, does it?
    Ms. Pueschel. It helps--and it is supposed to help the 
lowest-income students who most likely would not have gone to 
college without it.
    Senator Lieberman. I know it is a sliding scale. I notice 
in some of the material I have that the average family income 
of Pell grant recipients, that is, students who are dependent 
on their parents for financial support in 1996-97 was $19,260. 
So it is a great program, but it does not reach up to where you 
are.
    Just two quick questions, because I think the Chairman 
asked you the questions that I had in mind, as well. One is, 
does the Student Association have any particular proposals? I 
mean, one of the things we are going to try to do here today 
and tomorrow is to talk about why tuition is as high as it is, 
how are the aid programs affecting it, etc. But does the 
Association have any priority proposals as to what, for 
instance, Congress might most effectively do to deal with this 
problem?
    Ms. Pueschel. I do not know if you actually want to ask me 
that question for proposals. There are lots of things that we 
would like to do.
    Senator Lieberman. Just give me the brief form of the 
answer.
    Ms. Pueschel. I do not think anyone has come up with a 
great answer on college costs. I think States have a great 
opportunity now with public colleges to keep down their costs 
or to freeze tuition, and I think the Congress has a great 
opportunity to catch up as far as on our grant programs like 
the Pell grant. The College Board also puts together wonderful 
statistics on what percentage of college Pell grants make up. 
Twenty years ago, for a public institution, it comprised 60 or 
80 percent of tuition at a public 4-year college. Now, it is 
down to 40 percent. So there are places that we can make leaps 
and bounds in our funding to really make up for the differences 
now that we do have a surplus.
    Senator Lieberman. Let me just stop you. So, in other 
words, one thing you are proposing is to expand the income 
eligibility levels for Pell grants and the amounts of the 
grants?
    Ms. Pueschel. Well, whenever you increase the amount of the 
grant for a Pell grant, because of the way it works on the 
graph, the highest amount goes to the lowest-income people, and 
whenever you increase it, it pushes into higher and higher 
incomes. The minimum grant a family can receive is $400. There 
are other programs, like SEOG, a matching program with 
institutions that provides a ton of grant money, I think a 
maximum of $4,000 now, to really low-income kids. The LEAP 
program is a State grant matching program, as well as the 
opportunity to do things like making Pell mandatory. That is a 
pretty out-there thing to say right now, but we actually have 
the money. We are spending it on----
    Senator Lieberman. What would it mean to make it mandatory?
    Ms. Pueschel. Take Pell out of discretionary funding and 
make it an ``entitlement.'' And we could fund it at much higher 
rates now. The President just proposed spending $30 billion on 
tax incentives. Making the program mandatory and increasing it, 
doubling it, would cost less than that.
    Senator Lieberman. Would you prefer that as opposed to the 
proposal that the President made for the money going to the 
Pell grant program?
    Ms. Pueschel. I think we always like to see money put into 
grant programs as opposed to the tax incentives, because we 
still have a large population that is not going to college that 
would not without Pell and other need band grants. I am a 
student that would have gone to college anyway. It is just 
unfortunate, the debt I have to face afterwards.
    Senator Lieberman. Thanks very much. Just one comment that 
Senator Akaka's opening statement and your response to it 
brings to mind, which is in terms of the special needs of 
lower-income kids and either minority or first-generation 
Americans, which is that if you look at the demographics, our 
population of children in the decades ahead is going to become 
increasingly, what we refer to now as minority populations, and 
probably increasingly from lower-income families, so that our 
ability as a Nation to continue to have the bright minds, the 
innovators, will be increasingly affected by our ability to 
make it possible for lower-income kids, minority kids, to get a 
higher education. So the problem as we go along is probably 
going to get more demanding because of that demographic change 
that we see coming, that a greater proportion of the kids are 
going to be from the families that are going to be most in 
need. Thanks so much for your testimony.
    Ms. Pueschel. Thank you.
    Chairman Thompson. Thank you very much. Senator Collins.
    Senator Collins. Thank you, Mr. Chairman.
    Ms. Pueschel, I was very interested in your testimony and I 
want to follow up on the questions that the Chairman and 
Senator Lieberman asked you. You mentioned that you graduated 
with some $18,000 in debt, and that was the experience that I 
saw with students at Husson College, where I worked, as they 
were graduating with this mountain of debt. And one of the 
reasons, and I have asked for the chart \1\ to be put up, is 
that the ratio of grants versus loans has changed dramatically 
in the last 10 years. Where it used to be that Federal 
assistance covered more of the cost through grants, now much 
more of it is covered through loans. It is essentially reversed 
of what it used to be.
---------------------------------------------------------------------------
    \1\ Chart entitled ``Percent Share of Grants vs. Loans, 1980-81 to 
1998-99,'' appears in the Appendix on page 311.
---------------------------------------------------------------------------
    I found at Husson, where I worked, that some students got 
so discouraged by the prospect of facing this mountain of debt 
that they dropped out of school and went to work. Has that been 
your experience in talking with students, that the changing 
ratio and the prospect of being faced with 10's of thousands of 
dollars of loan payments due after graduation discourages 
people from remaining in school?
    Ms. Pueschel. I think that is a huge problem right now. 
There are a couple of reasons kids drop out, one being the 
seemingly insurmountable amount of debt that they are going to 
take on. One is that there is not much consistency in your aid 
package from year to year. Annually, you take out more and more 
loans. The way our maximum loan amounts you can take out work 
is it is capped, I think, around $2,500 in your freshman year 
and it increases to about $5,000 in your senior year. So every 
year, you are taking out more and more debt. That is scary, 
especially if you can go out and get a job and pay for things 
right now. Meanwhile, you are going to leave school with debt 
and not have a degree.
    Some kids come from high schools that do not provide as 
great an education as mine did and they get into a classroom 
with 500 other kids in their freshman year math class and they 
are not doing as well as some other kids and that is awful. 
They do not see a point if they are taking on all this debt and 
are not doing very well. Why should I stay in this? I can go 
get a job, and subsist. But that is a problem, because you are 
forcing kids to drop out without a degree but with debt.
    Senator Collins. And as you have pointed out, that debt 
load also discourages students from pursuing careers where they 
might make a real contribution, say in teaching or in public 
service, but because the salaries may be lower, they just feel 
they cannot take on those careers.
    I know my work-study student at Husson College was going 
back to her hometown in northern Maine where income levels and 
salaries are very low and she was faced with a debt load of 
$18,000 that she was going to have to pay back. In fact, she 
was the inspiration for my introducing a bill to allow the 
interest on student loans to be deducted was her experience. I 
think it raises a very important policy question for us as 
Senators on where should we put the money. Should the money 
that we appropriate go to tax credits or tax deductions? Should 
it go into Pell grants? Should it go into student loans? What 
is the right mix for making sure that we are doing as much as 
possible to expand access? I think your point about the need to 
expand Pell grants is very important in that regard.
    My final point, I think you have raised a very important 
issue about whether there is a bit of a bait and switch going 
on at some colleges, where the colleges will provide more 
institutional grant aid in the freshman year and then gradually 
take some of that away and change it to loans for the 
sophomore, junior, and senior year. I have heard that complaint 
from many students, and I think that is something we need to 
bring up with our college representatives, as well.
    Ms. Pueschel. I agree. It is scary when you are getting 
your loan package every year and it is different.
    I am glad you brought up the student loan interest 
deduction, because that is another area that we can really help 
our graduates out. The President has put it in his budget a 
second time. The Senate passed it last year with Ms. Snowe 
making an amendment to change it into a tax credit.
    I just got my little slips in the mail that told me how 
much interest I paid last year, and I paid about $1,400 in 
interest alone last year, and I can tell you, it would be 
really helpful to have that back in a credit. Right now, I can 
only deduct it for the first 60 months of payment, and for 
those students who have the most amount of debt, that pay over 
25 years, it would really help them out for the next 20 years 
for them to be able to take that deduction.
    Senator Collins. Thank you very much, Mr. Chairman.
    Chairman Thompson. Thank you. Senator Akaka.
    Senator Akaka. Thank you very much, Mr. Chairman.
    I want to commend you for your many accomplishments in this 
early age of your life. I believe that the struggle you and 
your family endured in financing your college education and 
that of your siblings is typical of the struggle of many 
middle-class Americans, and I am pleased to note that you were 
successful in your endeavors, but disheartened by the 
substantial education debt that you occurred. Eighteen-thousand 
is huge. I applaud your concern and recommendations for 
increased aid for low-income students, and I agree 
wholeheartedly with your recommendations to provide economic 
relief across the economic spectrum.
    I would like to thank Senator Lieberman for mentioning the 
issue in my statement regarding minority students. I would like 
to at a later time see anything that USSA might have produced 
in relation to this issue, unless you have any comments at this 
time on this.
    Ms. Pueschel. We would be happy to share any of our 
research with you. We have a largely minority population in our 
membership and have our Campus Diversity Project, which 
operates out of our office, which is continually working on the 
issues of recruitment and retention of students of color, 
especially from low-income backgrounds, and we would be happy 
to share with you at any time what we work on. We work on 
affirmative action and programs that are going to make sure 
that students stay on campus, such as support services, but we 
would be happy to share that with you at any time.
    Senator Akaka. In a section of my statement that I 
submitted for the record, I mention a study released by the 
American Council on Education in November of last year. This 
study said that regardless of race, economic status, or gender, 
most college students attend school part-time and work long 
hours while enrolled. This jeopardizes their chances to 
complete, in some cases, a degree. What are your thoughts on 
this, and maybe even touching on what reasons, other than the 
need to pay for their education, convinces students that they 
need to work while in school.
    Ms. Pueschel. Federal work-study becomes part of your 
package, as it was part of mine. Often, students, though, who 
are non-traditional students, students who are first 
generation, students with children, students going back after a 
long time, veteran students will work outside of school, not in 
the Federal work-study program, to make up for either their 
family costs, helping to help out their families if they come 
from a low-income background, paying for their own children, 
just regular costs of school.
    The important factor, I think, for all of us to recognize 
is that the amount of money required to go to school far 
exceeds tuition and fees. Room and board are issues, even if 
you do not live on campus. Your books are extraordinarily 
expensive.
    But as a lot of people report, students are working at 
extraordinarily high levels these days, often well over part-
time, and I think cost is part of that, a large part of that, 
because families see no other way to afford it unless their 
kids are working. It makes it harder for you to focus on your 
studies. It makes it harder for you to take a full load and 
graduate within 4 or 5 years and is extending the amount of 
time that you--because of work and because of the extra time 
spent in school--are going to be taking out more debt.
    Senator Akaka. My last question for you, in thinking of all 
of the experiences that you have had, what recommendation would 
you now make to a high school student, a high school senior who 
is looking at college, regarding their options or opportunities 
for financial aid?
    Ms. Pueschel. Well, I would talk to them about the 
difference between going to a private school and a public 
school. I am certainly feeling that now. I would talk to them 
about the different options they have got as far as Pell 
grants, SEOG, LEAP, any community scholarships they can 
research, talk to their own financial aid officers, develop a 
relationship with your financial aid officer and work on ways 
that the institution can help you out to find some other 
scholarships that will last you through the 4 years, not just 
for the first or second year, so that you can maintain the same 
level of grant aid over the 4 years.
    Senator Akaka. Thank you very much for your response. Thank 
you, Mr. Chairman.
    Chairman Thompson. Senator Durbin.

              OPENING STATEMENT OF SENATOR DURBIN

    Senator Durbin. Thank you, Mr. Chairman, and thank you for 
your testimony today, which I did not hear in person but I 
read, and I thank you for being here.
    It is interesting, we focus on the Federal scene, as we 
must because that is our responsibility, but a little bit of 
research that our office has done has shown that since 1980, 
State revenues for higher education have decreased almost 
$1,200 per student in constant dollars. Tuition revenues have 
increased by over $900 per student during this period. So at 
the same time as we are having more loans than grants, the Pell 
grant is not keeping up with the increasing cost of tuition, 
States are putting less money in higher education, forcing 
institutions, public institutions, in particular, to raise 
their tuition to make up the difference.
    Another factor contributing to increased student borrowing 
is that in the last 20 years, the relative value of the maximum 
Pell grant has decreased by one half. In 1979-80, the maximum 
Pell grant of $1,800 represented 47 percent of the total cost 
to attend the University of Illinois. In 1999, the maximum Pell 
grant of $3,125 represents only 23 percent of the estimated 
cost of attending the university.
    At the same time, I might add, that we are debating 
increasing the minimum wage, which I think should be done and 
should have been done a long time ago, a lot of students trying 
to supplement their incomes are working in fast-food places and 
whatever they can find and often making a minimum wage. When we 
talk about the minimum wage, I think we overlook that, that 
some students get by on it. I did it when I was in school. I 
bet you did, too, those types of jobs.
    Ms. Pueschel. Yes.
    Senator Durbin. So I thank you for being here today and for 
your testimony, and because I came in a few minutes late, I 
will not delay the hearing any further. Thank you.
    Chairman Thompson. Thank you very much.
    Thank you very much. You have been very helpful to us.
    Ms. Pueschel. Thank you.
    Chairman Thompson. We appreciate your being here.
    Our next panel consists of highly distinguished members of 
the academic community. They will discuss how colleges and 
universities manage costs and set tuition.
    This panel will include Dr. William Troutt, President of 
Rhodes College, Chairman of the National Commission on the Cost 
of Higher Education; Dr. David Breneman, Dean of the Curry 
School of Education at the University of Virginia; Professor 
Caroline M. Hoxby of Harvard University; Dr. William Massy, 
President of Jackson Hole Higher Education Group; and Dr. 
Claire Gaudiani, President of Connecticut College.
    Dr. Gaudiani, I understand you have a plane you have to 
catch and you probably are going to have to leave here in about 
15 minutes. If it is all right with everyone else, would you 
give us the benefit of your statement first?
    Senator Durbin. Mr. Chairman.
    Chairman Thompson. Yes?
    Senator Durbin. May I, just a moment, ask for consent to 
enter into the record a statement from the University of 
Illinois on this issue? \1\
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    \1\ The prepared statement from the University of Illinois with 
attachments appears in the Appendix on page 290.
---------------------------------------------------------------------------
    Chairman Thompson. It will be made part of the record.
    Senator Durbin. Thank you.

     TESTIMONY OF CLAIRE L. GAUDIANI, Ph.D.,\2\ PRESIDENT, 
                      CONNECTICUT COLLEGE

    Ms. Gaudiani. Thank you. Thank you very much, Mr. Chairman. 
I appreciate the grace of my colleagues and you and Senator 
Lieberman and the distinguished panel in permitting me to go 
first. I am, in fact, going back to New York to be part of a 
panel honoring and working on the work of Senator Fulbright.
---------------------------------------------------------------------------
    \2\ The prepared statement of Ms. Gaudiani appears in the Appendix 
on page 100.
---------------------------------------------------------------------------
    I come to you probably looking--well, let us say, 
hopefully, after 12 years, looking like a college president, 
but actually being a scholarship student, the oldest of a 
family of six, and benefitted from scholarships both as an 
undergraduate at Connecticut College and then through the 
National Defense Foreign Language grants support through my 
Ph.D. My husband and I--also, my husband was a scholarship 
student at Princeton and also did a Ph.D. under government 
support, and both of us finished paying back our college and 
university loans the year our children went into private high 
school education.
    Chairman Thompson. I had the very same experience.
    Ms. Gaudiani. So when I look at indebtedness, I want us all 
to be sure we know this is not a new trick. It is a persistent 
problem and we need to address it vigorously.
    But our Nation has been built on the American dream, which 
is people who are able and are willing to work hard will have 
opportunities to contribute their full giftedness to the 
strength of this democracy and their own personal and their 
family's advancement. I am going to speak to you today about 
one major item I hope you will consider in the coming days and 
in your work enabling more support to come to American citizens 
who need to continue to benefit from financial aid.
    I do not need to remind this distinguished panel that 
probably the best money we have spent in this century was on 
the GI Bill, which enabled a whole generation, including, for 
many of us, our fathers' generation, to make the kind of 
contributions that fueled the economic progress we have in 
place right now.
    The change in financial aid in the early 1960's that 
addressed some of the issues that Senator Akaka brought forward 
was another major realteration in financial aid which said aid 
will be need-based. That is, we are going to make sure that any 
citizen who needs aid will go to the institution that he or she 
is able to get into and will not be forced to go to another 
institution, perhaps of lesser rank, because the institution is 
more expensive or because the student has received less 
financial aid. I think that is a critical commitment for me as 
a college president and primarily as a scholarship student to 
bring before you.
    What I am concerned about is that in the financial 
pressures that colleges and universities have faced, which my 
colleagues in economics will share with you, in the pressures 
we faced in the last decade, there has come to be an alteration 
in the way financial aid, institutional financial aid, is being 
used in some campuses, and I want to bring this to your 
attention not because I am unhappy with my colleagues who face, 
like I do at Connecticut College, the tremendous pressures on 
our budgets to produce a very stronger faculty.
    If faculty salaries drop, of course, we have young people 
who go into other jobs, and you have all seen what happened to 
young lawyers' salaries recently. Well, I can tell you that did 
not happen to America's faculty salaries in the last couple of 
months. But if we are going to have the best and the brightest 
in the classroom, we have to have faculty salaries at a 
significantly strong level.
    The same thing with the price of technology. Colleges like 
mine have to have nuclear magnetic resonating spectrometers. We 
have to have very expensive infrastructure, that is, 
technological infrastructure, in order to provide the quality 
of education that will fuel America's wealth in the next and 
coming generations, and that has to be available for all 
students. But I am going to leave to my colleagues more fit 
than I the job of explaining our cost structure, and also I 
very much appreciate Senator Voinovich's concerns.
    Chairman Thompson. You are going to opt out on that 
question?
    Ms. Gaudiani. No, I just know when I have masters and 
mistresses of knowledge in the room. But we have, for instance, 
at Connecticut College gone through a cost restructuring 
program about every 3 years to keep taking costs out and 
assuring that we are spending our money in the absolute best 
places. The board has made a commitment to raising tuition 
within a point to a point-and-a-half of inflation and try to 
respect the ratios that you have seen up here.
    But the problem that I want a moment to bring before you is 
that over the last, let us say, 15 years, there has been an 
alteration in the way institutions' scholarship aid has been 
offered, and it is increasingly moving toward, at many 
institutions--not all, of course--merit aid, and that sounds 
wonderful. Let us reward merit. Unfortunately, it is not really 
merit aid at a significant and rising number of institutions, 
and let me just run a little scenario.
    Imagine that I am a college president looking at my board 
of trustees and I need to fill beds and I need to make the 
bottom line work. A consultant comes to me and says, let me 
help you out. You know that $30,000 scholarship to cover full 
tuition and room and board and fees and books that you would be 
prepared to give to a student who comes from a low, very low-
income, first-generation family, let me show you how to use 
that aid.
    Instead of giving that scholarship to one student who will 
take up that aid, $30,000 a year, 4 years in a row, let me show 
you some magic. We are going to give that scholarship to six 
no-need students, students whose families may make $400,000 a 
year, completely out of the need-based category, and each of 
those students is going to get $5,000 of merit aid and we are 
going to do a study using information readily available in the 
public sector in credit studies and credit card studies and we 
are going to tell you the price point sensitivity of those 
families and you are going to leave no money on the table.
    So those six students getting those $5,000 merit 
scholarships are going to pay you the rest of the $25,000 in 
tuition. So, my dear president, you are going to get a big 
chunk of cash, $25,000 times six, $150,000 for that $30,000. 
How does that grab you?
    Now multiply that times four and tell your board that one 
full-time scholarship divided like this not only fills six beds 
and brings you $600,000 in 4 years, but it also brings you 
families to whom you can go for annual fund gifts. They are 
going to be grateful, happy, wealthy families, because you know 
what? That student has not gotten a merit aid scholarship 
anywhere else. Connecticut College would not give that student 
a scholarship because Connecticut College and many of my sister 
and brother institutions give the men and women who apply to 
Connecticut College need-based aid.
    I believe that this is a problem we have to look at in 
higher education. It is making the scholarship money of an 
institution operate as a business resource. We are tax-exempt 
in higher education because we are supposed to be developing 
social capital. We are supposed to be returning to this Nation 
a higher set of opportunities in each citizen that can be 
played out over a lifetime.
    My brother's scholarship at Harvard has given the Nation a 
cardiac thoracic surgeon of the first order who has done 
research, who has done transplant surgery, and has spent a 
career giving back to his country and has sent three daughters 
to Harvard on his own nickel, one of whom is already in medical 
school.
    My sister who was on a scholarship at Bryn Mawr is a double 
board certified endocrinologist with four children who are in 
private school at her and her husband's expense, and she is 
returning to this country the benefits of her scholarship. And 
my brother who is a corporate executive, the same, only his 
kids are 4 and 2 years old, so they have got a ways to go.
    My point here is that it is important for us to look at 
institutional financial aid as a national resource to build 
social capital, not as a bottom-line business asset to create 
the kind of resources that the institution can use for other 
purposes.
    So I would draw to your attention what I believe is a hotly 
contested issue in higher education, and I realize I may not be 
making some friends among my colleague institutions by bringing 
this up, but I think it is important for us to call this by its 
right name. It is not merit aid, because these students are not 
more gifted than students who do not get this aid, who do not 
receive these merit scholarships. They are students whose 
families show in the credit reports available price point 
sensitivity. That is, they are the kind of people who are 
looking for discounts and will come to your institution if you 
give them that aid, and they are people with money who will be 
able to provide you with money going forward.
    We need to use our institutional financial aid resources to 
bring the best and the brightest from all across American 
families to the best quality education that we can give them 
access to, and for the most part, to be quite frank, they 
should not be in mathematics courses as freshmen with 500 other 
students.
    High quality education is expensive. It is impossible to 
get economies of scale when we are raising human beings, and we 
could look to science and to our own biology. We do not give 
birth to litters. We give birth to babies, mostly one at a 
time, and they take about 20 years, if we are lucky, to get 
them independent. Colleges and universities that are able to 
afford class sizes that are manageable and educational 
opportunities that permit teachers to really know students and 
guide them, that is the quality of education that this Nation 
deserves in the coming generation.
    We need to reduce the debt burden. You have heard some good 
ideas. You have some good ideas. I firmly support the expansion 
of Pell and the SEOG grants, but I also want to suggest that we 
look into debt forgiveness, not only the tax credits for 
indebtedness, but actually debt forgiveness.
    David and I, my husband and I, had debt forgiveness for 
teaching. That was a big help in managing our loans and young 
family. We could have debt forgiveness not only if people go 
into certain professions at certain income levels, but also 
debt forgiveness for civic engagement. It is very important for 
the best educated citizens to be willing to participate, as I 
am seeing in my own city of New London, in running for city 
council and being members of planning and zoning commissions 
and participating in the life of our democracy, and it might be 
that we should look into some method of debt forgiveness for 
citizens who have loans and who are willing to participate 
actively in local government and other nonprofit opportunities 
for civic engagement.
    We have a country that was built on a dream, and it is our 
responsibility to make sure that the dream can continue to be 
maintained at all income levels and that our country as we move 
forward will benefit from this great asset, which is America's 
higher education.
    That is the end of my formal testimony and I would be 
pleased to take questions.
    Chairman Thompson. Thank you. Thank you very much.
    Senator Lieberman. Thanks, Mr. Chairman.
    Ds. Gaudiani, if you are going to get that plane, I am 
afraid you should go. I do not want to risk that. I just wanted 
to thank you. Your testimony was stirring, as is your story, 
and I appreciate it.
    I guess, just boiling it down to a really quick question 
targeted, what can we in government, if anything, or you in 
higher education, do to counteract the problem of merit aid as 
you have described it, which to me in some ways seems as if we 
are making--we are asking colleges to be more like businesses, 
but part of what you are describing is a situation where 
colleges really are acting like businesses and making a 
business, not an education, judgment about how to use their 
aid.
    Ms. Gaudiani. Well, I think we have to make a very 
important distinction here, Senator Lieberman, and I am so 
grateful for your leadership here and the leadership of Senator 
Thompson, and Senators Collins, Akaka, and Durbin.
    The critical issue you are asking is the critical issue we 
are facing in higher education. We have got to act like 
businesses in cost reduction and in cost management, and we 
have tried to do this at Connecticut College. In fact, our 
planning and management system is a case study at Harvard 
School of Education that is taught every year and showing other 
academic institutions how to do management and planning.
    But we are not businesses. We are fundamentally not 
businesses. If you go in to buy a car, no one asks you whether 
or not you are willing to fill out an application so that the 
car dealer can decide whether or not you really ought to be 
driving a Lexus or a Taurus. We are not businesses. You apply 
to get into colleges and you have to prove by what you have 
done ahead of time that you are worthy to be there. And no one 
comes to you and takes back your Lexus or your Taurus if they 
decide they do not like your driving style. You get to keep the 
car if you make your payments. That is not like higher 
education.
    So I believe we have created some of this problem in the 
last 10 years in the way we have not faced up to the work that 
the country wants higher education to engage. We need to be 
told to manage our costs and to use the best wisdom, as Senator 
Voinovich mentioned, of private enterprise to control costs and 
to manage well. But we need to be told that our job is to 
enhance social capital and that in order to do that, we should 
not use our funds as a business resource but, in fact, as a 
resource to develop America's human capital and to assure that 
no student is left at home without that $30,000 scholarship 
that that expensive student is going to cost the institution 
because the money has been used more wisely from a financial 
standpoint by the institution.
    So I think we probably need a small study group of our 
leaders in government and in higher education to look at this 
in the context of the pressures on higher education to meet the 
expectations of business and to see that the results of that, 
in fact, are to leave young people on the sidewalk in some of 
our lowest-income neighborhoods, and also our middle-income 
neighborhoods, at our great peril as a Nation.
    Senator Lieberman. Thanks so much. I appreciate your 
twisting your schedule around to come, but it turns out that 
you are a perfect, I think, complementing witness to Ms. 
Pueschel in your story and the position you occupy. I just want 
to say that I feel badly for your brother, the corporate 
executive, because he is the only one at the table who cannot 
be called doctor. [Laughter.]
    Give him my regards.
    Ms. Gaudiani. Thank you very much.
    Senator Lieberman. Thanks. Have a safe trip.
    Ms. Gaudiani. And thank you very much, distinguished panel.
    Chairman Thompson. Thank you very much.
    I will now call on Dr. William Troutt, President of Rhodes 
College and Chairman of the National Commission on the Cost of 
Higher Education. Dr. Troutt has a special place in my heart. 
He was President of Bellmont College when two of my children 
graduated from there, so we have been very proud of his 
achievements and leadership. Dr. Troutt.

  TESTIMONY OF WILLIAM E. TROUTT, Ph.D.,\1\ PRESIDENT, RHODES 
   COLLEGE, AND CHAIRMAN, NATIONAL COMMISSION ON THE COST OF 
                        HIGHER EDUCATION

    Mr. Troutt. Thank you, Mr. Chairman, for the opportunity to 
be here before you and your distinguished colleagues this 
morning. If I might, let me submit my written testimony for the 
record----
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    \1\ The prepared statement of Mr. Troutt appears in the Appendix on 
page 103.
---------------------------------------------------------------------------
    Chairman Thompson. All prepared statements will be made a 
part of the record, and feel free to summarize.
    Mr. Troutt. I will use this time, then, if I might, to make 
five points that I hope will provide some context for our 
conversation today and hopefully connect with some of the 
concerns you have already raised.
    Point No. 1, college cost is one of those topics that grows 
in complexity the more you talk about it. Chairman, it is not 
unlike Tennessee goat meat. The more you chew on it, the bigger 
it gets. [Laughter.]
    Well, why is that? First of all, college finance works 
differently. In the world of commerce, price equals cost plus, 
hopefully, some profit. In the world of higher education, price 
equals cost minus subsidy. We also do not have the best 
vocabulary for talking about college costs. The distinction we 
make about four different terms is very important: Price, the 
tuition and fees we ask students to pay; cost, what 
institutions spend to educate a student; subsidy, the 
difference between price and cost; and net price, what students 
pay after financial aid is subtracted.
    At Rhodes College, it works something like this. Price is 
about $18,500. The cost of educating that student is about 
$32,000. The subsidy for every student is about $13,500. The 
net price that three out of four students pay at Rhodes College 
averages $9,000.
    We also have a very diverse system of higher education that 
adds to this complexity. American colleges and universities 
vary in their missions, in their sources of subsidy, and in the 
size of their subsidy. As you know, States vary greatly in 
their ability to support higher education. Private college 
endowments vary dramatically. We have 27 private institutions 
in this country with an endowment of $1 billion or more. We 
have over 1,500 private colleges and universities with an 
average endowment of about $10 million. Subsidy and cost both 
have a lot to do with price.
    Point No. 2, a number of factors drive college cost. Some 
are obvious and have been mentioned already today--people cost, 
technology, facilities, financial aid--and some are not so 
obvious--regulatory compliance and the expectations that 
students and families bring to campus about everything from 
support services to facilities.
    Point No. 3, it is difficult to connect the availability of 
Federal student aid with rising college prices. Our National 
Commission on College Costs found that Federal grants did not 
contribute to rising prices. But we could not find convincing 
evidence that loan availability affected tuition increases. 
More definitive research is needed. On a personal note, let me 
say that in 18 years of building budgets for the administrators 
and trustees, I never heard anyone propose raising tuition to 
capture more Federal dollars.
    Point No. 4, colleges and universities are taking steps to 
control costs, as you have already heard this morning. Price 
increases are moderating. This year's tuition increase for 4-
year private institutions is the lowest in 27 years. Academic 
leaders are taking steps to manage costs.
    At Bellmont, where I served as President for 17 years, we 
were able to significantly cut class offerings without 
sacrificing quality. We were able to reduce energy expenses. We 
were able to reduce staff through a redesign of work processes.
    At Rhodes, where I serve today, we have joined with 14 
other leading liberal arts colleges across the South to share 
resources and contain costs through innovations ranging from a 
virtual electronic library to a virtual classics department, 
from joint technology training for faculty and staff to jointly 
sponsored study abroad programs. More can be done and must be 
done, but campus leaders are taking public concerns about 
rising college prices seriously. You have got our attention.
    Point No. 5, much work remains to be done, not just in 
containing costs, but in sharing information and building 
knowledge. American families need to know more about college 
prices and about the availability of aid.
    Your hearing today is a reminder of how important this 
issue is to American families and how essential it is for all 
of us to work together to keep American higher education 
affordable. Thank you for this opportunity to share today.
    Chairman Thompson. Thank you very much.
    I will now call on Dr. David Breneman, Dean of the Curry 
School of Education of the University of Virginia. Dr. 
Breneman.

TESTIMONY OF DAVID W. BRENEMAN, Ph.D.,\1\ DEAN, CURRY SCHOOL OF 
               EDUCATION, UNIVERSITY OF VIRGINIA

    Mr. Breneman. Thank you, Mr. Chairman, Senator Lieberman, 
and other Members of the Committee. I am going to enter this 
through the standpoint of the media, because as I suspect my 
colleagues have the same experience, I must get two or three 
calls a week from a reporter who is going to write the 
definitive story on college costs.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Breneman appears in the Appendix 
on page 110.
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    Now, as I reflect over those hundreds of conversations, I 
have never had a reporter ask me about the soaring cost of 
community college education, where 43 percent of our 
undergraduates are enrolled. I rarely, actually, have them ask 
me about the soaring cost of public universities, where 37 
percent of our students are enrolled. What they wind up doing 
is obsessing about the rising costs of about 40 or 50 colleges 
in this country, mostly private, highly selective, and highly 
prestigious. So they wind up really writing about what, in my 
own view, is where their news editor's child wants to go, and 
so the reporter is tilted toward a focus on this particular set 
of schools.
    Chairman Thompson. For the record, we do not associate 
ourselves with any of those. [Laughter.]
    Mr. Breneman. I think then they write stories like 
Newsweek's famous $1,000-a-week story or the story in Time 
Magazine about Penn and so on, and I think this creates a sense 
of panic among parents, many of whose children will never have 
any interest in going to such schools, but it filters down and 
I think it helps create a perception that college is vastly 
more expensive than the reality shows.
    On the other hand, people act on their perceptions, and as 
the polling data show, the most serious concern most people 
express about higher education is exactly the subject of 
today's hearing.
    Now, in terms of a theory to determine the cost of college, 
there are lots of them out there, but I have always been struck 
by Howard Bowen's notion, the distinguished economist who was 
President of Grinell and the University of Iowa, and after 
studying this for some time, he came up with the revenue theory 
of cost, namely that colleges raise all the money they can and 
they spend it on good and useful things.
    The point of this, if there is any truth to it, is that it 
means there really is not an objective standard by which to say 
how much a college should spend. It becomes a relative 
standard, pure comparisons.
    As you know, I am sure, Senator Collins, from working at a 
college, every college has a set of peers and everything we do 
is indexed relative to our peers. So we do not shoot at an 
absolute cost figure, we shoot at a relative or a positional 
cost figure, and things like the U.S. News and World Report 
rankings just reapply this into a more significant competition.
    Now, we are an institution or an enterprise marked by 
multiple sources of revenue. I will not renumerate them for 
you, but we all know what they are. Tuition is just one of 
many. When one goes down, administrators seek to raise another 
one. For example, in the early 1990's when the States were 
cutting back sharply on their public appropriations, we turned 
to tuition increases and private fundraising. The University of 
Virginia in response to this undertook a massive capital 
campaign that has just gone over $1 billion. We did this in 
large part to replace the State money that was no longer there.
    Now, the diversity of the revenue stream means that the 
analogy to health care costs, which often gets invoked--
Secretary Bill Bennett did this for the first time some years 
ago--is simply wrong because there is not a single dominant 
third-party payer in the higher education system. There are a 
lot of payers, no one of which is dominant.
    My own sense, and I agree on this with the Cost Commission, 
is that objective evidence shows that Federal grants do not 
have one smidgen to do with tuition increases. It just does not 
work that way. If you raise your tuition, the Pell grant does 
not go up.
    The case of loans is much more controversial and hotly 
contested, and I, to be honest, have not seen a definitive 
study on this. Federal loan programs are capped, but you have a 
multitude of private loan programs and you have home equity 
loans and a variety of other loan sources and it is hard for me 
to believe, frankly, that somehow this has not played into some 
aspect of tuition increases.
    On the other hand, what do you do about that even if that 
were true? I hardly believe it would be acknowledged by most 
parents that taking away access to loan capital would be an 
improvement. So it is a dilemma. How do you do something about 
it, even if you could establish that case.
    I will say that the much discussed tuition tax credit does 
carry with it the incentive for tuition increases, potentially 
in the public sector to make sure that the tuitions are high 
enough to capture the full credit, if they are below it, and in 
the private sector, schools have the opportunity to offset some 
of their own institutional aid funds against the credits. So I 
think you do run the risk of setting up an incentive program 
for cost increases or price increases in those programs.
    The next point, very briefly, is that I think you have to 
do separate analyses for tuition setting in the public and the 
private sectors. In the public, price is a political decision. 
It is manipulated or influenced or set, even in some cases, by 
governors and legislatures at the State level. As far as I can 
see, I see no Federal role at all in getting into that thicket 
other than to be aware of the incentives that your programs may 
be putting out there, such as the tuition tax credits, that may 
influence that State-level decision.
    Governors, for example, right now, in response to tuition 
increases in the early 1990's, a number of the States and a 
number of the governors are intervening now to buy down those 
tuition increases. Virginia just took a 20 percent reduction in 
its in-State undergraduate tuition driven entirely by the 
governor and legislature.
    In the private sector, the market is the arbiter, and 
again, with my colleague, I agree. The majority of private 
colleges struggle to make ends meet and they are discounting 
heavily. It is not unusual to find 40 to 50 percent of your 
total gross tuition revenues being discounted in order to fill 
the class. I do not see any role the Federal Government can 
play in going in and trying to fool around with the pricing in 
those schools. They are so close to the margin, frankly, a 
number may indeed not survive the price wars of the next decade 
or so. They are in real trouble.
    That brings us back, alas, to these 50 or so extremely 
wealthy institutions that have had their endowments expand by 
incredible amounts in this utterly unpredicted bull market of 
the last 10 or 15 years. This is the group of institutions that 
fuels the media interest, rightly or wrongly, and I am not 
attacking them, I am just saying, the fact of the matter is we 
have a very strange and widely dispersed market now of higher 
education, much more divided into wealthy and less-wealthy 
institutions than we used to.
    And you have to modify Bowen's revenue theory with regard 
to those top groups because they do not raise all they can. 
Their tuitions, in fact, are considerably lower than they could 
charge with the applicant pools they have, so they restrain 
themselves already on the price side, I think for political 
reasons, and increasingly, they are saving a great deal of the 
money they raise through transfers to endowment.
    With the Williams College decision, which was mentioned 
earlier, announced 3 or 4 weeks ago, Williams decided they were 
going to freeze their tuition, and my view is that that is an 
attempt by the administrators at Williams to send a signal to 
their peers that politically--this is not an economic move, 
this is a political move--signaling their peers that it is 
time, for political reasons, to either freeze or hold down 
tuition increases, to take the heat off.
    Now, I have written about that and it is part of my 
testimony. My sense is that their peer institutions will do 
everything they can to marginalize and box Williams into a 
corner, make them look stupid. If they do not follow their 
lead, then the fact of the matter is, Williams will have to 
raise their tuition again next year and this one-time incident 
will be forgotten.
    I think that would be a pity, because I think Williams is 
trying to address a real issue here, but it is virtually 
impossible for a single institution to single-handedly try to 
alter this market. So in a way, it is a fool's errand, if you 
will.
    The one thought I did have, though, I do believe these 
extremely wealthy institutions are in what one economist has 
called a positional arms race, and I think they might like to 
mitigate that. The antitrust case of 10 years ago has cast such 
a chill over the environment, that these institutions do not 
have the opportunity to even talk together about what might be 
a rational response.
    I guess if I have one idea on this subject for the 
Committee, it might be to revisit the implications of that 
antitrust act and think through whether there might be some way 
that these institutions collectively could do something for the 
public that individually they cannot do.
    Finally, it seems to me the danger in the current situation 
is that with all of the fears about the rising cost of college, 
that financial aid funds are being, as Claire suggested, 
diverted away from financially needy students through 
government responses to the perceived crisis, be it tuition tax 
credits, prepaid tuition plans, or tax-deferred savings. All of 
the things that we keep coming up with the last few years have 
the feature that they only benefit those that are already at a 
significant wealth level. Low-income families essentially 
cannot take any benefit from the programs.
    But what I worry about in this, in an odd sort of way, is 
that the failure we may be reckoning with here is that 
political responses at the Federal and State level to this 
crisis may actually in some ways make some aspects of the 
problem worse. If I were testifying tomorrow, I would share the 
suggestion of the representative, Ms. Pueschel, which was that 
given the tax credits, which are entitlements, and guaranteed 
loans are effectively entitlements--once you are eligible, you 
get it--that I think in a time when we have a surplus, we ought 
to make the Pell grants an entitlement, because I do worry that 
the one program that specifically addresses the needs of the 
very lowest income is put on an annual appropriations cycle 
whereas the rest are not. Thank you very much.
    Chairman Thompson. Thank you very much.
    Professor Caroline M. Hoxby of Harvard University.

 TESTIMONY OF CAROLINE M. HOXBY, Ph.D.,\1\ ASSOCIATE PROFESSOR 
                OF ECONOMICS, HARVARD UNIVERSITY

    Ms. Hoxby. Good morning, Senator Thompson. Good morning, 
Senator Lieberman, Senator Collins, Senator Akaka, and Senator 
Durbin. I would like to thank the entire Committee for inviting 
me to speak.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Hoxby appears in the Appendix on 
page 120.
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    There is widespread acceptance that education is an 
important part of economic growth for the United States. We 
know this because, first, the relationship between growth rates 
and education suggests that for every additional year of 
education that a population attains, a country grows about 1 
percentage point faster per year.
    Second, American industries that have fast-growing net 
exports use a disproportionately high amount of educated labor. 
Also, high-technology industries demand labor that is very 
highly educated: Workers who have full mastery of advanced 
college-level analytic skills. If the growth of high-technology 
industries is not to be reigned in by rising wages, the United 
States would need to nearly double its share of new workers who 
have such an education by 2010. A doubling would mean an 
increase from approximately 7 percent of workers to 
approximately 14 percent of workers.
    There are three forces that are primarily responsible for 
the changes in college tuition that we have witnessed in the 
past 30 years. First, there is skill-intensive technological 
growth which has increased the demand for high-intensity 
college education in the American labor market. By high 
intensity, I refer to a college education in which students are 
expected to master a large quantity of difficult material in 
each year of college. In order to engage in getting a high-
intensity college education, a high school graduate must have a 
very full mastery of high school-level material.
    In a high-intensity college education, students are 
typically required to interact with technologies, like 
computers, in a sophisticated way. They are also required to 
develop advanced analytic and communications skills. People who 
have obtained such education are disproportionately in demand 
in America's highest-growth industry. In fact, students who 
have obtained such educations are nearly 400 percent 
overrepresented in the ten highest-growth industries in the 
United States.
    The second force that has been responsible for changes in 
college tuition is that prospective college students are much 
more mobile and better informed now than they were 30 years 
ago. They know much more about their own college preparation 
relative to the national pool of high school graduates. It is 
also much easier for them to learn about colleges.
    As a result, colleges now face a more competitive market 
than ever before as students compare colleges with similar 
offerings and are sensitive to tuition differences among them. 
More than ever before, students avoid colleges that charge 
tuition that is higher than those of other colleges with 
similar offerings. Also, colleges have had to become more 
specialized.
    Third, international trade and technological innovation 
have really decreased the demand for unskilled labor in the 
United States. As a result, even a high school graduate who is 
poorly prepared for college in the sense that he did not master 
most high school-level material has an increased incentive to 
get some amount of post-secondary education, even if that post-
secondary education begins with remedial courses.
    The three forces I have just described have caused the 
college sector to become much more diverse in order to 
accommodate both poorly-prepared high school graduates who 
might need remedial education and highly-prepared high school 
graduates who want a high-intensity college education. Because 
of this increased diversity, tuition is more diverse.
    College tuition has risen, but it has not risen across the 
board. In fact, since 1970, tuition has remained almost flat in 
real dollars for fully 50 percent of the college places in the 
United States. The first figure in my written statement shows 
how college tuition has changed since 1970. Tuition has 
declined 15 percent for the least-expensive 10 percent of 
colleges in the United States. Tuition has held steady at the 
20th percentile and median tuition has risen only very 
modestly. Tuition has risen significantly only for the 20 
percent of college places that are the most expensive.
    Also, list tuition is somewhat misleading because the 
colleges that have raised their tuition the most are the ones 
that give the largest grants to students. The second figure in 
my written statement shows how tuition paid for students has 
changed since 1970. It shows that list tuition exaggerates the 
tuition that students actually pay.
    I will make a final note on tuition statistics because that 
have been cited so much this morning. It is very important that 
when we compute tuition statistics over time that we do not 
weigh each college equally. Many statistics weigh a Williams 
College (with a class of 400 students) the same as a University 
of Illinois. Such statistics do not represent the true choices 
that are open to students in the United States. They tend to 
exaggerate the rate of tuition growth because they overweigh 
the small colleges and the small colleges are the most 
selective colleges in the United States.
    Statistics that do weight by enrollment tend to weight by 
4-year enrollment. That is also a mistake. If a college 
graduates 100 percent of its incoming class, that college gets 
weighted four times as heavily as a college that graduates 25 
percent of its incoming class. Such statistics tend to 
exaggerate tuition growth.
    The least expensive 50 percent of colleges in the United 
States, in other words, the colleges for which tuition has 
remained steady or has risen only very modestly, are good 
points of entry for students who are not very well prepared for 
college or only moderately well prepared for college. Why is 
this? Well, it makes sense for poorly prepared students to 
enroll in less-expensive courses until they have the skill to 
make use of the sophisticated and costly resources that are 
available at more high-intensity colleges.
    Tuition has risen in real terms for the most expensive 20 
percent of college places. These are the colleges, however, 
that have increasingly specialized in providing high-intensity 
education. We have had testimony this morning that describes 
how they have been providing students increasingly with 
technology and faculty attention. Also, the faculty themselves 
are increasingly expensive because they are in demand by the 
same high-growth industries that are propelling students to 
desire high-intensity educations. Thus, the costs of colleges 
that specialize in high-intensity education have risen and 
their tuition has risen accordingly.
    This does not necessarily imply that their tuition is not 
priced competitively. Indeed, this sector of the college market 
is by far the most competitive, because the students have the 
most ability to choose among colleges. They are the most 
mobile, they are the most informed, and they are the most 
sensitive to tuition differences.
    Estimates suggest that the highest return to a dollar of 
tuition is provided by American colleges that provide high-
intensity education, and these are also the colleges that are 
the biggest draw for foreign students who have a choice of 
going to college in their home country or going to college in 
another host country, like England or Australia.
    Much of the upset over rising college tuition is caused by 
the fact that commentators focus almost exclusively on the 
tuition charged for the most expensive 10 percent of college 
places in the United States. While these colleges may be of 
interest to them personally, analysis of college access 
requires a comprehensive view.
    To consider a different market, something like fabrics, 
say, you can see how misleading it is to focus only on the 
maximum price that is charged here. The same fabrics that were 
available to our ancestors are available to us today at a 
similar price or perhaps a lower price. But specialty fabrics 
have been introduced that perform much better under extreme 
conditions. Just think of the fabrics that are used for polar 
expeditions. These specialty fabrics are more expensive because 
they cost more to produce.
    If one were to study fabric prices by looking at only the 
most expensive fabrics every year, one would mistakenly 
conclude that fabric is becoming far too expensive for the 
manufacturing of fabric goods. Competition in the fabric market 
keeps prices in line with costs, but it does not prevent high-
performance fabrics from being introduced at competitive 
prices.
    In order to see whether tuition has made college less 
accessible, I analyzed two major data sets that are comparable 
and nationally representative. They are produced by the United 
States Department of Education. I compared 1972 and 1992 high 
school graduates and the analysis is shown in the table in my 
written statement.
    Let us first consider a high school graduate who is highly 
prepared for college but who comes from a family with very low 
income, less than $20,000 a year. In 1972, a student like this 
had a 6 percent probability of not going to college at all and 
had a 33 percent probability of going to one of the most 
expensive colleges in the United States. In 1992, the same 
student had a zero percent probability of not going to college 
at all and a 43 percent probability of going to one of the most 
expensive colleges.
    Clearly, access to college generally and access to 
expensive colleges in particular increased for highly-prepared 
students from very low-income families. In fact, the analysis 
shows that access to college generally and access to expensive 
colleges in particular increased substantially for highly-
prepared and medium-highly-prepared students from families of 
all incomes.
    Next, let us consider a high school graduate who has 
medium-low preparation for college. Among such students, the 
percentage who did not go to college fell sharply from 1972 to 
1992. Most of the increase was at colleges that charged median 
tuition. Thus, it is difficult to find evidence that 
appropriate colleges are inaccessible to this key group of 
students. This is the group of students who are likely to 
succeed in college, but they are unlikely to want to pursue a 
very intensive college education.
    Finally, let us consider a high school graduate who is very 
poorly prepared for college. A typical student in this range 
has SAT scores well below 300 and was at the bottom of his high 
school class. Even among such students, the percentage who do 
not go on to college fell between 1972 and 1992. For instance, 
in 1972, 76 percent of students with very low preparation from 
families with incomes between $20,000 and $35,000 did not go on 
to college. In 1992, only 67 percent of such students did not 
go on to college.
    In short, the evidence suggests that college is not less 
accessible to students now than it was 30 years ago; it is more 
accessible. Moreover, it is hard to find evidence that students 
are being forced to enroll in inexpensive colleges that are 
inappropriate for their level of preparedness. In fact, most of 
the students who are getting displaced from very expensive 
colleges are students from high-income families who have low 
college preparedness and they are being replaced by highly-
prepared students from low-income families.
    Since most of the increase in tuition affects only the most 
expensive colleges in the United States, perhaps it would be 
advisable to intervene just at those colleges. There are some 
difficulties here, however. First, these colleges are 
increasingly accessible to highly-prepared students from low-
income backgrounds, largely because of the aid that they give 
these students.
    Second, they have been changing their educational services 
most rapidly to keep up with the needs of high-technology 
industries. While we cannot be sure that workers with high-
intensity education will be crucial to future economic growth 
in the United States, such workers are certainly 
disproportionately in demand in high-growth industries today.
    Third, it is a basic tenet of economics that we need to 
identify a market failure before we suggest intervention. Right 
now, there is no critical mass of economists who have 
identified market failures related to competition among 
colleges.
    How can we help students have more access to higher 
education? One of the key developments of the past 7 years in 
particular has been the replacement of some need-based aid with 
merit aid. This has been caused, in part, by the antitrust case 
which chilled the sense of consensus among colleges about the 
importance of need-based aid. It has made it harder for any one 
college president to step out and offer a lot of need-based 
aid.
    The educational savings plans that Congress passed, 
commonly called education IRAs, are an important source of 
college accessibility for two reasons. The first is that they 
increase the funds that a family has when the child needs to go 
to college. The second is that they make a child aware of the 
fact that there is a fund being built up for his future, thus 
making him think harder about preparing for college.
    There are still too few students going to college in the 
United States, especially from low-income and minority groups. 
A lot of the problem is caused by the fact that many students 
have low preparation for college. They need to recognize early 
on that they have to invest in themselves in order to go on to 
college. Better preparation is the single best way of 
increasing access. If there were an education savings account 
that could also benefit students whose parents were too poor to 
save much, even poor students would realize that they needed to 
invest in themselves in high school. They would know that, if 
they did not, they would be sacrificing a potential fund for 
going to college.
    I would be glad to answer any questions you might have.
    Chairman Thompson. Thank you very much.
    Dr. William Massy, President of the Jackson Hole Higher 
Education Group.

  TESTIMONY OF WILLIAM F. MASSY, Ph.D.,\1\ PRESIDENT, JACKSON 
               HOLE HIGHER EDUCATION GROUP, INC.

    Mr. Massy. Thank you very much. Thank you all. It is a 
great pleasure to be here. I think it is very healthy that this 
Committee is looking beyond the symptoms and how to mitigate 
the symptoms, which certainly needs to be done, to get at the 
underlying causes of the situation, that is what I want to 
speak to this morning.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Massy appears in the Appendix on 
page 129.
---------------------------------------------------------------------------
    I think the central question, one that the staff posed, is 
whether the colleges and universities in the United States are 
doing everything possible to maximize value for money. My 
research with Andrea Wilger (who is here today) at the 
federally-funded National Center for Post-Secondary Improvement 
at Stanford University, indicates that the answer is no.
    Cost increases could be held within tighter limits, we 
believe, and while the quality of education in the United 
States certainly remains good by traditional standards, it 
could be significantly better. We believe that things need to 
change internally, within institutions, before the problems we 
are discussing this morning can be truly solved. My written 
statement elaborates on these matters, but let me give a brief 
summary here.
    First of all, institutions and faculty do not know enough 
about educational cost structures to make the kind of 
intelligent trade-offs that are needed to contain costs, and 
cultural factors make it difficult for them to act on the data 
that they have.
    Second, academic quality assurance and improvement 
processes appear inadequate when compared to the processes that 
U.S. business developed during the 1970's and 1980's.
    Third, applications of technology are being used widely to 
enhance quality in teaching and learning, but only a few 
schools are working systematically to reduce costs by using 
technology other than through the obvious method of distance 
education.
    And finally, in my view, markets can do more to discipline 
price and quality, but their operation is limited by a lack of 
data. I think there is a market failure because of data 
limitations. Today's markets certainly are competitive, but 
that does not necessarily mean they are competitive on the 
right kinds of issues.
    In short, I think that colleges and universities can learn 
to contain costs while simultaneously improving the quality of 
undergraduate education and maintaining research leadership. 
However, the needed reforms will come a lot easier if markets 
become more efficient and public accountability is improved, I 
will offer a few suggestions about that in a minute.
    Let me turn to the Committee's questions about tuition 
growth for a moment. First of all, my personal prediction is 
that the real sticker price of tuition at the majority of 4-
year colleges and universities will continue to grow, probably 
at rates averaging as much as one or two points over inflation, 
unless we can deal with the market imperfections I have been 
talking about.
    Now, Professor Hoxby's data included community colleges. 
There is no reason why one should not look at those, but I am 
talking about the 4-year sector.
    These kinds of rates are consistent with the typical 
``internal inflation rates'' in higher education. These rates 
reflect the labor-intensive character of the enterprise. There 
is a never-ending desire to fund new programs. There are 
escalating regulatory burdens. There are continuing needs for 
investment in facilities and technology, including information 
technology, mass spectrometers and things like that. But they 
also reflect an arms race of expenditures triggered by the 
pursuit of prestige. A more efficient market would reign in the 
arms race, discipline prices, and encourage better productivity 
that could blunt the effects of these cost drivers.
    Now, it is very important that we understand that tuition 
depends as much or maybe even more on markets than it does on 
cost. Put another way, cost tends to follow price rather than 
the other way around. My colleague on the panel mentioned 
Bowen's law, namely that universities will raise all the money 
they can and spend all the money they raise. As a former chief 
financial officer of Stanford University, I would only add that 
it is the job of the CFO, and it is a tough job, to make sure 
they do not spend more than the money they raise.
    There is, in other words, a very powerful desire to spend. 
That is not necessarily inappropriate. Spending comes naturally 
from the principles that govern not-for-profit entities. Not-
for-profit entities seek to achieve results that are in the 
public interest, and provided they are efficient (that is a big 
question). Provided they are efficient, the more money they 
get, the more money they can spend and the more good stuff they 
can do.
    Chairman Thompson. We are not unfamiliar with that concept.
    Mr. Massy. Yes. I know. [Laughter.]
    There is a question, by the way, about how much of the 
money gets spent to benefit undergraduate education as opposed 
to other institutional agendas, such as faculty research.
    I do not think tuition will grow to levels where 
enrollments drop off significantly. (This is another question 
posed by the Committee staff.) Institutions will charge as much 
as the market will bear, but no more. That is the good news. 
The bad news is that this market limit may leave a lot of 
students with very painful debt burdens, as we heard this 
morning.
    Institutions are learning to optimize use of financial aid 
to compete for students. In fact, enrollment management has 
become a very professionalized field. There are consultants. 
There are models. I personally think this is both inevitable 
and desirable. It provides a method of price competition. I 
cannot imagine the Federal Government intervening to halt price 
competition in this or any other open market situation.
    Less-selective institutions, especially in the private 
sector, already must discount heavily in order to survive. The 
selective ones do it partly out of a sense of obligation and 
partly in order to maintain the kind of student profile they 
want. The market is very competitive, although as I said a 
moment ago, it is not necessarily efficient.
    The staff asked about the baby boom echo effect. It is hard 
to predict, but my guess is that, if anything, it will raise 
the sustainable tuition level. It will stimulate demand for a 
while, and the more demand for a given supply, the more the 
upward pressure on price.
    One unfortunate result is that all of these effects taken 
together produce a very chaotic market. The uncertainty causes 
a lot of anxiety on the part of students and their parents 
about whether and how much financial aid will be forthcoming. I 
hope that, by providing better information about policies and 
about practices, some of the anxiety could be mitigated.
    The fundamental problem, though, is to improve what goes on 
within the institution? I think there are two areas there that 
require attention. First, we need to improve the state of the 
art in what I am coming to call ``education quality work'' and 
the second is in the area of cost management.
    To give you an idea of what I am talking about, just 
imagine--I do not want to overdo the analogy with industry, but 
just imagine an automobile industry where people, by and large, 
do not have a very precise knowledge of the relative advantage 
of plastic or steel in certain applications and where they do 
not know much at all about the relative cost. How easy would it 
be for them to make the tradeoffs needed to make their product 
efficient and effective? The answer is, ``not very easy.''
    The above is something of an exaggeration as far as 
colleges and universities are concerned, but it is, in my view, 
not that much of an exaggeration. It is these two areas, the 
understanding of quality and the understanding of cost, where 
we need to put our attention.
    Education quality work is the system of activities that 
improves and assures educational quality. It focuses on 
performance feedback and the organizational processes needed to 
act on the feedback. Quality work should not be confused with 
teaching and learning itself. It is a feedback and control 
system. I must say that certain European and Pacific Rim 
countries are ahead of the United States, significantly ahead, 
in developing quality work and associated public 
accountability.
    I am glad to say, and I am sorry the Senator from Hawaii 
had to leave, that the Western Association of Schools and 
Colleges will soon decide whether to adopt the standards and 
processes used in the United Kingdom, Hong Kong, and Sweden to 
regional accreditation. The North Central Association is 
considering the same sort of thing from the Baldridge National 
Quality Award and ISO 9000 point of view. On the cost side, the 
United States and the United Kingdom seem to be ahead of the 
other countries, but the state of the art is not all that far 
advanced.
    To illustrate the sort of thing I have in mind, there is an 
institution out in Missouri, Northwest Missouri State 
University, that is starting to use Activity-Based Costing 
(ABC) to tease apart the various components of instruction cost 
so they can make better judgments about what is actually done 
in and outside the classroom to stimulate learning--that is, 
about cost in relation to quality. ABC, by the way, was 
developed by business to get at the actual cost of identifiable 
tasks. It is being adapted to academic work, just as the 
quality principles are being adapted.
    Among the advantages of ABC is that it allows one to 
separate out the cost of unbudgeted research. This counts for a 
significant part of the cost of so-called ``instruction'' for 
most universities, and certainly the larger ones. ABC allows 
one to separate unbudgeted research from instruction. Until we 
do that, I think we are not going to have a good handle on the 
cost of education.
    I will skip over the details of technology, just to say 
that there are some cases now--the Renssalaer Polytechnic 
Institute's ``Studio'' courses, for example--where institutions 
have reduced the cost of on-campus instruction while they have 
demonstrably improved quality. We need a lot more of that. 
People are getting interested in such technological change, for 
example, in the professional associations. But technology 
requires the same sort of attention to cost analysis and to 
quality processes that every other element of education 
requires.
    In closing, let me offer some suggestions for the 
government, for the regional accreditation agencies, and for 
State higher education oversight bodies. These actions are 
aimed at jump-starting quality work and improving cost 
management. They also will provide better information for the 
market in order to make the market more efficient.
    First, I think that the regional accreditation agencies 
should make quality work a key feature of accreditation. I 
chaired the committee in Hong Kong that developed and installed 
their system and I can tell you that it has worked very well. 
It is receiving a good deal of attention around the world, 
including from the Western Association of Colleges as I noted 
earlier. While I certainly would not say that we have it 
exactly right in Hong Kong, I think there are lessons to be 
learned and I am glad that people here are beginning to pay 
attention to it.
    Second, I think that State higher education coordinating 
boards could and should hold public institutions accountable 
for quality work and more effective cost management. Why not? 
One can rather easily judge whether or not an institution is 
doing these things if one takes the trouble to develop 
standards and go looking. While one cannot guarantee that 
better quality work and better cost management, will produce 
better results, it certainly is likely. Experience shows that, 
in fact, this tends to occur.
    Finally, what about the Federal Government? I think the 
government could do a number of things to improve market 
information and stimulate change. For example, the Department 
of Education could produce in-depth studies of quality work, 
activity-based costing, and associated accountability methods 
as they are developing around the world and in the United 
States, and then use the results to develop policy 
recommendations, model guidelines, and so on. That is what the 
R&D function in the Department is all about. I think the 
Department would be a very appropriate vehicle for such work.
    The Department also could encourage or seed the development 
of pilot projects. You know the routine--that could have high 
leverage. None of these actions would cost very much, certainly 
not compared to Pell grants.
    As a third action, the Department could fund discipline-
specific doctoral curriculum development in the areas of 
quality work and cost management. As things are now, we 
continue to train faculty in traditional disciplinary research 
with no consideration at all of what quality and cost in 
instruction are all about. How you go about getting quality? 
How you cost it? How you optimize cost in relation to quality? 
The development of curricula would cause these things to 
propagate outward into the institutions themselves, simply 
because more faculty (the teachers as well as the Ph.D. 
students) would be familiar with them.
    In the longer term, the government might ask colleges and 
universities might be asked to provide the public with annual 
self-reports on their education quality work, particularly in 
the area of assessment. (I have material on assessment in my 
written testimony.) Assessment is an essential element of 
quality work. You cannot improve quality without getting 
feedback, and while it is not possible in my view to develop a 
top-down government-mandated assessment instrument, it is 
entirely possible for any given department--for every 
department in every institution--to develop value-added 
assessment measures. The measures would be tailored to their 
students, their situation, and their objectives. All 
institutions ought to do that such assessments. The information 
should be regularly collected by external agencies and made 
public.
    Finally, private enterprise could be encouraged to 
summarize and disseminate the information. I think that, as the 
methodology becomes proven, they would do this without much 
encouragement.
    By way of a footnote, I hope that Congress continues to 
support the Baldridge Award for nonprofit entities. Thank you.
    Chairman Thompson. Thank you very much.
    Congress is attempting to move these various departments 
and agencies toward measuring the results that they achieve, 
instead of just measuring outputs, measuring outcomes----
    Mr. Massy. Right.
    Chairman Thompson [continuing]. And the Government 
Performance and Results Act, we call it the Results Act, trying 
to really make them determine what they are trying to do and 
then measuring whether or not they are really actually doing 
it.
    Do I understand from you that we are making some progress 
in terms of education in that regard, that it is being used 
more and more, that it is available and not being used enough, 
because we all--I think a lot of people would think that that 
is not measurable. You cannot tell the quality of a teacher 
from a gross objective standpoint, standing back away from it. 
Then we hear things like that, actually, as tuition goes up, 
sometimes the class size goes up, too. Good teachers are 
teaching less, and publish or perish. Class time is actually 
reduced and nobody pays any attention to that.
    I would be interested in knowing that all these ratings you 
see in these magazines about quality institutions, what goes 
into that determination. My suspicion is, in large part, they 
are endowments and how much money they are spending, at the 
State level and then all of that.
    So where are we, in summary form, where are we there? And 
who needs to push that? That needs to be done at the State 
level, I suppose, more than anything else. I have several 
things there.
    Mr. Massy. Well, that covers quite a lot, but let me 
comment as best I can. First, the ratings that we all pay so 
much attention to, or at least read so avidly, are heavily 
weighted on inputs, size of endowment, size of expenditure, 
size of library, and selectivity, which is a measure of market 
power.
    Chairman Thompson. What activity?
    Mr. Massy. Selectivity: That is, admit to matriculate 
ratios or some such thing. They are a measure of market power 
which correlate with resource expenditure. This is kind of a 
self-fulfilling----
    Chairman Thompson. And they are easy to measure.
    Mr. Massy. Right. They are easy to measure. However, I 
think it is possible to measure the quality of the outcomes at 
the grassroots, but this has to be an activity of faculty for 
the benefit of the program of that faculty in that place. I 
think our experience with imposing assessment from the outside 
has not been as successful as we wish it had been. The reason 
is that it is something imposed from the outside. The processes 
inside the institution have not been transformed--have not been 
reformed in ways that make this kind of information important 
for the institution and for the academic department itself.
    Chairman Thompson. They get no credit for it if they do it.
    Mr. Massy. Well, that is true. Externally imposed 
assessments are pretty gross measures and it is easy to 
discount them. It is easy, frankly, to circumvent them. It is 
easy to get around them.
    Ms. Wilger and I have done 400 faculty interviews in all 
kinds of 4-year institutions, and including in a number of 
States where assessment is going on, and I can tell you, the 
above message comes through loud and clear.
    What I would like to see is a transformation of the kind 
that business had to go through when foreign competition 
started working us over. Faculty need to fundamentally change 
how they view the production of quality. The biggest difficulty 
is that most faculty, most of the time, consider that research 
and scholarship is ``job one.'' You might be surprised that 
this happens in many different kinds of 4-year institutions, 
not just the research institutions.
    In order to make progress, I think we have to shift that 
attitude so that education quality work and cost management 
become ``job one'' for many faculty. This means balancing and 
finding new ways to do things--perhaps at lesser cost, but if 
more cost, at least with the increases being justified in terms 
of demonstrably greater quality. I think this has to become job 
one for many faculty at most institutions most of the time.
    I do not believe that to do that means decimating the 
country's research base. We are not talking about that much of 
a shift of effort. But unless that kind of shift occurs----
    Chairman Thompson. But there is not going to be any real 
motivation to move in the direction that you suggest unless 
there is some measurement and they know that there is going to 
be somebody looking at that.
    Mr. Massy. Right. That is where we get to the public 
accountability part that I mentioned. I think this has to be 
jump-started. I think if we wait for it to arise spontaneously, 
we may have a longer wait than we would like. So what I am 
suggesting is the external agencies that have cognizance, the 
State oversight boards for the publics institutions, and the 
regional accreditation agencies for everybody, put this on the 
agenda. You start by working it from an improvement standpoint. 
That is, you go in and you work up standards and you talk with 
institutions and so on. You do not start with accountability on 
something that nobody knows how to do. You try to teach and 
work together to develop. However, accountability always is 
there.
    We had an exemplary case in Hong Kong, where we are very 
improvement oriented. However, one institution declined to work 
on this, so we took away some of their money. It took about 3 
months. Now they are working on it very hard and very 
effectively, so ``yes.''
    Chairman Thompson. It seems to work that way.
    Mr. Massy. Yes.
    Chairman Thompson. That is very fascinating. I hope we can 
follow up with some of those ideas.
    Let me move on to a couple of things in the time we have 
left here. I noticed several interesting things here. Tuition 
costs, affected by lots of different things. Nobody seems to 
know. It kind of reminds me of what somebody said about a 
political campaign one time. Ninety percent of it is wasted 
activity, but nobody knows which 90 percent.
    But a lot certainly seems to depend on State aid, and my 
notes here indicate that from 1987 to 1994, State aid was down. 
It has been up since 1994, but even when State aid was up and 
when State aid was down, tuition kept going up under both 
scenarios.
    On the other hand, I am getting here today from at least, I 
think, from Dr. Breneman and Professor Hoxby, that perhaps we 
are not looking at this correctly. Professor, you mentioned, 
for example, since 1970, tuition has remained almost flat in 
real terms for half the colleges. Tuition has declined 15 
percent for the 10 percent of colleges that are least 
expensive. It has risen significantly only at the 20 percent 
that are most expensive. So I realize that we are kind of 
talking about how long is a piece of string here, but it is our 
job to generalize as correctly as we can, realizing it is a 
gross generalization sometimes.
    But on the issue of whether or not, all things considered, 
tuition is, in fact, too high, do you think that our concern 
about the direction of things is misplaced? Am I reading you 
correctly in your comments? What can you say about that? What 
would you say to the American people, the average American 
family? We all think most things are too high for sure, but we 
see in the paper, some institutions are going up 
astronomically. As the stock market goes up and the endowments 
go up, the tuition goes up, too. Then we see some State 
institutions--the University of Tennessee over the last 10 
years, the tuition has increased in real terms, inflation-
adjusted terms, 36 percent, not nearly as high, as much as 
twice CPI, I guess. Should we feel good about that or not?
    Could you elaborate a little further on that, and 
obviously, Dr. Troutt, your ideas, too, and mindful of the 
fact, of course, you are educators and I do not know what 
position that puts you in, to come in here and say that your 
institutions are charging too much money, but be as objective 
as you can about it.
    Ms. Hoxby. One thing that we always have to keep in mind is 
that our institutions are not representative of all the 
institutions in America, so I think when we study this issue, 
one of the first things we learn is to look outside our own 
institutions.
    I think it would be wrong to say that Congress should not 
be concerned about college accessibility. The main reason that 
colleges have become more accessibile to low-income families is 
that Congress and State legislatures have been interested in 
accessibility. It is mainly the plans that are now in effect 
that have made things change over the past 30 years. So taking 
accessibility off the radar screen would not be a good idea.
    On the other hand, I think the extent of the crisis is 
often overstated. There are a few things that I would focus on 
if I were to talk to the typical American family about college 
access. First, they need to go out and inform themselves about 
the opportunities that they have. They should not focus on 
whatever newspaper reporters focus on. They need to find out 
what their local colleges charge, what their State university 
charges, what need-based aid is available, what sort of 
scholarships they could get. I think the whole experience would 
be less frightening if families were more informed.
    Chairman Thompson. I can see a real problem there. I 
imagine that this has grown up into an industry, but I can see 
the average family, in some locations, they see tuition going 
up astronomically and they are told, do not worry about that. 
There are 15 different things out here that you can piece 
together. You can get a little here and a little there and 
travel across town and call this guy and qualify and fill out 
10,000 forms and you can piece it all together and get half of 
that astronomical figure. So I can sympathize with that, too, 
can you?
    Ms. Hoxby. I think that one of the best things that has 
happened very recently is that parents can increasingly go to, 
say, the College Board website. They can plug in their own 
income and their family characteristics and where their other 
children are going to school. They get back a number that is a 
realistic estimate of how much need-based aid they would be 
offered by various types of institutions. Parents should not be 
in the business of understanding financial and formulas. They 
should be in the business of understanding what college would 
cost them.
    It is hard to know what to think about the most expensive 
colleges in the United States. We are succeeding wonderfully in 
this sector, in the sense that these colleges are widely 
regarded as the best in the world. They are a very enviable 
part of our education system. Yet, we do not really understand 
exactly what is happening in them. We know that they are part 
and parcel of our high-technology economy, but we do not 
completely understand the relationship between them and 
technological growth.
    Given the fact that we do not understand the relationship, 
I would not be tempted to intervene. Also, it is important to 
keep in perspective that they are just not relevant to a lot of 
families.
    Chairman Thompson. If you have got to ask about it, you 
cannot afford it. It comes to my mind that in all other aspects 
of society, we have Cadillacs and Chevrolets and we recognize 
some people can afford more than others. I think it is more the 
average that most people are concerned about.
    Dr. Breneman.
    Mr. Breneman. In direct answer to your question, back in 
the 1980's, when I was President of Kalamazoo College, I got 
very concerned at a trend that was going on in the private 
institutional world at that time, which was started, I think, 
by trying to catch up with inflation. As you remember, in the 
late 1970's, we were looking at double-digit inflation and some 
colleges missed that and then started catching up, and then 
they discovered, many of them, that the demand for their 
services appeared to be virtually price insensitive, price 
inelastic.
    I mean, it did not seem to matter how much you charged, 
within reason. People would still come. I think that was a new 
observation. The earlier 1970's had been much devoted to worry 
about the tuition gap between public and private, and there was 
a lot of fear that the privates would be in dire straits vis-a-
vis the publics. But a subset of the privates discovered this 
relative inelasticity, and then you introduced--so I was 
watching my colleagues raising their prices----
    Chairman Thompson. Excuse me, but it seemed to work 
inversely--you are talking about competition--it is the more 
you charge, the more prestigious you are.
    Mr. Breneman. Well, in a way, because the more resources 
you have got. And yes, so for an individual school to try to 
buck this is really just to kick yourself in the foot, so we 
are all trapped. I think the term positional arms race is a 
very good one. If Williams has announced to the world that for 
next year, they are fully capable of providing the quality of 
education they perceive to be what they want to provide----
    Chairman Thompson. You would think a lot more people would 
want to go to Williams, but you are saying that is not 
necessarily true.
    Mr. Breneman. No. That is not going to have--can I read you 
a little note that I got from a president of a small private 
college in response to that? I think this summarizes the 
problem very nicely. ``Three years ago,'' and the president 
gave me allowance to mention the name, Sweetbriar College in 
Virginia, but ``3 years ago, we held Sweetbriar's tuition, 
fees, and room and board steady, no increase. We took this 
action for two reasons, both market driven. First, we felt that 
we needed to get Sweetbriar out of the most expensive position 
it held among the Virginia women's colleges, although the 
difference between our costs and those of our competitors was 
only a few hundred dollars. Second, we hoped to get some 
positive publicity from this action. The following year, we 
increased less than 2 percent, which was below the general 
norm. Indeed, for a 3-year period, our increases in tuition, 
room, and board averaged less than 2 percent.''
    ``The result? We have moved to the middle of the pack in 
terms of cost. We have had no response at all from anyone about 
our efforts to keep tuition at a reasonable level. We have not 
been able to detect any effect one way or the other on our 
enrollment, and we have attracted no attention at all by our 
actions. Happily, because we have a small student body and a 
relatively high discount, our holding of tuition was fairly 
painless. At this point, I have decided to go back to a 
reasonable 3 percent or so increase each year. Sincerely, Betsy 
Mulenfeld.''
    Chairman Thompson. All right, let me read you one. 
[Laughter.]
    Ten years ago, in the middle of this huge growth in college 
tuition, one of my staff received a letter from a private 
college, which gave a very interesting, perhaps informative, 
explanation for a sharp increase in tuition that year. The 
president of this college wrote to parents that the increase in 
tuition was necessary to keep up with the tuitions being 
charged by the most academically competitive colleges. In other 
words, to be considered in the same class with the most 
academically competitive colleges, they had to charge as much. 
So it is all turned on its head. To become more competitive, 
its the more you charge, instead of the less.
    Mr. Breneman. To the extent that there is an element of 
disinformation in this market, and Caroline argues and I agree 
with it, we have got a lot less of it than we used to have, but 
to some degree, it is an odd issue because you buy it once in 
your life and ultimately you really do not know what you are 
buying until you experience it. So price can become a signal of 
quality.
    Chairman Thompson. Dr. Troutt.
    Mr. Troutt. Mr. Chairman, I did not write that letter, as 
you know. [Laughter.]
    Chairman Thompson. It is not from Tennessee.
    Mr. Troutt. If anything, the last 2\1/2\ hours, I hope, 
have reinforced my initial point of the complexity of this 
question you have before you.
    I would like to call to your attention the five-part action 
agenda that our National Commission offered 2 years ago as a 
road map for dealing with this complex issue and to say that 
you have heard today some progress on some of those fronts, and 
yet we have not heard talk much about some of those agenda 
items.
    The first, of course, is to strengthen institutional cost 
control, and you have heard anecdotally some wonderful stories 
of responsible institutions working very hard and you have 
heard some encouraging data about where price increases have 
been going in recent years, and most recently, the lowest price 
increase in private higher education in 27 years.
    We have talked a little bit about the second agenda item, 
which is to improve market information and public 
accountability. I think we have much work yet to do there. We 
know that, still, families that need to know the most about 
college prices know the least. We know that families that need 
aid the most know the least about how to access it.
    A third action agenda item was to deregulate higher 
education. We have not talked much about that this morning, but 
that is a pressing item I would invite your further attention 
to. As a president of a relatively small college, we send here 
an awful lot of information, an incredible amount of 
information, often information that is redundant.
    Chairman Thompson. Can I ask, is it true that a college 
with a class with experiments going on and so forth have the 
same regulations pertaining to the chemicals that they use that 
Dow Chemical Company would have?
    Mr. Troutt. That is a very good illustration. We are very 
concerned about the health and safety of our students, but our 
laboratories are regulated--we may buy a gram, one gram of a 
particular item, but we are regulated just as if we buy a 
carload of it, and that is worthy of further study and thinking 
about how we might deregulate higher education.
    Chairman Thompson. So if government wants to help, they 
could look at the harm and complexity that they are causing.
    Mr. Troutt. Looking at the cost of regulation would be a 
worthy topic. Gerhard Casper, the distinguished President of 
Stanford University, testified before our Commission that out 
of every additional tuition dollar, 12\1/2\ cents goes in some 
way to regulatory compliance or reporting, which is a stunning 
figure in terms of direct and indirect cost.
    We also talked in our Commission about rethinking 
accreditation. Some comments have been made about that today. 
We also talked about enhancing and simplifying Federal student 
aid just to reinforce one of your last points. We continue to 
think everybody working together, campuses, the Federal 
Government, policy makers at all levels, we can continue to 
make progress on this very important issue to American 
families.
    Chairman Thompson. Your Commission set off, or turned the 
corner, I think, on this debate, and I want to congratulate you 
for your leadership on that. It is not one of those Commission 
reports that somebody filed on the shelf somewhere and did not 
think about anymore and I appreciate that.
    Dr. Massy, I know you wanted to get in on this, but I have 
taken up too much time. I am going to ask Senator Lieberman.
    Senator Lieberman. Thanks, Mr. Chairman. I will certainly 
give Dr. Massy a chance.
    First, let me say, Dr. Troutt, you said the word, and our 
staff prepared us for it, this is a complicated question. Even 
as I listened to the four of you and Dr. Gaudiani before, there 
are mixed feelings, I think, or mixed testimony here on the 
baseline question that we are asking, whether tuition is higher 
than it should be. That is one of the first questions we are 
asking. I think, Dr. Massy, you would say yes and others would 
say probably not, although maybe more cost efficiency could be 
worked in.
    But I am left skeptical because of the strange market in 
which higher education operates and the notion that if there 
was competition--first, I have come to understand better this 
is a segmented market. At the top group of private and public 
institutions, there is demand by the students for a supply of 
the product. But in a lot of the other schools, which is the 
majority, it probably goes the other way around, that the 
higher education institutions are competing for the students, 
and that has differing effects.
    But the effect that Williams' decision to freeze would not 
lead its competitors, at least in that subcategory--if you talk 
to kids that are applying at Williams, a lot of them tend 
also--I am going to reflect my Connecticut parochialism--to be 
applying to Trinity, for instance, or Wesleyan, the smaller 
group of fine liberal arts colleges.
    The Sweetbriar example is a perfect one, and maybe it is 
because it is Sweetbriar, it made me think of ice cream, you 
know, stream of consciousness. But I remember, years ago--that 
is the only way I can explain why I had this connection. Years 
ago, I remember reading an article about the man who created 
the Haagen-Dazs ice cream company. First off, he made up the 
name Haagen-Dazs to sound Scandinavian. It does not mean 
anything. Second, he put out ice cream, pretty good, but he 
charged three times as much as anybody else was charging. I am 
choosing numbers here. I will probably get sued or at least 
criticized by Haagen-Dazs now, but I do not remember the exact 
thing, and everybody went out and bought it. So there is a 
certain way in which, not that higher education is ice cream, 
but it makes you wonder about the market.
    So here in the role that we have here, asking the 
questions, let me start simply by asking whether there is 
anything Congress can do to encourage schools who are not to 
make cost containment a higher priority.
    Mr. Breneman. I have not had time to think about that, but 
it seems to me that if that became the clear focus, I can 
imagine some kind of reward system, some kind of program that 
you could incentivize the doing of that precise act. The 
Williams case is interesting----
    Senator Lieberman. I am sorry. In other words, perhaps some 
sort of reward system in terms of Federal aid to schools if 
they are showing----
    Mr. Breneman. Yes, something where--see, the problem, what 
was being expressed in the Sweetbriar case, they were trying to 
be a ``good citizen.''
    Senator Lieberman. Right.
    Mr. Breneman. They were doing their job. All they did is 
lost ground. I mean, all that Williams is likely to do is lose 
ground.
    Senator Lieberman. Right.
    Mr. Breneman. All the smart money in this business who 
looked at the Williams study thinks they are nuts, I mean, that 
this was the dumbest thing they have ever done. They are going 
to lose a step on the rest of the competition. So the schools 
are locked into a situation where they just cannot win in this 
situation. They do the right thing, if you will, of holding the 
line on price and you get beat up by your colleagues and 
everybody thinks you are a stupid manager, and the next year, 
you have got to join the crowd again. So something has got to 
break that cycle, and right now, there is nothing in the system 
that directly breaks it.
    Senator Lieberman. I invite you to think about that.
    Mr. Breneman. Yes. Let me think about that.
    Senator Lieberman. I welcome your thoughts. I mean, the 
Baldridge-type award is one way to recognize and incentivize 
good management, as we do in the private sector.
    Mr. Troutt. Senator, we in our accreditation visit at 
Belmont used the Baldridge criteria.
    Senator Lieberman. You did? Good.
    Mr. Troutt. It was very, very helpful. You are seeing in 
the Southern Association of Colleges and Schools more 
encouragement to use alternative self-studies which does the 
kind of gap analysis and helpful things that you see in a 
Baldridge criteria.
    Senator Lieberman. Dr. Massy.
    Mr. Massy. Yes. I reinforce that. I would just add that the 
Baldridge Award is, of course, great. It provides incentives, 
it provides leadership, and so forth. But what is needed is an 
on-going program where every institution is doing this stuff 
all the time. In particular, they should be developing 
assessment information that measures the quality of the 
student, if you will, at input (matriculation) and the quality 
on output (at graduation or exit). That is, value added, if you 
will.
    The big problem is the market: In one sense, it is very 
simple. The market really has no valid information available to 
it about the quality of the value added.
    Senator Lieberman. And by quality of the value added, you 
mean----
    Mr. Massy. I mean----
    Senator Lieberman. Just as you would have a general idea, I 
do not know, if you buy a PC, for instance----
    Mr. Massy. You have a pretty good idea. You can look at 
speeds. You can look at hard disk size. You can look at 
reliability. The problem we have in higher education (again I 
must oversimplify) is that you get wonderful institutions, like 
my own and Caroline's, that take in absolutely terrific 
students that come out absolutely terrific. We may do more, but 
at least, we observe the Hippocratic oath. We do no harm while 
they are there.
    Senator Lieberman. Right.
    Mr. Massy. Imagine a market where we had better value added 
measures on a regular basis. They would be generated by the 
institutions but audited appropriately for accuracy. Now people 
would not feel as trapped by prestige. They would not have to 
use the price or the amount of assets as surrogates for 
quality. I think this would produce a healthy effect. I think, 
in the long run, this is the only way we are really going to 
solve our problems.
    I think what we are seeing now in the for-profit sector, 
the University of Phoenix and similar kinds of entities, is, in 
fact, they are beginning to generate such measures. They are 
learning to do it, and that competition is getting people's 
attention.
    Senator Lieberman. And that helps the consumers.
    Mr. Massy. Precisely.
    Senator Lieberman. It gives them more information. 
Therefore, it makes them more intelligent.
    Mr. Massy. They can make better trade-offs, better 
judgments. That, in turn, puts the competition on the right 
kind of basis, rather than what I think now is a rather 
imperfect market.
    Senator Lieberman. Dr. Troutt, I know in the National 
Commission--I was going to ask you this question, but what Dr. 
Massy said leads to it--I am going to quote from the report, 
``Institutions of higher education even to most people in the 
academy are financially opaque. Academic institutions have made 
little effort, either on campus or off, to make themselves more 
transparent to explain their finances.''
    So I wanted to ask you to just talk a little bit about 
whether greater transparency would have the effect of 
increasing efficiency and cost containment.
    Mr. Troutt. It certainly has that potential. I do want to 
commend the National Association of College and University 
Business Officers. They, in fact, have a very important project 
underway right now to see if we cannot begin to address this 
transparency issue in a much more forthright way.
    Some of the problems relate to common definitions among 
institutions. Some of the complexity comes, obviously, with the 
most complex institutions. At research universities, where do 
you allocate certain costs? It makes it very difficult. But 
certainly, I think, as we become more transparent, first of 
all, it helps policy makers in terms of important questions 
about where is that money going? Is it truly going to 
undergraduate education or is it going somewhere else?
    I think as we make progress on the transparency issue, it 
will both help policy makers, but also help people making 
judgments about what kind of resources are there for my son or 
daughter's undergraduate education, and I know that is, as we 
learned in our Commission hearings, a real concern for American 
people.
    Senator Lieberman. It strikes me that what we are saying 
here is that it is possible, if we had a real assessment of 
value added and quality institutions, that some of the 
institutions that now are competing for students might actually 
turn out to parents and students to be a better buy.
    Mr. Massy. A better deal, yes.
    Senator Lieberman. And it might drive the market in that 
way. Now, it is not easy to come up with a system like that, 
but it is a very interesting idea.
    Professor Hoxby.
    Ms. Hoxby. I wanted to point out that if outcomes at the 
end of college were regularly measured, it would be relatively 
easy for U.S. News and World Report, for Peterson's and 
Barron's, and all of the other college guides to incorporate 
them.
    The nice thing about incorporating outcomes is that even if 
the best, most transparent accounting data is available to 
parents, parents will never figure out how the money is 
allocated at different colleges.
    Senator Lieberman. Right.
    Ms. Hoxby. But they will be able to say, look, this college 
took in students who had SAT scores or ACT scores like this and 
they turned out students who had scores like that. That is 
something that is not hard for parents to understand. They 
already understand this for K-12 education. Outcomes are the 
single most important piece of information that could be 
provided to make this market more efficient.
    I do not agree that parents are not price sensitive. The 
National Post-Secondary Student Aid Survey, which the 
Department of Education sponsors and samples about 60,000 
undergraduates each year, shows that parents are quite price 
sensitive. They will not favor schools that raise their price 
and offer the same offerings.
    Senator Lieberman. That is a good point. Just one or two 
more questions. One of the questions we are asking ourselves is 
how does what we do affect the cost of higher education 
tuition, and you have said that the studies seem to suggest 
pretty clearly that increasing grants to students does not lead 
higher education institutions to increase tuition. But it is 
not that clear in regard to loans, and I am just puzzled as to 
why. I know you, Dr. Troutt and Dr. Breneman, both said this, 
and just help me understand why the question is not so clearly 
answered with regard to loans.
    Mr. Troutt. We simply do not have the data. We have not had 
the kind of analysis that looks at particular undergraduate 
populations, what price increase has happened and what loan 
increase happened. That data is just not available. In the 6 
months that we had to do our work on the National Commission on 
the Cost of Higher Education, we received a number of papers. 
Most of those papers tended to be more bound by theory or 
speculation or even anecdote, but we were not able to come up 
with any hard data to address that question.
    I do think, Senator, it would be useful to think about 
charging and funding a study, perhaps by the national Center 
for Education Statistics, to take the time to go back and do 
those kind of calculations. It would be very helpful to you as 
policy makers. The Commission's point was just, this is such a 
serious policy matter, to act without good information would 
not be an appropriate thing to do.
    Senator Lieberman. That is a very good idea. We have heard 
a couple of you refer to the antitrust case and the possibility 
of granting an antitrust exemption through Congress to higher 
education institutions. For what purpose would that be? In 
other words, so much of what we are saying today reminds me of 
things we are doing in other areas. The idea of more 
information for consumers is part of what we are trying to do 
in health care today to drive up quality, to have the various 
managed care plans produce information about what they are 
offering so that consumers, if I am going to get my childhood 
immunization and breast cancer screenings covered for the same 
price, I am going to go here as opposed to there.
    The analogy here with this one is the entertainment 
industry has said to us when we appealed to them about self-
policing content that they are driven by competition, and so if 
some of their competitors go low in content, they have got to 
go, and then they say, we cannot get together to set standards 
because the Justice Department will file an antitrust action 
against us. That is pretty easy to decide how to focus that.
    Now, what would we enable higher education institutions to 
do if we gave an antitrust exemption?
    Mr. Breneman. My take on it, and I do not know if my 
colleagues share this, is that the antitrust case started out 
looking at two questions, which were what are driving up prices 
and are colleges in any way colluding on wage pools, and 2 
years later, they wound up with the one definitive action being 
something that originally they were not interested in very much 
at all, they just happened to throw it in as a last-minute 
thought, and that was to do away with a thing called the 
overlap group, which, in fact, was a very public and open, I 
mean, it was not a secret that this happened.
    A group of the top highly-competitive institutions whose 
financial aid officers met to go over financial circumstances 
of individual applicants who had applied to several of their 
schools to agree upon a common expected family contribution, 
and then they agreed to that and they did not engage in bidding 
wars with each other over these students. They said all of us 
have an adequate pool and we will take the money out of the 
competition.
    Now, the Justice Department apparently felt that parents 
have a right to shop their kids, if you will, and go after 
merit aid, and so that, which is, I think, a debatable premise. 
I think the outcome of eliminating overlap was a mistake, and I 
guess my answer would be that I would like to see some effort 
at eliminating this kind of bidding war introduced at that 
level.
    Senator Lieberman. Professor.
    Ms. Hoxby. The antitrust case made it very hard for 
colleges to coordinate the idea of neediness. That is, they 
could not agree on how needy a student was. The consequence of 
this was the following. Let us say that Yale thought that a 
student needed $2,000 and Princeton thought that the student 
needed $2,500.
    Under the old regime, they would just agree on how needy 
the student was. In the new regime, they cannot agree on how to 
calculate need so that a student who has a small aid difference 
between schools, begins a sort of bidding war. He ends up 
getting an amount of aid that is not based on his need but is 
based instead on his merit, because the way that a student wins 
the bidding war is to have high SAT scores and a very good high 
school record. The antitrust case has broken down the consensus 
that aid is for need, not for merit. It is easy to twist a 
need-based formula into a merit-based formula.
    The antitrust case did not just affect elite institutions. 
Their culture need-based aid spread throughout the entire 
college community and college presidents felt strongly about 
it.
    It is hard to have the same culture when college presidents 
cannot say to one another, ``I care about need.'' They are 
afraid that they would be breaking the antitrust rules.
    Senator Lieberman. Dr. Massy.
    Mr. Massy. I think if there were to be an exemption, it 
should be a very narrow one.
    Senator Lieberman. How would you narrow it?
    Mr. Massy. I can imagine discussions, for example, on the 
formulas for need, but I would not extend that to looking at 
individual cases and I would be very clear that getting 
together to discuss merit aid is not appropriate. I think merit 
aid is a legitimate form of composition. I realize it is 
controversial, but I think such price competition is an 
appropriate, and in the long term, a healthy kind of thing. 
Getting together to settle on a need formula could be helpful 
to families who are trying to predict their need-based awards, 
but aid merit would represent another card that an institution 
could play or not.
    I think it also would be helpful for institutions to get 
together and talk about what kinds of market information about 
value added would be most appropriate. It may well be that is 
OK now under the antitrust laws. I do not know, but a 
clarification certainly would be helpful. Again, they should 
not discuss what an individual institution should report, but 
if we got common formats, common approaches, I think it would 
be helpful.
    Senator Lieberman. I thank all of you. It is complicated. I 
mean, it does seem to me that the data are fascinating, and 
Professor Hoxby, you referred to some. We will get into this 
tomorrow with Mr. Gladieux of the College Board who is coming 
in. But it does show that over the last 15 years or so, that 
there have been increases in attendance at higher education at 
each quartile of income, including the lowest, probably for 
various reasons.
    But my impression is that that is being achieved at a very 
high cost in terms of indebtedness and stress, and that if it 
keeps going in that direction, at some point, particularly with 
the boom in the demographics that I talked about before, the 
future, which certainly says that more and more of the children 
in our country are going to be lower-income, perhaps first-
generation American, and, therefore, they are going to really 
need help to get to higher education, and, therefore, we ought 
to do everything we can both to create incentives to cost 
containment and to increase aid in the most effective way.
    We are talking about cost effectiveness here on both sides 
of this discussion. I mean, nobody here that I have heard of, 
anyway, or met in Congress wants to, at the extreme, impose 
price controls on higher education, but the question is, and I 
think you have given us some interesting testimony and ideas, 
how can we incentivize? How can we create a system where there 
is some more competition that does create cost containment, and 
then what can we best do to provide the most effective forms of 
subsidy to students to help more and more of them to be able to 
afford education?
    Tomorrow, we are going to focus part of the hearing on the 
aid question, but I thank you very much. You represent 
extraordinary experience and you have been very responsive and 
helpful to our questions. Thank you.
    Chairman Thompson. Thank you. Thank you very much. Just 
another couple of minutes, if you do not mind. There is so much 
that we are not going to have time to go over. I wish we did.
    In listening today, I hear a lot about merit regardless of 
income levels, and need regardless of merit. The person I 
really feel sorry for is the low-income person who has achieved 
a lot and who is a good student. It looks to me like we need to 
double up on those kinds of people.
    The real policy question I think that we, in Congress, are 
going to have to ultimately be faced with is what is the role, 
in the future of this country, what is the role of the Federal 
Government. One can make a case that things are changing 
because of the global economy, because of the increased 
competition, because our success in the global economy depends 
upon our productivity and our productivity depends upon our 
growing technological capability and growth, and that, in turn, 
is going to depend on a well-educated workforce.
    It has almost become a matter of national security for the 
future. You see what is going on out there and the new 
challenges that are facing this country out there. If that is 
the case, then perhaps a case could be made for some kind of 
new entitlement somewhere along the line. The suggestion has 
been made, Pell grants. Maybe the Federal Government should get 
more involved under that scenario.
    However, on the other hand, if you are going to do that, 
where do you stop? What do you subsidize? How far do you go? Is 
it just going to be the poorer students? Is it just going to be 
secondary education? How far can we go? How much progress can 
we make if we increasingly have the problems we are having in 
our grade schools and our high schools not producing? We have 
turned the three R's into the six R's now with the remedial 
reading, 'riting, and 'rithmetic.
    Those are the policy questions I think that we are going to 
have to decide up here, which kind of pours into my question, I 
guess, and that is in looking at what we do for kids, which is 
our main involvement here right now, young people primarily and 
the aid and so forth, I am interested in whether or not we have 
got it balanced right. We have got all these different kinds of 
programs and loans and tax incentives and then the colleges and 
universities themselves have all of this.
    In one sense, it seems to me like we are not doing enough 
for the lower-income students. Some of these tax credits--first 
of all, you have to have an income to get the benefit of the 
tax credit, and some of them only apply to the $100,000 range, 
the new credit, up to $100,000 or $120,000. Although more money 
is coming in, it has really stabilized or going down a little 
maybe per student, I think.
    On the other hand, I can see the middle-income parent 
saying it is just like the tax code. People at the lower end do 
not pay any taxes, people at the other end get all the tax 
breaks and the middle class is stuck. So the middle class is 
where you need it because there is so much help for the lower 
end.
    So I would be very interested in, as concisely as you can, 
in giving us your own kind of assessment as to whether or not 
we are getting the mix right or as close as we can in terms of 
the kinds of aid and help to the kinds of students, and also 
for me, it looks like we ought to incorporate need and merit 
when we look at this thing. There is no reason why a middle-
class student who has tried hard and excelled ought to be 
disadvantaged from a lower-income student who is a mediocre 
student. I would appreciate any comments anybody has.
    Mr. Breneman. Well, I will make a quick remark. I really 
appreciated your introducing K-12 discussion, because once 
again, we have done here what we do in this country so often, 
which is to treat this system as if it were a set of non-
interacting horizontal slabs, and, of course, all of this aid 
for low-income students assumed proper preparation for those 
students. I think one of the debates about remediation are 
drawing to the fore are the obvious fact that we have real 
problems.
    Have you ever thought how weird it is that we say in one 
breath that our higher education system is the envy of the 
world and our K-12 system is in shambles? Now, that is 
completely nuts to have those two things in your head at one 
time. It is one system.
    I guess if there is anything I would do in all of this is I 
would think real hard about the coming teacher shortage and how 
we are going to get high-quality people into the classroom. One 
thing I think may make it make sense for people to be 
supporting more low-income students is if those students are 
better prepared.
    With regard to your specific question, however, let me just 
say I worry right now that we are tilting too far to the middle 
and upper income and that we are losing our interest in access, 
so I guess if you ask me for a balance, I would be tilting 
back. I think the Federal role is the one place where there is 
an interest in the low income clearly articulated and I would 
hate to see that lost.
    Chairman Thompson. Dr. Hoxby.
    Mr. Hoxby. I agree with everything that Professor Breneman 
has just said about the importance of thinking through K-12 
education. I think that the Federal Government can kill two 
birds with one stone if it uses access to higher education as a 
way to give good incentives to students in K-12 education, 
especially students who really think that they have no future 
in higher education in the United States.
    Low-income students, minority students, students who come 
from first-generation families where no one has gone through 
the American higher educational system before do not really 
believe that college is for them. They do not understand that a 
Pell grant might be available to them when they reach the age 
of 18 or 19. Therefore, by the time they reach that age, many 
of them are so poorly prepared that the biggest barrier for 
them is not money; it is the fact that they have bad study 
skills. They face a tremendous uphill battle to make it through 
the first year of college. A student cannot stay on a Pell 
grant if he needs 2 years of remedial education.
    Thus, I was serious about education IRAs. I think that 
there is something about knowing, when you are an 8th grader, 
that there is money being put away for your college education. 
There is something about knowing that you will lose the money 
for college if you do not do well in school. If students 
prepare up through the 12th grade, then when the money is given 
to them, it is most effective.
    Students from upper-middle income families know that their 
parents are saving for their college education. Part of the 
conversation between parents and students in high school is, 
``We have been saving for your college. This has been a 
struggle for us.''
    That same conversation does not occur in a low-income 
family that cannot afford to save at all and that cannot afford 
to take advantage, say, of the education IRAs. One can think 
about saving on behalf of poor students who are doing well in 
school, with a phase out for families who can save for 
themselves.
    Chairman Thompson. Yes?
    Mr. Massy. I would just add, Chairman, that for me, a 
combination of need and merit is the way to go. I have not 
studied the data enough to know whether the present mix is 
right or not. However, the principle clearly has to include 
equity and access, and I am sure it always will. But it also 
needs to include incentives for hard and intelligent work, 
wherever the student starts in the process. A properly designed 
merit component, normalized for differences in background that 
are not the fault of the student, would be a very helpful 
thing.
    Mr. Troutt. Mr. Chairman, I think we would all like to 
think more about that thoughtful question, but just to come 
back and say that we, I think, also should celebrate the 
success of the programs that you are currently funding. As 
those are continued and enhanced and more people know about 
those programs, it will continue, I think, to support higher 
education and support this country in a very powerful way.
    Chairman Thompson. Thank you very much. And another thing 
we need to keep in mind, too, is that it is not absolutely 
essential that everybody go to college. I grew up in a little 
town in the middle of Tennessee and some of the most successful 
classmates I had did not go to college. They started little 
construction companies after working construction and little 
businesses that their dad maybe worked at or something and they 
had their own business and all of that. In the future, along 
with all the high-tech stuff, not everybody is going to be 
either making or using computer chips and it is going to be 
more and more difficult to find mechanics and people who know 
how to read blueprints and plumbers and construction people.
    Obviously, the more education you got, the more it would 
help you in any of these jobs, clearly. But as we think about 
what to do in spending money, there are probably a lot of young 
people in college that should not be there, and there are going 
to be a lot of good ones out there that just choose not to do 
that. I do not think we ought to be taxing them too much for 
kids who go to college, especially the ones who are just kind 
of there and not really achieving. So that is another thing we 
have got to enter into the equation as we consider this.
    Senator Lieberman, do you have anything further?
    Senator Lieberman. I do not. It has been a very full and 
productive morning. Thank you, Mr. Chairman, and the witnesses.
    Chairman Thompson. Thank you very much.
    I would like to include in the record a statement from the 
Department of Education.\1\
---------------------------------------------------------------------------
    \1\ The prepared statement of the Department of Education appears 
in the Appendix on page 276.
---------------------------------------------------------------------------
    I would also like to include a statement on this subject 
from the University of Illinois.\2\
---------------------------------------------------------------------------
    \2\ The prepared statement of the University of Illinois with 
attachments appears in the Appendix on page 290.
---------------------------------------------------------------------------
    This hearing has been extremely productive. We really 
appreciate your help. Thank you.
    The record will remain open for 1 week after the close of 
this hearing. We are in recess.
    [Whereupon, at 1:14 p.m., the Committee was adjourned.]

  RISING COST OF COLLEGE TUITION AND THE EFFECTIVENESS OF GOVERNMENT 
                             FINANCIAL AID

                              ----------                              

                      THURSDAY, FEBRUARY 10, 2000

                                       U.S. Senate,
                         Committee on Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:05 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Fred 
Thompson, Chairman of the Committee, presiding.
    Present: Senators Thompson, Collins, Lieberman, and Akaka.

             OPENING STATEMENT OF CHAIRMAN THOMPSON

    Chairman Thompson. Good morning. Let us come to order, 
please. We are convening the second day of the hearings on the 
cost of higher education.
    Yesterday, we heard from witnesses who testified that the 
finances of colleges and universities are not as transparent as 
they should be. We also discussed the many issues that 
institutions of higher learning have to navigate when coming up 
with enough funding to educate our Nation's children.
    Today, we continue to look at the issues surrounding the 
high cost of college tuition and the effect of aid programs on 
the availability of higher education. One might think that it 
ought to be easy to come up with what goes into the price of a 
product, but if we are learning anything, it is that it is not 
that simple. There are so many drivers of cost and price and so 
little attention is given to how those complexities interact 
that we cannot really get hold of what makes college tuition 
rise so rapidly. To add to the confusion, there was some 
disagreement among the panelists yesterday as to whether rising 
tuition is even a problem.
    As policy makers, it is difficult to craft the right 
solutions to a problem no one understands. That is the value of 
these hearings, and I am encouraged by the work of the National 
Commission on the Cost of Higher Education and the National 
Association of College and University Business Officers, 
organizations that are helping us unravel some of the mysteries 
of college and university financing.
    Much like the Federal Government, it seems that colleges 
and universities rank themselves as much by the level of the 
outputs, how big their endowments are, how many books are in 
their libraries, how hard it is to get in. In the Federal 
Government, we are trying to get agencies to focus not so much 
on what goes into a program but what results come out of those 
programs. It seems colleges and universities could benefit from 
the same philosophy. Only then could we determine whether 
students were getting the value for the price they pay in 
tuition.
    One of the many drivers of the cost of college education is 
financial aid. We are devoting much of the second day of 
hearings to the status and effectiveness of grants and loans. 
We will hear from witnesses who have a perspective on the 
changing financial aid policies of the Federal Government and 
look forward to hearing more about just what effect grants and 
loans have on the availability of higher education.
    Another important part of today's discussion will be about 
fraud. Students in the position of trying to finance a college 
education are easy prey, and we will hear some about the 
outfits that take advantage of these students. More 
importantly, we will learn what parents and students should do 
when confronted with fraudulent enterprises.
    All of the issues surrounding the pricing of college 
tuition are worthy of this Committee's attention. We have not 
solved the problem, but perhaps we have shed some light and 
asked the right questions so we are further along the road to 
understanding more about this issue. Certainly, education in 
this country, whether it be at the college or university level 
or the K-12 level is not primarily a Federal responsibility, 
and I do not think anyone is suggesting that we take it over.
    But clearly, even if we are just looking at the aid and 
loan policies, there is Federal involvement and we need to 
understand what we are doing right and what we are doing wrong 
to contribute to the problems that we have been talking about. 
So, hopefully, we will make some progress along those lines.
    Senator Lieberman.

             OPENING STATEMENT OF SENATOR LIEBERMAN

    Senator Lieberman. Thanks, Mr. Chairman. I, too, thought 
that yesterday's hearing was an important beginning. We had a 
range of witnesses from differing perspectives, so I cannot say 
that we had total unanimity, but my own conclusion listening to 
the baseline question of is tuition too high, could colleges 
and universities by and large do more to achieve cost 
containment is, yes, they could, and that tuition is too high, 
not at every school, not in every part of the market, but the 
very fact that the numbers show that the rate of increase in 
the cost of higher education has gone up so much more rapidly 
than either the increases in inflation or, in addition, or 
particularly, in median family income tells us that we have got 
a problem here.
    Some of the anecdotal evidence that was presented 
yesterday, certainly in some parts of the market, the most 
competitive parts of the market, where students are actually 
competing for admission to particular schools, not schools 
competing for students to come to them, it is clear that the 
market, as one of our witnesses yesterday said in the 
magnificent understatement of economists, ``The market is 
imperfect.''
    When you have the case of Williams College now freezing its 
tuition based on increases in the value of its endowment, in a 
competitive market, one would presume that that would benefit, 
that reduction in cost would benefit Williams, but our 
witnesses yesterday were all of a mind that it would not of 
itself help the school attract the students that it 
particularly wanted.
    A letter was read about Sweetbriar, which actually had 
lowered its price, or froze its price at one point and found 
that, contrary to what might be expected, it was losing 
applicant interest because there was a kind of luxury mentality 
that if it costs less, it must not be as good as the schools 
that cost more. So all of that combined to give me the 
impression that there is more that the higher education 
institutions could do and more we can do to incentivize them to 
hold down or contain the cost of the very valuable service that 
they are providing.
    At different times yesterday, we inevitably rolled over 
into the subject of aid, and there was an interesting exchange 
about, for instance, the question the Chairman raises, whether 
Federal grants actually have the effect, as many worry, of 
raising tuition. The witnesses yesterday generally indicated 
that the studies that have been done show that increases in 
Federal grants, scholarship grants, do not raise the cost of 
tuition, but that there is not similar research done on the 
effect of loans, not that there is evidence that loans do 
increase, but it remains a question.
    And there was a fair amount of testimony about the various 
kinds of aid that one might prefer and would we be better to 
increase the funding to the Pell grant program, for instance, 
to benefit the neediest as opposed to having tax credits or 
loan programs that benefit those that are in need but not the 
neediest.
    Those are some of the questions that I hope in this second 
panel, or third, if we count Ms. Pueschel as the first, with 
the two of you who are experts on questions relating to aid, 
that we will be able to form some judgments, not only about the 
impact of aid on the cost of education, both in the general 
sense that we talked about but in the sense that obviously the 
sticker price, if you can call it that, of a college education 
is only the beginning, then the net cost is the key and that is 
achieved after aid and loan packages and the rest are fed in.
    And then we want to take your counsel as to what we could 
do, accepting the premise that just came out from all the 
testimony yesterday, not only that the access to higher 
education is fundamental to the basic American dream of upward 
mobility, it has worked for generation after generation of new 
Americans, but that it is increasingly critical to our overall 
economy, not just to the realization of the American dream, and 
that in the years ahead, the demographics tell us that the 
student population that will be growing will be increasingly 
poor and minority, so that need for aid to make higher 
education achievable, accessible, will grow more intense.
    The question then becomes, what can we do, since as Senator 
Thompson said absolutely correctly, we are already entangled, 
if you will, involved. What can we do in the Federal Government 
to not only sustain the individual American dreams by children 
growing up, but that we can thereby sustain the extraordinary 
economic growth that we have had which, in so many fundamental 
ways, has been conditioned on the education of our people.
    So these are detailed questions, but they have big results, 
and I think, Mr. Chairman, we have got some real experts to 
hear today and I thank them for being here and I thank you for 
convening this second day of these hearings.
    Chairman Thompson. Thank you.
    As our panel will look at the effect of various aid 
programs on the availability of college education, we will hear 
from Lawrence Gladieux, Executive Director for Policy Analysis 
at the College Board, and Michael S. McPherson, President of 
Macalester College and coauthor of the book, ``The Student Aid 
Game.''
    Mr. Gladieux, do you care to make an opening statement?

 TESTIMONY OF LAWRENCE E. GLADIEUX,\1\ EXECUTIVE DIRECTOR FOR 
               POLICY ANALYSIS, THE COLLEGE BOARD

    Mr. Gladieux. Thank you very much, Mr. Chairman and Senator 
Lieberman. I appreciate the opportunity to testify. I did sit 
in on yesterday's hearing and I thought it was an excellent 
discussion. It is a hard act to follow. At the end of that very 
full discussion, I said, what is left to say, but I am really 
glad to join the discussion today.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Gladieux with attachments appears 
in the Appendix on page 138.
---------------------------------------------------------------------------
    I have submitted my written statement. I will summarize it. 
It is in three parts.
    In the first part I review indicators on the extent of 
progress made in broadening college opportunities over recent 
decades, and we have made progress. Access to some form of 
post-secondary education and training has been growing steadily 
overall and for just about every economic and racial and social 
group. But very large gaps persist in who benefits from higher 
education in America. Opportunity for it is not spread evenly 
across our society.
    There seemed some disagreement in yesterday's discussion, 
yesterday's panel, on whether we have an access problem any 
longer. I think it is clear that we do, and I will use just one 
indicator, but I think it is representative. Figure 3 that is 
attached to my statement traces a broad index of post-secondary 
participation based on census data for 18- to 24-year-olds, and 
what it shows is that all groups have gotten increased access. 
All groups show gains. But low-income young people attend 
college at much lower rates than those with high incomes, and 
participation gaps are about as wide, maybe even wider than 
they were in 1970.
    Also, opportunity is not just a matter of access. It is a 
matter of equal choice. Here, it appears that there is an 
increasing stratification of higher education enrollments at 
different levels of the system by family income. Mike McPherson 
and his colleague, Morty Schapiro, have done research on that. 
But the real bottom line is who actually completes a degree. 
Overall access has soared during this past quarter-century, but 
the proportion of college students completing degrees has 
remained essentially flat and gaps remain very wide when you 
look at completion rates among different groups.
    The most recent longitudinal studies from the Department of 
Education tell us that of high school seniors who enter post-
secondary education, 40 percent of high-income students receive 
a bachelor's degree within 5 years, while only 6 percent of 
low-income students receive a bachelor's degree within 5 years. 
Clearly, getting students in the door is not good enough. In 
fact, my real----
    Chairman Thompson. Are these of students who start college?
    Mr. Gladieux. Who start college, yes, and this is back in 
1989, they did a beginning post-secondary study, and 5 years 
later, in 1994, that was the result, 40 percent versus 6 
percent. And similarly, there are gaps between whites and 
blacks and Hispanic students, considerable gaps.
    Getting students in the door is not good enough, and my 
greatest concern is that some of the students who do not 
persist may be left worse off. They have borrowed to finance 
their studies, which is increasingly the case for low-income 
students, particularly, and they do not complete. They leave 
college without a credential and a debt to repay.
    The second part of my testimony asks why do these gaps 
remain so wide, and part of the explanation is affordability, 
the focus of this hearing. I will not retread the ground that 
was gone over pretty well yesterday. Figure 6 attached to my 
testimony summarizes the trends. Adjusted for inflation, 
tuition has more than doubled at both public and private 
institutions since 1980, while family income has only risen 22 
percent over this 20-year period. And aid has gone up, but it 
has not kept up with the rise in tuition.
    The median family income does not tell the whole story of 
the 1980's and 1990's. We all know that income disparities have 
grown during this period. So when you look at another chart 
(Figure 7) attached to my testimony, it shows the cost of 
attendance as a share of income for low, middle, and high, and 
the greatest burden, the increasing burden is on low-income 
students, and even if you factor in student aid awards, the 
greatest burden is on the low- and moderate-income students.
    Also, it is important, and this was gone over yesterday, 
that aid that students are receiving is increasingly in the 
form of borrowing. Student aid has drifted from a grant-based 
to a loan-based system, and low-income students, students most 
at risk, actually have the highest rate of borrowing. That is 
reflected in Figure 10 attached to my testimony. It is the 
students in the lowest-income group who are borrowing in the 
greatest numbers, and they are borrowing the largest amounts on 
average.
    So part of the explanation for the gaps is affordability, 
which is the primary focus here. But it is not the only 
explanation. There are deeper roots of unequal opportunity and 
I think we need to keep in mind, and this was brought out, I 
think, at the very end of your discussion yesterday, the issue 
of academic preparation and student readiness for higher 
education. Making college affordable is critical, but we have 
also got to address these other challenges. There are a lot of 
other things that need to begin earlier in the lives of young 
people and in their schooling.
    I will not dwell on this complementary set of issues and 
challenges, but I do think it is important to keep in mind, as 
I think Dave Breneman said yesterday, that American education 
is all one system. We clearly need broad K-12 reforms and 
improvement. In my view, we also need much greater investment 
in direct outreach and intervention programs that make a 
difference in the lives of young, disadvantaged kids, early in 
their schooling. We need the wholesale school reforms. We also 
need the retail, one kid at a time, ``I Have a Dream'' kinds of 
efforts. These programs are very labor intensive, but we need 
to invest more. We need to step them up to a much larger scale.
    The third and last part of my testimony, and you touched on 
this, Senator Lieberman, in your opening comments, includes 
policy recommendations to address the needs of the coming tidal 
wave of students. The Census Bureau projects that there will be 
5 million more 18- to 24-year-olds in the year 2010 than there 
were in 1995, an increase of more than 20 percent. The country 
is already experiencing this expansion in the potential pool of 
high school graduates and college students, but this new cohort 
will look considerably different from previous generations of 
college students.
    The age cohort that we will see over the next 10 to 15 
years will be more ethnically diverse than the general 
population and the fastest growth will come from groups in our 
society that at least until now have been poorer than the 
general population, more likely to drop out of school, less 
likely to enroll in college prep courses, less likely to 
graduate from high school, less likely to enroll in college, 
and least likely to persist to completion of a baccalaureate 
degree. So we are looking at a huge challenge ahead of us.
    To sustain or increase current levels of college or post-
secondary participation is going to require aggressive public 
policy, both to strengthen the readiness of students to 
undertake college-level work and to assure that low- and 
moderate-income students have the financial resources to pay 
for it when they get to that point.
    Now to my recommendations. First, keep the Federal focus on 
helping those with the greatest need. The Federal Government 
has exerted enormous leadership in helping to level the playing 
field in higher education, begining with the GI Bill of 1944, 
the Higher Education Act of 1965, the Pell grants, etc. But 
recent policy shifts, and I think this was brought out in 
yesterday's hearing--the Justice Department antitrust action of 
the early 1990's, the tuition tax breaks enacted 3 years ago--
run counter to need-based policy. In fact, I thought the drift 
of testimony yesterday was that the whole system these days is 
tilting toward cost relief for the middle and upper-middle 
class. The Feds, the States, the institutions are all leaning 
that way. The Federal Government, in my view, should reassert 
its leadership in fostering need-based aid.
    Second, restore the purchasing power of Pell grants. The 
single most important thing I think the Congress could do is to 
restore the promise that Pell grants once represented. Back in 
the 1970's, it was at its peak in real value, in buying power. 
In fact, the very last chart in my testimony is a simple bar 
graph titled ``Returning Buying Power to the Pell Grant.'' The 
first bar, the lowest bar, is where we are right now, with a 
$3,125 maximum Pell. Where we need to be is $4,300, to make it 
have the buying power it did back in the late 1970's based on 
the Consumer Price Index.
    Based on costs of attendance as they have changed during 
this period, where we need to be is $7,000 to match the average 
cost of a public higher education institution, and $8,000-plus 
is where we would need to be for a private 4-year college. I 
recognize that these numbers are way out of bounds of the 
incremental framework of current appropriations----
    Senator Lieberman. What is the standard there? In other 
words, to be where we were when the Pell grants started, you 
mean?
    Mr. Gladieux. Yes. In the early years, the 1970's, I think 
it had more drawing power. The Pell Grant was a beacon and it 
was coming at a time when institutions were aggressively 
recruiting the most disadvantaged students. State scholarship 
programs were focusing on these same students.
    Now, I realize these numbers are way out of bounds, but 
this is where I think we need to be if we want to restore the 
Pell grant to what it once was. And, by the way, the more we 
invest in the Pell grant program, the more we help not only the 
neediest students, because they get a larger grant, but we 
bring in students in the moderate-income range. We bring in 
more students who are just outside the range of eligibility.
    Yesterday's student representative from the United States 
Student Association said she came from a middle-class family. 
Her parents were both educators. They had $50,000 in income. 
She got an institutional grant. She did not get a Pell grant. 
The fact is that she is just above the eligibility line for a 
minimum Pell grant, which is $400. If we increase the funding 
for Pell, we will bring students like Jamie into the range.
    Third, make the Pell grant an entitlement program, and I am 
glad several people broke the ice on this yesterday. I am not 
the first in this hearing to utter the dread word of 
entitlement. But we have essentially new upper middle-class 
entitlements through the tax code and the Pell grant relies on 
annual appropriations. In fairness, and in anticipation of the 
coming tidal wave of students, I think we need to have a Pell 
grant entitlement.
    By the way, you could provide a low-income entitlement 
through the tax law by making the tuition tax credits 
refundable, but that is not a very effective mechanism for 
people who are really struggling to meet tuition bills and make 
ends meet because the relief does not come at the time the 
tuition bill is due. It comes in a year-end tax refund. So I 
just do not think the tax code is a very effective vehicle for 
closing these gaps.
    Fourth, establish a college savings or lifetime learning 
trust for low-income children. Some form of this idea was 
kicked around in the Taxpayer Relief Act discussions 3 years 
ago, as I remember, and there were several Senate sponsors, I 
do not remember who, but the idea was the Federal Government 
would set up a $500 trust account for each low-income child and 
it would be pooled in an investment fund. Corporations, private 
donors, States could chip in, too. It was an attempt to balance 
the education IRAs and other savings incentives that were being 
put into the law at that time.
    The proposal died, but I say, let us take another look. The 
college savings industry is booming. You have got substantial 
Federal and State tax incentives. Savings are so important to 
people feeling that they have a stake in our society and in our 
economy and in their own future, but not everybody has money to 
put aside. Without going into particulars but to put it simply, 
shouldn't we find a way to extend the wonders of compound 
interest to all our citizens?
    Fifth, in the same vein of getting to kids and students 
early, we need to expand pre-collegiate outreach, intervention, 
counseling, and mentoring programs. The Federal Government 
needs to step up and invest a lot more in this. I give 
wholehearted credit to the Clinton Administration for its 
proposals in the budget for the TRIO programs and the GEAR UP 
program along this line.
    Finally, let us focus on students' success, not just 
access. Again, public policy has done a pretty good job of 
boosting access over these several decades, but getting 
students in the door is not good enough. We need greater 
attention and incentives focused on student persistence, and 
again, I support a Clinton administration proposal included in 
this week's budget for college completion challenge grants to 
institutions.
    So I am not a fan of the administration's tuition tax 
proposals, but I do support these latter initiatives, I think 
they are right on target, and I thank you, Mr. Chairman.
    Chairman Thompson. Thank you very much. Dr. McPherson.

   TESTIMONY OF MICHAEL S. McPHERSON, Ph.D.,\1\ PROFESSOR OF 
          ECONOMICS AND PRESIDENT, MACALESTER COLLEGE

    Mr. McPherson. Thank you, Mr. Chairman and Senator 
Lieberman, and thank you for operating such a, as I understand 
it, as I was not able to be here, but such a thoughtful and 
wide-ranging hearing.
---------------------------------------------------------------------------
    \1\ The prepared statement of Dr. McPherson and Dr. Morton Schapiro 
appears in the Appendix on page 159.
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    My remarks this morning and my written testimony are on 
behalf of myself and my longtime co-author, Morty Schapiro. Our 
remarks are based on our work as economists to study higher 
education and are not meant to represent the views of the 
institutions that we work for.
    I will say that I know hearings thrive on controversy, but 
there is nothing in what Larry Gladieux said that I would be 
inclined to disagree with.
    Senator Lieberman. I do want to apologize to you, Dr. 
McPherson. Yesterday, the circuits in my brain switched and I 
referred to something I had read and I said that you were from 
the College Board. I know that was a terrible assault on your 
reputation and I---- [Laughter.]
    Mr. McPherson. Well, I am a trustee of the College Board.
    Senator Lieberman. Oh, OK. So I was only half confused.
    Mr. McPherson. So I am sure that is what you had in mind.
    Senator Lieberman. It must have been. [Laughter.]
    Mr. McPherson. In my brief remarks here, I want to really 
pick up on Larry's emphasis on viewing the system as a whole, a 
system that involves contributions from certainly the Federal 
Government and also State Governments, which, in fact, are 
larger players than the Federal Government in providing finance 
for higher education, and the colleges and universities 
themselves. The concern I would like to focus on is the loss of 
a sense of common purpose, which I think at one time did much 
more to shape our efforts in the finance of higher education.
    For more than 30 years, the U.S. system for financing 
undergraduate education has been based on the principle that 
colleges and universities, together with the Federal and State 
Governments, should help financially needy students to pay for 
their education. Increasingly now, though, we see institutions, 
colleges and universities, using financial aid to recruit the 
most desirable students and to help their bottom lines, and we 
see government shifting resources from lower-income students to 
the children of middle-class taxpayers, who have more political 
clout even if they have less need.
    Those changes, in our view, threaten the educational 
prospects of our neediest young people, particularly in the 
face of the kind of demographic developments that Senator 
Lieberman and Mr. Gladieux talked about, and they threaten the 
health and the stability of U.S. higher education in general.
    To focus on history for a moment, the present system of 
meeting families' need for financial aid had its origins in an 
enrollment slump back in the mid-1950's, a slump that followed 
the influx of Korean war veterans who were supported by the GI 
Bill. With enrollments declining, a number of prestigious 
colleges and universities found themselves slipping into 
bidding wars for attractive students, just as is happening 
today.
    In 1954, driven by the desire to stem the flow of dollars 
to competitive offers of student aid, as well as by a 
commitment to increase access to higher education, a group of 
institutions formed the College Scholarship Service as part of 
the College Board. The goal of that organization was to develop 
a uniform and objective way of assessing financial need. The 
assumption was that, ideally, institutional and governmental 
programs would combine to meet that need.
    Although colleges and government agencies and individual 
students have had lively disagreements over those many years 
about how to measure a family's ability to pay for higher 
education, the underlying consensus among everyone involved has 
been that trying to meet financial need is the right thing to 
do, and that essentially creates a partnership between 
colleges, States, and the Federal Government. That consensus 
and that sense of partnership is now breaking down.
    The Federal tuition tax credits introduced in 1998 were 
aimed clearly at the middle class and even the upper middle 
class, and they cost the government more money every year than 
the entire need-based Pell grant program. Many States seem more 
interested these days in merit scholarships and in tax-exempt 
prepaid tuition plans than in grants for citizens with lower 
incomes. And colleges and universities themselves increasingly 
are turning their back on the principle of meeting financial 
need as they adopt programs such as merit aid that are aimed 
mainly at more affluent students.
    In the past few years, indeed, our most prestigious 
universities have been leapfrogging each other as they modify 
their aid systems to lure the students that they want. Even 
Harvard University, which last time I checked had no difficulty 
recruiting a class, Harvard characterized its need-based aid 
program as, ``competitively supportive,'' and invited 
applicants to seek a response from Harvard to offers of aid 
from other leading institutions. It is no wonder that families, 
feeling that the aid system can be and often is manipulated by 
colleges, are less and less inclined themselves to play by its 
official rules.
    The resulting free-for-all, with institutions competing for 
students and students trying to play one institution off 
against another, tends to divert financial support from very 
needy families toward middle- and upper-income students, and 
these trends are reinforced by the trends in governmental 
support that I described earlier. It is increasingly clear in 
our view that, unchecked, this trend will lead to growing 
stratification in U.S. higher education and increasing 
inequality of income and opportunity in society at large.
    How can we reverse the trend? We need to undertake, in our 
view, a national effort to restore the commitment of colleges 
and of governments to the principle of meeting students' 
financial need.
    We would offer two specific recommendations for Congress to 
consider. First, we would urge that Congress find a way to 
affirm that colleges can enter into agreements to apply common 
standards in assessing need and awarding aid without running 
afoul of the antitrust laws. The antitrust investigation of the 
early 1990's, when the Ivy League institutions were 
investigated, has had a chilling effect on forms of cooperation 
among colleges that, in our view, are socially desirable.
    Second, we would urge the Federal Government to create a 
supplemental student aid program that would provide extra funds 
to students whose colleges adhere to need-based principles in 
awarding student aid. This, we feel, is an intelligent way to 
incentivize colleges and universities to do the right thing. It 
would also, in our view, help to move the balance of 
expenditures on student aid and support for students in the 
direction of helping the needier.
    The real question in our view is whether the United States 
possesses the will to pursue such a course. The principle of 
equal access to higher education which Americans continue to 
espouse and which has served the country well over the past 30 
years is increasingly honored only in principle while being 
abandoned in practice. The fate of future generations of young 
people depends on our reversing that trend.
    That is my basic statement. I would like to add, if I may, 
one other thought, perhaps particularly appropriate to the 
Governmental Affairs Committee. There is a lot of uncertainty 
and a lot of controversy about exactly what impact loans and 
grants and tax preferences have on student behavior. There is a 
lot of money at stake and there are a lot of important 
educational decisions at stake in determining what these 
effects are, and I would endorse a proposal from Tom Kane, who 
is a professor at Harvard University, that the Federal 
Government invest in some experiments analogous to the negative 
income tax experiments that were conducted 20 years ago or 
more, experiments that would be aimed at measuring in a 
scientific way the impact of these kinds of investments. For an 
investment which would be a small fraction of what we spend 
every year on these programs, we could learn a great deal about 
what effect they really have. Thank you very much.
    Chairman Thompson. Thank you very much.
    That is an interesting suggestion and it really plays into 
something that I have been concerned about for a long time. 
That is, we get into controversies whether you are talking 
about how to handle juvenile crime or what to do about 
education, issues of federalism. You know, 7 percent of 
education spending is Federal, 7 percent only, so we are the 
tail that is trying to wag the dog, you might way.
    Mr. McPherson. Right.
    Chairman Thompson. But one thing that we do better than 
anybody else at the Federal level is research, and again, 
whether you are talking about juvenile crime, something that I 
have worked on over the years, or education, there is an awful 
lot we do not know. It is not like we have the right solutions 
to all these problems and we just need to tell people to 
implement them, because we really do not know what works 
oftentimes and what effect what we are doing has.
    So we really need to put more into research, and Mr. 
Gladieux, you mentioned the same thing. I think at the Federal 
level, you do not get into a lot of those federalism issues. 
What should the Federal Government be doing? What should the 
State be doing? We could be a clearinghouse of research into 
these things, a clearinghouse for States and local communities 
as to who is doing what and what results are they having, not 
to mention the effect it would have on our own programs.
    On another point, on the issue of access, it raises a real 
question for me because I wonder about our underlying 
assumptions. I'm going to play kind of devil's advocate for a 
minute, but I am wondering, are we assuming, when we talk about 
the access problem and we see that the completion rates are 
flat when the student enrollment is up, that not all people are 
going to school that we think might ought to be going to 
school. That there is an underlying question there as to who 
should be going to college. That is a societal question that we 
cannot answer, but we cannot totally ignore it, either, I 
guess, as we look at this.
    I am wondering if the philosophy that we are headed toward, 
toward kind of a total access, is going to wind up stratifying 
things more and more. We see now that, more and more--some 
studies were done recently in one large high school, one large 
community where the high school students, half of them could 
not pass a standardized merit test if it were given and they 
were required to pass a certain test to get out of school.
    We see the demographics are catching up with us. We know 
about what it is doing in the elderly segments of our society, 
with Social Security and Medicare. It is happening, the same 
thing, again, with juvenile crime. We have a bunch of kids in a 
problem age group that are coming along. We have a bunch of 
kids that are coming along now from maybe poorer backgrounds 
into the college system.
    So how do we look at that? If we do not base it, if we 
continue to stigmatize kids who do not go to college, who 
choose to become mechanics or carpenters or something like that 
and we do not place the emphasis on the underlying problems 
that get these kids in the problems to start with and we do not 
really reach out and try to get the poor kids who show some 
capability and some potential and not try to get all the rest 
of them into school, we are going to bring down the quality of 
our college and university education. The real good students 
are going to even more elite institutions at even higher prices 
and we are going to have a small, extremely elite college-
university system and broad-based education with broad access 
to everybody, dragging everybody down. The decent students, the 
good students working hard will be brought down by a situation 
like that.
    So I question whether or not when we look at the access 
problem that we ought to look at it just strictly from a 
standpoint of who is going to college who we think maybe ought 
not to be going. Does any of that resonate with you? It kind of 
goes against the grain, I guess. It seems to me that not only 
are we going to need a computer-literate society, more and 
more, we are going to need people who know how to do things, 
how to do things with their hands as well as other skills. 
There is always going to be room for that, too. If we continue 
to push everybody toward college and universities, it is not 
going to be good for anybody. And, of course, as I say, the 
rich and the extremely bright are always going to have 
someplace to go, but it is going to stratify things worse than 
they are. Does that make any sense at all?
    Mr. McPherson. I have two observations. I think it is a 
very important issue. The first observation I would make is 
that, as an educator, I think it is a misfortune that, 
increasingly, the only path to a good life and a rewarding life 
in our society is seen to be a path that goes through college. 
It would be a much healthier society, in my view, if young 
people really felt they had a choice of ways to build a good 
life, and not all of those ways ought to require that they get 
a college diploma. I think it would bring a better attitude 
toward students when they are in college if they felt like they 
had chosen that.
    The reality is that if you look at income statistics, if 
you look at occupational results and so on, things look pretty 
bad for folks who only have a high school degree, and it seems 
to me that part of the solution to that should be national 
investments, not necessarily Federal Government investments, 
but national investment in secondary vocational training and 
post-secondary vocational training, which would allow people to 
become equipped to become mechanics and do other kinds of 
preparation which are not necessarily collegiate preparation.
    But at the other end, Senator, in some of the work that 
Morty Schapiro and I did, we reviewed a governmental study 
which looked at the probability of people going to college 
based on both their family income and their academic abilities 
as measured by tests in high school, and among the top third of 
students in terms of test-taking performance, the highest 
income group had 19 chances out of 20 of attending college. The 
lowest-income group, and this is among high-performing high 
school students, the lowest-income group had three chances out 
of four of attending college. Now, three chances out of four is 
better than it used to be, but it still means that 25 percent 
of low-income students who clearly have the ability to benefit 
from college do not get there. So I think we have problems to 
work on still at both ends of the problem you described.
    Chairman Thompson. Yes, and that is really the point. The 
distinction should be made with regard to the low-income 
students who show some potential. Of course, some really have a 
tough time in even showing that potential. I guess you could do 
a certain kind of a test and so forth. Grades might not even be 
the total determining factor, based on their family situation 
and all, but there must be some liberal ways of determining who 
has that ability. I guess I am beginning to sound like the 
English system or something. I am not suggesting that. And then 
concentrating on those low-income kids who show the ability or 
the potentiality of succeeding and wanting to go.
    Mr. Gladieux. Mr. Chairman.
    Chairman Thompson. Yes?
    Mr. Gladieux. I think in these discussions, there is 
sometimes an issue of terminology. We talk about college and 
going to college and we all have different things in mind, but 
it is just the way we refer to this process that we are talking 
about here.
    But what we are really talking about is a very broad range 
of post-secondary opportunities for education and training, and 
I personally do not believe that everybody should go to 
college. I do not believe that is----
    Chairman Thompson. Perhaps vocational, as Dr. McPherson 
said.
    Mr. Gladieux. Yes. And I think where the market is 
generating and State systems are setting up an increasingly 
rich range of sub-baccalaureate degree opportunities that are 
very important to drive our economy and to sustain the promise 
of opportunity in our----
    Chairman Thompson. In other words, there is hardly any role 
in society that some post-high school training of some kind 
would not clearly benefit. That is certainly true.
    Mr. Gladieux. Yes. I am talking about completion rates. 
Bill Gates is a college dropout. But in the main----
    Chairman Thompson. And you do not have to expect them to 
get a 4-year degree from some liberal arts college or 
something.
    Mr. Gladieux. In the main, our economy and our labor market 
is driven by credentials. So I think this is the message, that 
we want to keep the options open to everybody for some form of 
post-secondary education or training.
    Chairman Thompson. If somebody knows how to fix something 
or do something, I know a lot of employees who do not care if 
you went to the 3rd grade, and I am not suggesting that this is 
the wave of the future. This is just reality. In the little 
community I grew up in, there is a place and will continue to 
be a place that will grow as everybody else moves into other 
things, people that know how to fix things and do things and 
show up for work on time and things like that will have a 
place.
    Mr. Gladieux. Some people do very well without formal 
training, but again, the range of what is being offered out 
there, is being generated by the market, is just astounding, 
the certificate training as well as the degree programs.
    Chairman Thompson. Thank you. Senator Lieberman.
    Senator Lieberman. Thank you, Mr. Chairman, an interesting 
exchange. That brings up the first matter I wanted to bring up, 
which is getting a handle on the effect of the increasing cost 
of higher education on different income groups. It takes a 
little bit of work.
    I was surprised, and one of the witnesses yesterday, I 
think, dwelled on this somewhat, that if you look at the last 
couple of decades, the participation rates for 18- to 24-year-
old high school graduates has increased at every quartile of 
income, 11 percent for the bottom quartile, 15 percent on up, 
10 percent at the highest level, and I found that surprising 
and, I guess, counter-intuitive, because I figured as the cost 
went up that it seemed unlikely that there would have been a 
comparable increase in the number of poorer kids going to 
school, and maybe I should ask you to comment on that.
    I want to come on to other questions, some of which you 
have already testified to, but is that a reflection? You have 
said that it is still true that there are a smaller percentage 
of lower-income kids attending college, and as the most recent 
exchange indicated, and your research, Dr. McPherson, is very 
compelling there, that though it is three out of four, still, 
that is a lot lower than 19 out of 20, so there is still a gap.
    But why is it over the last 2 decades that the number of 
poorer kids in college has gone up about as much as the number 
of better-off kids?
    Mr. Gladieux. Again, the gaps remain very wide when you 
look at all the dimensions of opportunity, access, choice, and 
completion. But it is true. The demand for higher education in 
our society is reflected on those charts that show all the 
lines growing up in every group, racial or by income.
    Senator Lieberman. So does that show also that some of the 
aid programs, like the Pell grants, have worked to enable the 
lower-income kids to go to college, or does it show that there 
is just such a demand that they are willing to do anything, as 
middle-income families are, to make sure their kids go to 
college?
    Mr. Gladieux. I think the aid programs have worked, but we 
have got a long way to go.
    Senator Lieberman. Yes. Dr. McPherson.
    Mr. McPherson. I think the comparisons here we are talking 
about are comparisons of 1972 to 1992, and that means it is 
pre--the major Federal investments in student aid and post--
those investments. It would be great to have 1972, 1980, and 
1992 so that you could get more of a profile of what has 
happened during that time.
    But I would underscore that while there has clearly been 
progress, and it is also clear that, as you put it so well, 
Senator, the economic rewards to attending college are so high 
that people will work very hard to solve that problem and 
figure out a way to do it.
    But despite those good things, in our work, for example, we 
looked at the attendance rates immediately out of high school 
for white kids, African Americans, and Latino/Latina children, 
and in the middle 1970's, whites attended in greater numbers, 
but the differences in attendance rates were something like 3 
or 4 percentage points among those three groups. Now, every 
group has increased its attendance rate, but the differences 
are quite a bit bigger.
    Senator Lieberman. The gaps.
    Mr. McPherson. They are more like 5 to 10 percentage 
points, and I think what that reflects is that----
    Chairman Thompson. Like national income figures.
    Senator Lieberman. There is probably a connection.
    Mr. McPherson. There is a persistent problem.
    Senator Lieberman. That is important. I mean, I think that 
makes the point very compellingly.
    Mr. Gladieux, those numbers you gave, however, about the 
completion rate of college in 4 years are stunning. That was 
only 6 percent of lower-income kids finish college in 4 years, 
whereas----
    Mr. Gladieux. In this study, they began in 1989. Five years 
later, they took another look and they went back to the same 
students and that was the gap in percentage that completed a 
bachelor's degree.
    Senator Lieberman. I do not want to push you into too much 
detail, but how are lower-income kids defined in that study? Is 
it bottom quartile or poverty rates?
    Mr. Gladieux. Yes, I think that is bottom quartile.
    Senator Lieberman. Do you know how many of them, of the 
students in the lower-income group, actually ultimately 
finished 4 years?
    Mr. Gladieux. Well, there is some data, and there are 
additional follow-ups. The gaps remain pretty wide. Five years 
after high school graduation, students are 22 and 23 years old. 
If you go out to age 30, some intermittent students come back 
and complete their degrees, but the gaps remain very wide.
    Senator Lieberman. Yes. I am about to ask a question, what 
was it, that F. Scott Fitzgerald-Ernest Hemingway dialogue 
about the rich are just like the rest of us except they have 
more money. I mean, I am about to ask you, why is it that there 
is this remarkable discrepancy, 40 percent completion in 4 
years, 6 percent, among the poorest? Is it just plain income, 
or is it something more?
    Mr. Gladieux. As I said, I think it is this issue of 
affordability, and there have been a lot of adverse trends, 
tuition, family income, and the aid policies. I think that has 
played a part. But it is also the underlying gaps in prior 
preparation. I mentioned that larger challenge of student 
readiness for higher education. Obviously, we cannot read that 
out of our calculus here in anything we are talking about. If 
we are focused on closing these gaps----
    Senator Lieberman. As you said today and was said 
yesterday, it is more than aid, college aid alone. It is also 
our ability as a society to prepare kids in poorer families in 
elementary and secondary school.
    Mr. Gladieux. Right, though these two things, these two 
challenges interact.
    Senator Lieberman. Sure.
    Mr. Gladieux. I suggested a savings initiative, and there 
have been tremendous new incentives, Federal and State tax 
incentives for college saving. Those do not reach down into the 
low end of the economic scale, but it does send a message and 
you can help to motivate young students early in their 
schooling if we make a promise, if we say that the financing is 
going to be there, and the same with Pell grants, and that is 
why I put that on the table, the Pell grant entitlement.
    Senator Lieberman. I assume, again, just briefly, that if 
the demographics of the future are as we expect, as experts 
project, which is that a greater and greater proportion of 
children growing up in the country will come from ethnically 
diverse lower-income families, then the gaps that we have 
identified here, both in access and in completion of college in 
4 years, are going to get greater and greater.
    Mr. Gladieux. That is what I see, and the College Board has 
also commissioned a study that the Rand Corporation did for us, 
providing very detailed estimates of projections in the year 
2015, the students who are going to be coming online then and 
what their characteristics are. It says the same thing.
    Senator Lieberman. Yes.
    Mr. Gladieux. It is a huge challenge.
    Mr. McPherson. If I could add to that point, one of the 
things we know from research is that two of the main 
determinants of somebody's likelihood of going to college are 
their parents' income and their parents' educational 
attainment. What I wish we could do is create a kind of a movie 
which would let us see where we are going over the next 20 
years. If we allow these gaps in educational attainment to 
persist for another generation, those will then be perpetuated 
because those now young people who did not get to college will 
have children who are less likely to go to college.
    And if we picture what that society is going to look like 
25 years from now, it is not one any of us will want to live 
in. But it is so hard to come to grips with it because it is so 
abstract, but we are building, I think, a divide which is going 
to wind up being punishing to the entire society and not just 
to the poor people, but to everybody.
    Senator Lieberman. Let me ask a final question. 
Incidentally, thanks to both of you for your recommendations, 
which are, I think, very thoughtful and constructive, and 
perhaps on another occasion we can go over them in a little 
more detail with you.
    But here is my question. I accept, based on the testimony 
we have heard and the numbers that have been put before us, 
that both today and in the future, the greatest need for 
financial aid is, this sounds axiomatic, but is among those who 
are poorer. But it is also true that people who are making a 
little more money, the middle class and particularly what might 
be called the lower-middle class, really are strapped to send 
their kids to college.
    The young lady who was in here yesterday, not needy, not 
from a needy family, but $50,000, both parents teachers, 
$50,000 family income, they took on $22,000 of debt to send her 
to college and they have another student coming along for whom 
presumably they will also take on debt.
    So we cannot, and I know you are not asking this, we 
certainly cannot turn our backs on them, either. I think what 
we have got to do is figure out a balanced system, and maybe it 
does in the best of all worlds include more fully funding the 
Pell grants but keeping a kind of tuition credit or tax 
deduction system for people in the middle class who are finding 
it very hard.
    I think I said yesterday in my opening statement, and it 
really is true, I find that among the middle-class families in 
Connecticut, the greatest single worry they have is how they 
are going to afford to send their kids to college without going 
into hock that will stay with them for the rest of their lives. 
Maybe they do not worry about health care as much because most 
of them are working in places where they get their health care. 
I understand that. But it is a major worry.
    So just talk to me a little bit about that and what the 
ideal--I presume you are not suggesting that we turn our backs 
on the middle-class families who also need help.
    Mr. McPherson. I certainly do not mean to suggest that we 
turn our backs on those folks, and I think from my point of 
view, a family earning $50,000 a year with one or more children 
in private colleges absolutely is a needy family.
    I may differ somewhat with Larry in thinking about the 
politics of these things. I think it would be desirable, 
actually, for the Pell grant program to reach further into the 
middle class, perhaps even beyond what happens simply by 
driving the formula with more dollars. What I really worry 
about, thinking about the future of Federal funding, and I am 
an amateur political scientist, so forgive me for this, but 
what I worry about is we have kind of created a system where 
there are two buckets that Congress can fill. One bucket is 
Pell grants, and the label on that is poor folks in the way it 
is done now. The other bucket is tax credits, and the label on 
that is middle class and up.
    I just have a hunch that you folks will be more attracted 
to filling bucket No. 2, and if we have some academically 
perfect system where we say, well, Pell will take care of the 
poor folks and tax credits will take care of the middle class, 
I do not think the poor folks are going to win in that 
competition.
    So just as with Social Security, a lot of its strength has 
clearly been that it reaches a broad range of Americans. I 
think we need to think realistically about creating a set of 
programs which you folks can go out and explain to your voters 
which is responsive to these underlying social needs and which 
reflects the reality that for a lot of people in the middle 
range, it is a strain to finance college.
    Senator Lieberman. It is a good argument. It is very 
important that we talk about that. I mean, look at not only 
Social Security but Medicare. Part of the reason why it enjoys 
such support, and, of course, is in such financial difficulty 
right now, is because it is a universal benefit program and it 
has had results. People are living longer and living healthier.
    Mr. Gladieux. If I can just address my colleague, I think 
we are going to still have to work on where we disagree. I 
think, if I understood you, I agree that we ought to expand the 
Pell grant program and push it up as far as we can into the 
moderate and middle-income ranges. So I think we agree on it.
    Mr. McPherson. I tried to disagree with him.
    Senator Lieberman. All right, nice try. Thank you both. We 
are not going to get to ``Crossfire'' here, no matter how hard 
we try. [Laughter.]
    Mr. Gladieux. If I can just add, on the tax code, I know 
time is short, but on the tax code, I do support expansion of 
the interest deduction on student loans for student loan 
repayment. I think that is a judicious use of the tax code, and 
maybe we disagree on this, Mike. I do support the tax 
incentives for savings. I think they go mostly to middle and 
upper-middle class. But they support this whole savings 
movement, which I think is, in general, very constructive. I 
just do not support the big tax breaks for current tuition 
bills because I do not think that is a very effective----
    Chairman Thompson. The divide you talk about reminds some 
of us what a lot of people are concerned about in society as a 
whole, in terms of the gap between rich and poor. In this 
country, I think it is very valid to point out that we are very 
mobile. We move from one category to the next. You may be lower 
1 day and then middle the next, and that is the beauty, and 
perhaps that mitigates it somewhat.
    On the world stage, though, it is really, a lot of people 
think, becoming a problem, the haves and have nots, the 
technological haves and have nots, and those are going to be 
driven apart further. And while it is unfortunate and unfair, 
in the United States, when you get to that level, you are 
talking about ethnic conflict, countries that have nuclear 
capabilities now, and all of that. So this is a microcosm of 
what is going on in the world.
    Mr. Gladieux. We talk about a digital divide in this 
country. It is a digital chasm when you look across regions of 
the world, third world and first world.
    Chairman Thompson. Senator Collins.
    Senator Collins. Thank you, Mr. Chairman.
    Mr. McPherson, you mentioned that some 25 percent of low-
income students who have the capacity to go to college still do 
not get there, and Mr. Gladieux, you mentioned in your 
testimony that only about 6 percent of them finish it, a 
statistic that I share Senator Lieberman's alarm about.
    Prior to coming to the Senate, I worked at a private 
college in Maine that primarily served low-income first-
generation students, and I would suggest to you that one reason 
that 25 percent does not get there, even though they are 
qualified, is not only that they come from families with no 
experience with higher education, their aspirations are low, 
and that is why, parenthetically, I would say I am such a 
strong supporter of the TRIO programs. I think those are just 
critical. But it is also that a lot of them are frightened of 
the cost. They have sticker shock and they do not realize that 
help is there.
    So one of the things that I wanted to ask you to comment on 
is, how can we do a better job of reaching those children who 
come from families without any experience in higher education 
who may even not want their children to go on to college, may 
be threatened by that--I have seen that--and who look at the 
cost of private schools, in particular, and think that is just 
not for them. There is just no way they can experience that or 
afford that.
    And second, and related to that, I think one of the reasons 
that only 6 percent finish, based on my direct experience, is 
they start looking at that mountain of debt and they think, 
there is no way I am going to be able to find a good enough job 
to pay that off, or they just get so discouraged by it, and 
they particularly get discouraged when the college changes the 
ratio of grant aid to loans, which happens over and over again, 
where the amount of grant aid provided by the institution 
decreases the longer the student is there.
    So I think that cost is still very much part of the 
underlying problem for both of those alarming statistics. Dr. 
McPherson.
    Mr. McPherson. Yes. I think you have identified a really 
major problem. If I can talk from personal experience, I am the 
president of a college located in the city of St. Paul and my 
son recently graduated from St. Paul Central High School, which 
is a big public high school, and a number of his friends whom I 
used to drive around were from families of moderate incomes and 
their families are not willing to think about Macalester 
College because they hear about the sticker price and say, oh, 
well, that is hopeless. The fact is that two-thirds of our 
students get aid from the institution, and probably half of 
them get aid from governmental sources.
    But it is so complicated that it is hard to get that 
message across. I used to drive these folks around. I would 
keep copies of our financial aid brochure in the car and I 
would say, show this to your parents. This is really something 
you can think about. I would think I would be a reasonably 
credible source, but I could not get over on that. [Laughter.]
    I think we have a lot of work to do on the college side of 
making this system much more transparent, which was a word that 
was used earlier. You asked, what can the Federal Government 
do? I would recur to one of Larry's recommendations. The 
original idea of the Pell grant was to make it obvious to 
people that they could get a good chunk of support toward 
paying for college, and it was unambiguous. If the Pell grant 
were an entitlement, it would return to that original hope, and 
it was originally designed to be an entitlement. I think that 
would be a great statement for the young people of the country, 
that that support is there.
    Chairman Thompson. Mr. Gladieux.
    Mr. Gladieux. I would just add that the data that we have 
from the Department of Education tells us that young people in 
the middle schools, 8th grade--at all income levels--tell us 
that they expect to go to college. Expectations are very high. 
It is just that the course-taking patterns of students from 
different backgrounds and different school systems just are 
so--they are not adequate to let those students meet their 
expectations.
    Senator Collins. It is high in the young grades. I always 
ask that question.
    Mr. Gladieux. Yes.
    Senator Collins. It diminishes as the kids get older and 
older and more attuned to the cost.
    Mr. Gladieux. Right.
    Senator Collins. I know we have a vote on, so I will just 
quickly ask one more question. We had a witness yesterday who 
said that no college ever says, let us raise tuition to draw in 
more Federal aid, and I agree with that, but I will tell you 
what does happen, and this is what happens. When discussing 
tuition rates, what colleges figure is that truly poor students 
are going to be taken care of by scholarships, by Federal aid. 
The rich families can afford the increase in tuition. I would 
suggest that it is the lower-middle class and the middle class 
that really get squeezed. I think that those calculations very 
much do go into the discussion of tuition rates and that we do 
play a role, whether we want to or not, in student loans and 
Pell grants, and I am intrigued by the idea of extending Pell 
grants further into the middle class. I think there is a lot to 
be said for that.
    But the other issue which I want you to comment on is the 
prestige of a high sticker price. When you look at your peer 
colleges, there is a dynamic that goes on that if you are under 
the average cost of the tuition, are you somehow sending a 
signal that you are less worthy of their going there, and I 
think that is a very perverse mechanism that occurs when 
colleges set tuition rates. Dr. McPherson, could you expand on 
that?
    Mr. McPherson. Yes. I have some sympathy with both of your 
points, but also some doubts about both of them. I think there 
is a phenomenon which is by no means confined to higher 
education of families judging the quality by the price. I think 
Dave Breneman coined the term, the ``Chivas Regal effect'' for 
that phenomenon. He asked, why does that happen? The answer is, 
it is so darn hard to get meaningful information about how good 
a college really is.
    I think an area where the colleges need to do a lot of work 
is, again, another form of transparency, as the Chairman began, 
talking not only about our inputs, the big swimming pool, the 
great ratio of teachers to students, but also about the results 
and give families more information that can really help them 
make judgments that are independent of price.
    My point of view, when we think about our tuition decision 
at Macalester, I am, frankly, not looking to be more expensive 
than anybody else. I am looking at what I think we need to do 
in order to deliver a program which will meet the standards 
that we have set for ourselves, and in all honesty, it is an 
expensive thing to do.
    On the question of feeling like poor folks will be cared 
for by Federal and State programs, there certainly is some 
consideration of that kind, but the fact is that at a place 
like Macalester College, a very low-income family will probably 
get a grant on the order of $15,000 or more from the college to 
assist in attending and the cost of education for a student at 
Macalester is higher, actually, than the sticker price, so 
there is an additional subsidy involved there.
    So we certainly do not feel like these folks are getting a 
free ride from our point of view. We do feel like it is a 
fundamental commitment of the college to make it possible for 
them to attend and we put up the resources that will make it 
possible.
    Senator Collins. And just so I am clear, I am very 
sympathetic to the idea we need to do more to help our low-
income students have that opportunity.
    Mr. McPherson. Right.
    Senator Collins. I know we have a vote on, but Mr. 
Gladieux, if you could just comment quickly, since I read on 
your face some disagreement with what he said.
    Mr. Gladieux. I thought Dave Breneman has put this very 
well. There is price competition, but, as Dave says, higher 
education finance is kind of cockeyed. I mean, it is price 
competition in the----
    Senator Collins. The other way.
    Mr. Gladieux [continuing]. The other way.
    Senator Collins. Thank you, Mr. Chairman.
    Chairman Thompson. We do have a vote on. We will be in 
recess for a very few minutes.
    [Recess.]
    Chairman Thompson. Let us come to order, please. Naturally, 
it took a little longer than we anticipated, but thank you for 
waiting on us. Senator Akaka.

               OPENING STATEMENT OF SENATOR AKAKA

    Senator Akaka. Thank you very much, Mr. Chairman. Again, I 
want to tell you how much I appreciate this hearing that you 
have put together and look forward to witnesses and also 
questions.
    I was particularly interested in the testimony of Mr. 
Gladieux. You have indicated, Mr. Gladieux, that you are 
concerned that rising tuition costs still outpace inflation and 
fear that the income gap is widening. My question is, do you 
believe that the administrative cost containment measures 
recommended by the witnesses that we have heard here today will 
adequately mitigate these increases?
    Mr. Gladieux. I should turn to my colleague, the college 
president, who is on the front lines of responsibility for cost 
containment, but I am going to quote Dave Breneman again, who 
quoted an economist, Howard Bowen, whose theory of higher 
education finance was that you raise all the money that you can 
and you spend all the money you can raise. That is basically 
what colleges do. I mean, every college, I think, is a bundle 
of ambitions for doing good things. I think colleges have gone 
through various kinds of restructuring and I think they have 
felt pressure from the business community to get with the 
program and restructure and contain costs.
    Have they done enough? I do not think--here I will weigh in 
on the question of what is driving the tuition spiral--I do not 
think that all of the pressures are on the cost side, the 
underlying costs of providing the instruction. I guess this has 
been said, it is ground that has been gone over, but it is also 
a matter of the very high demand for the product. Everybody 
knows that there are good returns for this investment and a lot 
of demand. This is an imperfect market, post-secondary 
education, but prices go up in part because they can, because 
the demand is so high.
    Senator Akaka. Dr. McPherson.
    Mr. McPherson. One thing I would underline is from a public 
policy point of view and from a concern about how these 
tuitions are impacting on people's ability to go to college, it 
is very important to remember that 80 percent of the students 
go to public colleges and universities and that most of the 
low-income and first-generation students begin in public 
colleges and universities. It is also true that private 
colleges, on the whole, put a lot of resources into providing 
aid from their own resources for low-income students to try to 
provide access.
    If you look at what has gone on in prices in public higher 
education, they have gone up pretty fast, and I think that has 
produced access problems. But the main thing that has driven 
those price increases is reductions in State funding for the 
institutions, not increases in the cost of education. The cost 
of education on the public side actually has gone up quite 
slowly in the last decade. State appropriations have declined 
in many States, and schools have made up part of the difference 
with tuition increases.
    To me, the big challenge and the big issue is, whatever 
happens with tuition, are the schools, the States, and the 
Federal Government focused on making sure that needy low-income 
students are insulated from the impact, and that is, to my 
mind, where the public policy focus needs to be.
    Senator Akaka. Mr. Gladieux, I was glad to read about your 
concern about unequal education by income and race. You 
discussed here college participation and successes among these 
type of students. You also mentioned financial aid is critical, 
but not enough. I am really interested in this area as to why 
we have this inequality. You pointed out that much of this 
probably has come because they have not been properly prepared 
for college and pointed to programs such as Upward Bound, TRIO, 
and GEAR UP as programs that help that cause. You also 
mentioned that complementary strategies are needed to equalize 
college opportunities.
    I know you have discussed this in here, but I just wanted 
to further ask you whether you had anything else to say about 
that complement of strategy.
    Mr. Gladieux. Well, on the broad question of what are the 
roots of unequal opportunity, of course, there are many--
tracking policies in schools, social conditions and society's 
expectations of students. There are many, many things that play 
into this.
    Now, what to do about unequal levels of participation, as I 
said, I think we need the wholesale effort to reform the 
schools and lift performance of the schools and students, but 
we also need, I think, these one-on-one, one kid at a time, 
very intensive programs. At the Federal level you have the TRIO 
programs, Upward Bound, Talent Search and support services, and 
the new GEAR UP program that the administration proposed and 
Congress enacted.
    But there are programs in the private sector that are 
proliferating across the country. In fact, we held a 
conference, the College Board sponsored a conference, a 
national summit on pre-college outreach 3 weeks ago and it 
brought 500 people together. A lot of funders, a lot of 
foundations were there and are ready to invest more in these 
efforts.
    We need to save more lives. We need to reach more kids 
early, to widen their horizons and keep their options open, by 
taking the right courses and staying on track. That is what the 
I Have a Dream program is all about. I Have a Dream is just one 
of the national programs now that does great work and is 
expanding across the country.
    Senator Akaka. I know you are proposing expanding pre-
collegiate outreach.
    Mr. Gladieux. Right. It is very labor intensive. Mentoring 
students one-on-one is expensive. We just need more of these 
efforts.
    Senator Akaka. Would you have a word on that, Dr. 
McPherson?
    Mr. McPherson. Well, I do. One of the barriers, 
particularly for first-generation college students, is sheer 
information, is just knowing how this whole process works, and 
Senator Collins talked some about that before the break. Tom 
Kane, who is a professor at Harvard University's Kennedy 
School, is conducting, I think, a really interesting experiment 
with support from the Mellon Foundation which--they picked some 
school districts in the Boston area and, in a controlled 
scientific sense, are providing one-on-one counseling with 
trained counselors for a set of first-generation high school 
students whose parents have not been to college in low-income 
areas in Boston and they want to look to see if the college-
going results differ based simply on the application to one 
group of students of a serious amount of information and 
college counseling. I think that is a great example of actually 
trying to go out and systematically learn what works.
    Senator Akaka. Mr. Gladieux, in your testimony, you spoke 
of students who leave college with no degree, who have no 
skills and who may be unable to pay their debts. We heard from 
a young lady yesterday. She finished college and received her 
degree, but she is $18,000 in debt. What percentage of 
students' loans are outstanding from students who do not 
complete their bachelor's degree?
    Mr. Gladieux. Frankly, I do not know, and I do not know 
that we have such data. I know we do not have good research on 
students who fall off the track, who do not make it. I think we 
need some--Michael, do you have----
    Mr. McPherson. I have nothing.
    Mr. Gladieux. I do not know that any research is being 
done. It really is not picked up in the longitudinal--well, it 
should be picked up in the longitudinal studies of the 
Department of Education. We should be able to glean something, 
but I do not have the data for you.
    But this is what worries me most, is the number of 
students, and I guess I am just going on anecdotal evidence, 
what I hear. This is the downside of this whole effort and 
enterprise, students who are drawn into higher education and 
borrow and end up with a debt. Now Bill Gates, he had some 
skills and he did not need his degree. But for most folks who 
are in this situation, I think there is a real social fallout--
it is a serious problem.
    Senator Akaka. And I do worry, too. I worry about what this 
might do to the default rate in the future. Thank you very much 
for your responses, and thank you, Mr. Chairman.
    Chairman Thompson. Thank you very much.
    Gentlemen, thank you very much. That reminded me of another 
figure that we have got here that I guess is relevant to this 
discussion, and that is the default rate for loan programs in 
fiscal year 2000 is estimated to be 15 percent, which is a lot 
lower than it used to be. I am told by people who have been 
around here a long time that this Committee had hearings many, 
many years ago and it was astronomical, and it is slowing and 
it should be.
    But still, just for loans in 1 year, that is over $5 
billion that taxpayers are paying. That is kids who pay their 
loans back and go to work, and that is grandparents who already 
got their kids through college, and that is the factory worker 
who does not go to college. All these taxpayers are giving $5 
billion a year to the cost, so that needs to be considered, 
too, in terms of Federal cost, i.e., taxpayers' costs that we 
are incurring in these loan programs. You can say a lot of 
things about it. The kids are too poor, loans are too high, 
society's standards are declining, or whatever, but that does 
go into the Federal contribution.
    If there is nothing else, thank you, gentlemen, very, very 
much. This has been extremely helpful.
    Mr. McPherson. Thank you, Senators.
    Chairman Thompson. I appreciate it.
    Our final panel will examine the growth in the use of debt 
to finance a college education and the danger posed by 
perpetrators of fraud who prey on students seeking money to pay 
for college.
    We will hear from Jerry S. Davis, Vice President of 
Research at the USA Group Foundation; Mark Kantrowitz, 
Publisher of FinAid.com, and Patricia Somers, Professor of 
Higher Education at the University of Missouri in St. Louis.
    Mr. Davis, would you care to make a statement?
    Mr. Davis. Do we have to go in the order that you had 
listed us?
    Chairman Thompson. Not necessarily.
    Mr. Davis. Dr. Somers wanted to go first.
    Chairman Thompson. All right. That would be fine.
    Mr. Davis. So I yield to Dr. Somers.
    Chairman Thompson. Dr. Somers.

TESTIMONY OF PATRICIA SOMERS, Ph.D.,\1\ ASSOCIATE PROFESSOR OF 
            HIGHER EDUCATION, UNIVERSITY OF MISSOURI

    Ms. Somers. Thank you, Mr. Davis. Good morning, Mr. 
Chairman, Senator Lieberman, and Senator Akaka. I am delighted 
to be here to talk about students and their debt load and how 
it influences their lives.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Somers and Mr. James Cofer 
appears in the Appendix on page 215.
---------------------------------------------------------------------------
    As you said, I am Pat Somers, Associate Professor of Higher 
Education at the University of Missouri at St. Louis, and I am 
going to be talking about a series of studies on student 
persistence and debt load which I did collaboratively with Dr. 
James Cofer, Vice President of the University of Missouri 
system, who is also here with me today.
    Collectively, we call these student debt load studies 
``Mortgaging Their Future,'' and mortgaging their future is an 
analogy that came through time and time again as we talked with 
students. In my remarks, I will give a brief introduction, then 
examine the three questions posed by the Committee, and end 
with some policy suggestions. You have heard some of these 
things before.
    While I am a researcher who looks at the impact of student 
aid, I have also had involvement in the financial aid system as 
a recipient. As an undergraduate at Michigan State University, 
I received Federal grants, loans, work-study money, and also 
State grants. I received war orphans' benefits under the GI 
Bill, and I was the first person in my family to graduate from 
college. Half of my NDEA loans of $8,000 were forgiven because 
I ended up in an educational institution and I taught.
    Then my second experience with the financial aid system as 
a participant came as a parent. In 1993, I found myself newly 
widowed with my daughter, who is a poet, at a very expensive 
private college. I ended up with $28,000 in PLUS loans on a 
salary of $32,000, and I am probably the only parent in America 
paying back the PLUS loans instead of foisting them on my 
daughter. She ended up with $30,000 for undergraduate loans and 
will amass at least $80,000 in student debt load by the time 
she receives her Ph.D. in English literature.
    Now, I did point out that she could be a poet and do, let 
us say, massage therapy at the same time, and I offered to fund 
her completely to go to massage therapy school, but she decided 
she really wanted a Ph.D. in English instead, and we recognized 
the impact of that decision. She also, after her father became 
ill with cancer, had offered to drop out of the expensive 
private college and go to the public school near home so she 
could help us save money. We had over $100,000 in medical bills 
in 3 months. But also, she could help take her father to 
treatment.
    Between my experiences with financial aid in the 1960's and 
my daughter Susan's in the 1990's, there were some fundamental 
shifts in student financial aid policy, which I will outline.
    From its beginnings in the Higher Education Act of 1965, 
there have been several key principles of Federal student 
financial aid policy. These are, first, that the costs of 
higher education are shared by the student, the parents, and 
the taxpayer. The second is the Federal Government makes grants 
available to low-income students so that they can afford 
moderately-priced public institutions, which we call access to 
post-secondary education, makes loans available to middle- and 
upper-income students so they can afford higher-priced private 
institutions, which we call choice in higher education 
institutions, and provides aid to students without regard to 
academic discipline or achievement as long as the student 
maintains satisfactory academic progress.
    A key change between when I was in college in the 1960's 
and when my daughter was in college in the 1990's is that 
students have assumed more of the cost of college primarily 
through loans, while parents have decreasingly supported their 
students in college. As I said before, I suspect that many of 
the PLUS or parent loans are actually being paid by the 
students after graduation.
    The Higher Education Act of 1992 increased student 
borrowing limits, and probably as a result, we are here today 
talking about student debt load, college costs, and so forth. 
With this change came renewed concern about the impact of debt 
load on students, an anxiety that is supported by figures on 
student borrowing. Fully one-third of all loans in the history 
of the student loan program were extended in the fiscal years 
1994 to 1996. Between 1989 and 1995-96, spending on student 
loans doubled. In 1997, the Federal Government invested over 
$40 billion in generally available student aid with fully 
three-fourths of that devoted to student loans.
    Let me now turn to the questions that the Committee has 
posed me. First, to what extent does actual or potential debt 
load influence student choices. The studies that Dr. Cofer and 
I did were based on data from the National Center for 
Educational Statistics gathered between 1987 and 1996, so we do 
have an historical base there, and also student interviews that 
we did with over 900 students around the country in 2-year, 4-
year, and graduate programs.
    First of all, the decision to attend a post-secondary 
institution. Studies have repeatedly shown that students and 
their parents make decisions about college affordability long 
before they have any information about it. This may happen as 
early as the 6th grade. This is why programs such as GEAR UP 
are so important. Remember, part of GEAR UP is the year 2000 
scholars program that gives 8th grade students certificates 
that tell them the kind of financial aid that they could 
qualify for once they were ready for college.
    While we found that some students were undeterred in their 
educational plans because of the expected debt load, many 
students chose institutions and majors based on cost. We call 
this the 3 Ps of college choice: price, price, price. There are 
two ways to look at price, total price of attending the 
institution minus all aid, and the second, for those savvier 
students, total price minus the gift aid, in other words, how 
much do you get for free.
    Three quotes are illustrative of how financial aid affects 
these decisions. ``This university was the closest school, and 
since I drive 45 minutes a day to get here, it was feasible. 
However, this university does not offer a degree in theater. I 
had to change my goals and major in public relations instead.''
    Another student said, ``Cheap is important. I would have 
considered getting a medical degree if the debt load was not so 
tremendous.'' She chose a bachelor's degree in allied health 
instead.
    And finally, a student in a 2-year institution said she 
chose that ``because of the location and the costs are low. I 
was able to work and go to school at the same time.''
    Students also reported a number of loan avoidance 
behaviors. One student said, ``When I first started out, the 
first 2 years, I tried as hard as I could not to take out a 
loan. My husband was going to school and we are both trying to 
make life better for our son, and after 2 years, I could not 
afford it. It is embarrassing living poorly, and finally, I had 
to take out loans. If that is what I have got to do to make 
life easier for my son later, that is what I have got to do.''
    One interesting side note is that some students charge 
their educational expenses to credit cards rather than take out 
student loans. It sounds like a really dumb idea. No, wrong. 
Educational expenses charged on a credit card are dischargeable 
in bankruptcy, while student loans generally are not. This puts 
low-income students who may have bad credit experiences and do 
not use credit cards at a disadvantage as compared to middle-
income students who do.
    How does debt load influence which job to take after 
graduation? One student said, ``Having student loans is very 
stressful.'' As students approach graduation, the specter of 
repayment looms large. They really focus in on which job is 
going to pay them the most so that they can reduce their debt 
load after graduation. They would in many cases prefer other 
jobs that paid less that were a better fit.
    How does it affect other life decisions? Student debt load 
obviously influences financial decisions such as buying a 
house, buying a car, and living expenses after graduation. 
However, we also found that personal decisions, like marriage, 
divorce, and having children, are influenced by debt. One 
student said that he would not have married his wife had he 
known that she had defaulted on $30,000 worth of student loans.
    The second question is, are post-secondary student 
persistence rates affected by debt load? We found that student 
persistence in all types of institutions is influenced by 
accumulated student debt load. Rather than being incremental, 
the effect of debt is felt suddenly as debt is occurred. This 
we call the threshold effect. That is, a student borrows, which 
varies depending on need and other factors, in a lump sum at 
the beginning of the semester. When the next semester rolls 
around, the student has to again make a decision to persist 
based in part on this new higher level of debt. Students view 
threshold levels as intimidating, especially when they move 
from one perceived level to another.
    Further, in the short term, students are increasingly 
willing to borrow for college and at an increasing rate. The 
short-term borrowing to finance tuition appears to have 
decreased the influence of rising tuition on the persistence 
decision. This is an important point. Because there are more 
grants and more loans available, tuition is not as much of an 
influence as it was in 1987, for example, as it was in 1996.
    However, the long-term effect of this short-term borrowing 
decreases the likelihood of continued enrollment, and I do have 
a couple of statistics which I will give you. These are all 
1996 numbers from the National Center for Educational 
Statistics, the National Post-Secondary Student Aid Study.
    The 4-year students who have the lowest level of debt, 
$3,000 or below, are 4.6 percentage points less likely to 
persist from one semester to the next than students who do not 
have debt. Between $3,000 and $6,000, it is minus-2.7 
percentage points. Above $6,000, it is 5.3 percentage points.
    For low-income students, this is particularly pronounced, 
and that is the next issue that I am going to deal with. For 
those low-income students who have the lowest level of debt, 
$3,000 and below, are 13 percent less likely to persist than 
students without loans. For those with medium-level debt, 
$3,000 to $6,000, they are 8 percent less likely to persist. 
And for those in the highest level, $6,000 and above, they are 
17.7 percent less likely to persist from one semester to 
another.
    The 1992 reauthorization resulted in a significant shift in 
Federal policy from a commitment to promote access through 
need-based grants to a broader strategy of loans regardless of 
family income or need. The findings from our study suggest that 
the pendulum has swung too far. Middle-income students appear 
to be adequately subsidized to enable them to attend the 
college of their choice. The access and choice question is 
essentially a public school and private school dichotomy. 
Public schools offer low tuition and little institutional-based 
aid. Low tuition implies that most of the aid at public schools 
will go to low-income students, since middle- and high-income 
students will have no need. Therefore, Federal student aid acts 
to implement the low tuition strategy of public institutions 
and promote access. Remember that 80 percent of the students 
are in public institutions, 2-year and 4-year.
    Private institutions, in general, spend a large portion of 
their resources on student aid through discounting. Therefore, 
Federal student aid federalizes some of the cost of student aid 
that these institutions would incur in the natural course of 
business.
    In addition to the decreasing persistence rate among low-
income students, our studies seem to confirm that low-income 
student participation in higher education was decreasing. 
Further, low-income students and students of color tended to 
attend 2-year colleges in larger numbers.
    So what can be done? We have a number of suggestions for 
changes in Federal policy. However, these must be implemented 
with the recognition of the differential impact on low- and 
middle-income students, the bucket one versus the bucket two 
that we talked about before.
    In general, programs that increase aid to the neediest 
students during college and ease repayment after graduation 
will help low-income students while tax breaks and repayment 
reforms will assist middle-income students. I will just briefly 
run through the suggestions.
    The first is to reform the packaging method that financial 
aid directors use in putting together student aid packages. The 
current floor of the package is the Pell grant. If that were 
changed to State grants, particularly in States like Georgia 
with their HOPE program, it would make more Pell money 
available for the neediest students and would reduce 
inflationary pressures on tuition.
    The second is reform of the method for payment for income-
contingent student loans. You have to only think of having a 
40-year mortgage versus having a 15-year mortgage, and that is 
the difference in income-contingent loans.
    The third thing is cafeteria payment plans. Allow those 
with student loans to repay these through employer-offered 
cafeteria payment plans and the employers could contribute 
matching funds.
    Tax-reduction plans, which many people have talked about 
before me.
    Loan forgiveness, which would tie forgiveness of all or 
part of the student loan to working in a high-demand, low-
supply occupation.
    Bankruptcy law changes, and here, I have done a lot of work 
on the impact of student loan discharge in bankruptcy. I know 
this was a big issue with the Bankruptcy Review Commission, and 
in my study, between 1980 and 1997, out of the 437 published 
cases in bankruptcy involving student loans, only 121 were 
fully or partially discharged. That is 27.7 percent. That is 
not nearly as much of a problem as we anticipated it was. So 
there are two things to do with the bankruptcy law. One is 
standardize the undue hardship definition and the second would 
be to drop the special treatment of student loans in bankruptcy 
proceedings.
    The next is vocational training, which, Senator Thompson, 
you have asked about several times. This would be to provide 
additional training at public technical institutions and 2-year 
colleges, have widely-available vocational training for 
students so that they would not have to go to the more 
expensive proprietary schools.
    And the final thing is an educational HMO.
    We talked to students all over the country about student 
loans. We learned that most students, unlike the popular image 
of a college student, were dedicated not only to achieving a 
better education, but being better citizens with that 
education. The majority were, however, concerned that no one 
really cared about what they had to offer and no one really 
wanted to assist them. Their frustration and anger was not uni-
directional. The institution, the Federal Government, financial 
aid directors, credit card companies, and often professors and 
family were subjects of their diatribes, and I am not going to 
repeat their rude remarks here about Congress, but they are in 
the written testimony.
    What we did learn was that most thought the program is 
poorly designed and not particularly student-friendly. They 
perceived that all the talk about reform was only window 
dressing. The proposals that they were aware of changed only 
the delivery mechanism, not the root of the problem. Many 
students were concerned not only about their particular 
situation, but also what would be facing their brothers, their 
sisters, their children.
    The mortgage analogy kept repeating itself. The students 
were terrified of mortgaging their future, of graduating into 
debt, marrying into debt, raising children into debt, and dying 
in debt. If these college students must mortgage their future, 
then so, too, do we as a society mortgage our future. Thank 
you.
    Chairman Thompson. Thank you very much.
    Your comments about your discussion with your daughter, the 
poet, reminds me of a discussion I had with an old gentleman 
down in Lawrenceberg, Tennessee, where I grew up. I told him I 
was a philosophy major. He said, ``What does that pay, son?'' 
[Laughter.]
    He had not seen a whole lot of philosophy shops around town 
and it concerned him.
    Senator Lieberman. What does he think about where you ended 
up?
    Chairman Thompson. I am afraid to ask. [Laughter.]
    Who wants to go next? Mr. Davis.

   TESTIMONY OF JERRY S. DAVIS, Ed.D.,\1\ VICE PRESIDENT FOR 
                 RESEARCH, USA GROUP FOUNDATION

    Mr. Davis. Maybe now we will have a panel that disagrees. 
Good morning. My name is Jerry Davis. I am Vice President of 
Research at USA Group Foundation in Indianapolis, Indiana. My 
remarks today are based primarily on a monograph that the 
Foundation will soon publish. It is entitled, ``College 
Charges, Affordability, and Earnings Outcomes: An Analysis of 
Some Long-Term Trends and Their Policy Implications.'' I have 
been looking at affordability issues for almost a decade and 
have been looking at access to student loan debt burdens for 
almost 3 decades.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Davis with attachments appears in 
the Appendix on page 260.
---------------------------------------------------------------------------
    I want to talk today and summarize my presentation, which I 
have given to the administrative clerk as testimony. I want to 
do just three things. The first thing is to talk about a new 
way of looking at rising prices in college, to talk about the 
debt burden issues and those questions that were posed for me 
in your letter, and then to direct your attention to some 
important State-by-State differences in affordability that I 
think have very strong implications for Federal policy.
    College prices, as we have learned in previous days of 
testimony, have risen faster than family incomes to pay them, 
but the growth rate has slowed in recent years. In my 
testimony, I note that I looked at a way of trying to figure 
out what college prices mean and what college costs mean in 
terms of the way people actually behave, and I determined that 
the net cost of colleges in comparison to median family income 
for people with college-age children absorb about 2 more days 
of their annual earnings a year in 1997 than they did in 1990. 
That is at 4-year public colleges. At 4-year private colleges, 
net costs absorb about 4 more days of work.
    So it takes a couple more days a year for parents to pay 
the costs if they are at the median family income. College 
prices have not risen much faster than the incomes of people at 
upper-income levels, at the top quartile.
    College prices have not risen faster than the additional 
earnings students achieve by attending and graduating. I want 
to emphasize, and graduating, since we can think of college as 
an investment. If we think of that and we consider the 
additional or marginal earnings of college graduates over high 
school graduates as the payoff from the investment, it took 
about the same number of months to recover college costs in 
1997 as it did in 1990--I am sorry, as 1970. Over a 30-year 
time period, basically, the recovery period or recovery time 
has stayed about the same.
    Even when you consider that many students have to borrow to 
pay for college expenses, the number of months it takes 
graduates to recover their expenses with higher earnings from 
their degrees has not grown substantially in the past 3 
decades. For example, if you borrowed at the typical borrowing 
level in 1997, $12,000 for public graduates, $14,000 for 
private graduates in 1997, it would have taken males 25 months 
to recover their total costs for those loans at the public 
institutions, females 30. In 1985, without loans, it would have 
taken males 24 months; it would have taken females 33 months. 
So even with the increased borrowing, the time to recover the 
costs of education has stayed very stable.
    Now, I am going to go on to another point. College prices 
have risen faster than the additional earnings that students 
receive if they fail to graduate. The costs of attendance are 
especially higher for students who borrow and do not finish 
college. But in spite of the increase in the penalty for 
failure, more students continue to enroll in college, and this 
is because the value of a college degree remains very high.
    But there is only a slight increase in the proportion that 
successfully earn undergraduate degrees. We talked earlier 
about completion rates and the figure that we have from the 
Department of Education study says that 46 percent of the 
students have degrees, and that was an earlier study. I would 
guess that from the statistics I have looked at, it is up a 
little now because colleges have gotten a little better at 
retention, but it is not up by much.
    Let me give you just the starkness of the recovery times. 
If a student goes for 2 years at a 4-year institution, a male 
student in a public 4-year institution and borrows $5,000 and 
drops out, it is going to take him 44 months of working to 
recover his costs. A female is going to take 56 months. Now, 
this is just net costs. If a male student attends a private 
college and drops out, it is going to take him 92 months to 
recover his costs and it is going to take females attending 
private colleges 118 months to recover their costs of 
education.
    Now, there are significant State-by-State differences in 
affordability of 4-year public colleges and I think these 
differences are more the effect of State policy choices than 
the effect of differences in family ability to pay for college. 
Federal student financial aid policy does not consider State-
by-State differences in college affordability and it does 
create inequities in the distribution of aid dollars among 
students throughout the Nation. Costs at public institutions, 
net costs range anywhere, the top 12 States, $6,100--I am 
sorry. The lowest costs are $6,100. The highest are around 
$8,800.
    Between two States whose families have similar financial 
characteristics in the ability to pay for college expenses, the 
students in the State that has decided to charge higher 
tuitions will receive more Federal student aid. This is because 
most Federal student aid is need-based and the students in the 
States with higher tuitions will have greater financial need.
    These differences in affordability on a State-by-State 
basis are not the function of the differences in family incomes 
across States. They are more a function of policy decisions to 
charge higher tuitions. Thus, State policies have major effects 
on how Federal student aid is distributed and these effects are 
largely ignored in Federal policy making. Is this what Congress 
intended? I do not know.
    Now, I want to turn to your questions about student loan 
debt burden. Students and parents, as Dr. Somers has mentioned, 
are very concerned about debt burden. So are the lenders. So 
are the guarantors. We are probably second in terms of the 
people in the United States that are most concerned about debt 
burdens because the loan money is ours. Contrary to what many 
people believe, when students default, it is not a game for us. 
It is a very strong loss for us.
    One of the things I wanted to mention is that when we talk 
about mortgaging the future of our generation, we have to 
remind ourselves that only about half of the 4-year public 
college undergraduates actually borrow, and only about 60 
percent of the 4-year private undergraduates actually borrow, 
and about 6 percent of the public 2-year college students 
actually borrow. So we are not talking about a huge proportion 
of all students.
    As far as the trends in student borrowing are concerned, 
USA Group borrowers' average cumulative student loan debt 
continued to rise in 1999. We have been studying debt burden 
issues since the early 1980's. The growth rates in indebtedness 
for 4-year college and community college undergraduates rose 
after 2 years of decline, so that is a little discouraging. But 
the annual growth rates for graduate students and for 
proprietary school students have declined in each of the past 3 
years.
    In spite of the increased borrowing, the percentage of 
borrowers who are delinquent in making payments has moved 
downward since 1995. The economy has been good. It has boosted 
salaries so debt repayment burdens have eased a bit. It appears 
that repayment burdens continue to be manageable for most 
borrowers.
    Dr. Somers has told you about the difficulties many 
students have had in repaying their loans, and I sympathize 
with those difficulties. There are students in difficulty. But 
one of the indications that we have of difficulty is that 90 
percent of the students who are in repayment are still using 
the standard 10-year repayment cycle and they are not taking 
advantage of some of the debt relief plans that we have 
available to them.
    The research on borrowers in the early 1990's has shown 
relatively few negative effects of borrowing on students' 
decisions about careers, pursuing post-baccalaureate study, or 
dropping out without a degree. I think that since borrowing has 
increased, we can reasonably assume that the potential for 
negative effects has also increased, and I think Dr. Somers has 
mentioned that this potential has probably been realized.
    We funded a study that is going to try to assess the 
relative effects and to parcel out the effects of borrowing on 
student behavior because all behavior is complex and the 
motivations are complex. So we want to parcel out and see 
exactly what happened in terms of the impact of the loans.
    As a director of financial aid, I used to do exit 
interviews. I had to interview all the youngsters that had 
loans and were leaving, or trying to leave school, and I 
discovered that there were lots of reasons that they left 
besides financial aid. I also discovered that it was way easier 
to get the student to stay than it was for me to go recruit 
another one, because I was director of admissions at the same 
time. The research we funded, I hope, will help us parcel out 
the effects of debt.
    I think for now, the safest thing that I would say about 
borrowing to pay for college is that the effects of borrowing 
are much more often positive than negative, and this is 
especially true when borrowers complete their degree programs.
    This summarizes my testimony. Thanks again for asking me to 
be here.
    Chairman Thompson. Thank you very much. Mr. Kantrowitz.

TESTIMONY OF MARK KANTROWITZ,\1\ PUBLISHER, FINAID PAGE, L.L.C.

    Mr. Kantrowitz. Mr. Chairman, thank you for convening this 
hearing on the rising cost of college tuition and the 
effectiveness of government financial aid, and for inviting me 
to testify before the Senate Governmental Affairs Committee 
this afternoon. My name is Mark Kantrowitz and I am the 
publisher of the FinAid and eduPASS websites, free resources 
that exist to aid students in navigating the sea of financial 
aid and to combat scholarship scams and financial aid schemes. 
Both sites are associated with FastWeb, the Nation's leading 
free scholarship search. Together, our sites had more than 2 
million visitors last year. I am pleased to have the 
opportunity to share my experiences with the Committee today.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Kantrowitz appears in the 
Appendix on page 274.
---------------------------------------------------------------------------
    Every year, several hundred thousand students and parents 
are defrauded by scholarship scams. The victims of these scams 
lose more than $100 million annually.
    The most common types of scholarship scams include 
scholarships for profit and guaranteed scholarship search 
services. The first type charges an application fee for 
scholarships that never materialize, or are less than 
advertised, or disburses less money in scholarships than it has 
received from application fees.
    The second type charges a fee to match student information 
against a scholarship database and guarantees that the student 
will actually receive money. Few, in fact, do. Both types of 
scams were targeted by the Federal Trade Commission's Project 
ScholarScam, which was initiated in 1996.
    Recently, a third type of scholarship scam has grown in 
prominence. I call this the financial aid seminar scam. This 
scam sends students a misleading letter inviting them and their 
parents to a financial aid seminar or interview. To illustrate, 
I would like to read an excerpt from a letter that was received 
by my cat.
    ``We are pleased to inform you that Nash has been selected 
by our College Review Board as one of the Pittsburgh area 
students eligible to apply for grants, scholarships, negotiated 
tuition discounts, and interest-free loans through our college 
assistance program. We are committed to maximizing your 
eligibility to receive financial assistance and to reducing or 
even eliminating your family's expenses for Nash's college 
education.''
    ``Your personal interview has been tentatively scheduled 
for Saturday or Sunday, at which time you will receive your 
free financial aid information packet. Our program is dedicated 
to making higher education an affordable reality to all 
families regardless of income. There is no cost for your 
financial aid information packet or interview. Together, we can 
make your dream of a college education an affordable reality.''
    I attended this meeting and several other similar seminar 
scams and discovered them to be nothing more than a high-
pressure sales pitch for financial aid services and products of 
doubtful value. After a 45-minute fast-paced presentation 
filled with incorrect and misleading information about 
financial aid, each family was invited to stay for a personal 
interview. The interview was actually a one-on-one attempt to 
sign up the family for the company's services at a cost of 
hundreds or thousands of dollars per year.
    This type of scam is especially troubling because they 
appear to target lower-income families and because they 
aggressively discourage families from seeking advice from 
recognized financial aid experts, such as college financial aid 
personnel.
    Scholarship scams are difficult to recognize because they 
often mimic legitimate organizations. A good rule of thumb, 
however, is if you have to pay money to get money, it is 
probably a scam.
    Foundations that award scholarships exist to give away 
money, not get money. Most scholarship scams try to trick 
students into giving them money with little or no benefit to 
the student in return.
    Other common signs of a scholarship scam include use of the 
unclaimed aid myth, which falsely states that millions or 
billions in aid went unclaimed last year and promises to get 
the student their fair share. In fact, no financial aid goes 
unclaimed. This is an extremely pernicious myth because it not 
only defrauds consumers, but also suggests to private sector 
benefactors that there is no need for them to create new 
scholarships. After all, if it is going unclaimed, then there 
is no need.
    The second is bogus guarantees, which often include 
restrictions that render them meaningless, such as requiring 
the student to submit rejection letters or which include 
Federal aid as part of the total. If Federal aid is part of the 
total, of course they are going to get the unsubsidized 
Stafford loan.
    And third, false claims of government or nonprofit 
affiliation or endorsement. One scam even created its own bogus 
Better Business Bureau and gave itself a good, glowing 
recommendation. Others misrepresent the nature of their 
businesses by using an eagle and a formal seal as their logo 
and words like ``National,'' ``Federal,'' and ``Foundation'' in 
their names.
    When a family encounters a fraudulent scholarship scheme, 
they should report it to the State Attorney General and the 
Federal Trade Commission. It is also helpful to report the scam 
to college financial aid administrators and to the U.S. 
Department of Education's Federal Student Aid Information 
Center. Private consumer fraud organizations, however, are not 
able to deal with the volume of inquiries. One such 
organization reported that they were only able to answer 5 
percent of their telephone calls on the subject.
    Mr. Chairman, I once again thank you and the Committee for 
taking an interest in the issue of scholarship scams, financial 
aid fraud, and for inviting me to share my thoughts on this 
matter. I would be happy to answer any questions you may have 
on this or other topics.
    Chairman Thompson. Thank you very much.
    Mr. Kantrowitz, some of our folks received the same letter 
your cat did, as a matter of fact, and I think we checked on it 
and found out it was a West Virginia company. The State of West 
Virginia was able to, in effect, put them out of business, 
evidently. Are the States dealing with this effectively, do you 
think? Are there specific criminal statutes pertaining to this, 
or do they usually operate under the general fraud or consumer 
protection statutes?
    Mr. Kantrowitz. They usually operate under the false 
advertising statutes in the State and the FTC Act. One problem 
that they face is that the amounts per consumer tend to be 
lower than in other types of fraud. In one case, the New York 
Attorney General sued an organization and the judge found that 
the organization had violated the law but questioned whether 
each individual complaint, and they had close to 1,000 
complaints from students, was a triable issue of fact, and the 
cost of pursuing that would be greater than any potential 
redress for consumers. So I do not know what the status of that 
particular case is, but that is a big problem for the states 
that pursue cases. Most successful cases have been pursued by 
the Federal Trade Commission.
    Chairman Thompson. I see. Thank you. On the issue of the 
disparity between income levels of those who do not go to 
college versus those who do, I think the most helpful 
information there probably is the fact that the relationship 
seems to have remained the same, basically, over a long period 
of time.
    I have always questioned that in a way, though, because it 
assumes that someone who graduated from a 4-year college or 
university, had he or she not gone to college, would make the 
same amount as the average person who did not go to school. It 
also assumes that the person who did not go to college or 
dropped out of college, had he stayed in college, would have 
wound up making the same amount as the average person who 
stayed in college. I do not think that is necessarily true. I 
think some people drop out of college because they realize they 
are not college material. Some people do not go to college 
because they are just not up to it.
    So I think probably my own opinion is that gap 
realistically probably is narrower than we sometimes think. Do 
you have any big problem with that?
    Mr. Davis. No. One of the things that I was using that 
information to point out is the phrase in my testimony, the 
penalty for failure. As college costs go up, the penalty for 
failure to try and fail has gone up because we have shifted 
more of the burden of paying for college onto the student 
through loans. I think that we still have an open access 
society. Our colleges do a great job of trying to do as much as 
they can to get students into school. But I do not think that 
they have done as much as they can do to get them through 
school.
    If you look at graduation rates over time, say a 30-year 
time period, the graduation rates have increased hardly at all, 
and so it may be a function that they are dipping further down 
into the applicant pool, because two-thirds of high school 
graduates go to college now.
    But as far as your comparison of the spreads of income, 
they are averages. I know there are exceptions to averages. 
Averages are simply central tendencies, and so I do not have 
any way of refuting or assessing your observation.
    Chairman Thompson. Professor Hoxby yesterday pointed out 
that one of the reasons why we have the higher dropout rate is 
because we have such open access. That is good in many 
respects. We concentrate sometimes on the students who we 
openly let in who never should have been let in, perhaps, but 
there is also a group of students, such as myself, who did not 
exactly tear it up in high school, but somewhere along the 
line, they got my attention, and once I got in, I did all 
right. So we need to take into account those types of people, 
too. A lot of people go into the army and come back and really 
turn things around. So I think we have got to keep very open 
access, but it is not necessarily bad that you have a winnowing 
out process of those who belong there and those who do not.
    Senator Lieberman.
    Senator Lieberman. Thanks, Mr. Chairman. Thanks to this 
panel of witnesses. I was tempted, Mr. Kantrowitz, to ask you 
how your cat did on the College Boards. You do not have to 
answer. [Laughter.]
    I am interested, actually, in your websites. Could you tell 
us a little more about that? You said you had a couple of 
million hits last year?
    Mr. Kantrowitz. Right. We have three websites. We have the 
FinAid website, which is free information about student 
financial aid. It acts as a comprehensive collection of 
information and advice for helping students make the critical 
decisions regarding financial aid.
    We have eduPASS, which is a guide for international 
students who wish to study in the United States. It provides 
information about admissions and financial aid and cultural 
differences in the United States.
    And FastWeb is a free scholarship search. The students 
provide information about their class rank, their GPA, their 
academic interests, and are matched with awards for which they 
are eligible. They then write to the sponsors and get 
information and apply.
    Senator Lieberman. So you have created these three sites?
    Mr. Kantrowitz. The third site, I did not create. The first 
two sites, I created.
    Senator Lieberman. And this is your business or is this a--
--
    Mr. Kantrowitz. This is a business.
    Senator Lieberman. That is quite remarkable. Do people pay 
a fee, or----
    Mr. Kantrowitz. It is free to the students.
    Senator Lieberman. It is free to the students, and like so 
many businesses on the Internet, I presume there is 
advertising.
    Mr. Kantrowitz. There is advertising.
    Senator Lieberman. Are you surprised at the number of hits 
you have had?
    Mr. Kantrowitz. We are always surprised at the number of 
hits. It has been growing very steadily and we try to provide 
new services to encourage even further growth. We find that the 
better we serve the student population, the better we do. That 
is a wonderful formula.
    Senator Lieberman. Is this an active area? In other words, 
are there other sites like this that are providing information 
to parents and the college applicants?
    Mr. Kantrowitz. There are many, many sites on the Internet 
that provide information, some great quality, like the College 
Board has a site, some of lesser quality. There are sites out 
there that still mention the SLS and GSLs instead of the 
Stafford.
    Senator Lieberman. That is quite something. I wish you well 
with that. There was a story in the Washington Post the other 
day about somebody who has created a site on which students can 
essentially put out a bid for a college, offer a price along 
with their academic record and then see who matches it. Have 
you heard of that?
    Mr. Kantrowitz. Ecollegebid, yes.
    Senator Lieberman. Yes.
    Mr. Kantrowitz. I do not know how many colleges or students 
are actually participating in that.
    Senator Lieberman. If I remember, the article said that the 
creator had only had nine or ten colleges that were signed up 
at this point, so it is not much of an auction, but is that 
something that is likely to grow, or are there limits to it?
    Mr. Kantrowitz. I do not think that that kind of haggling 
is necessarily going to grow. It is most beneficial for 
students who maybe missed deadlines and are looking to go to 
any college. I do not think you will see Harvard or other Ivy 
League institutions joining in such an effort.
    Senator Lieberman. We heard here yesterday particularly, 
and a little bit today, about merit aid or discounting, but I 
am curious as to why, if that is going on among colleges that 
are not getting either as many applicants as they want or the 
quality that they want, why that would not eventually be 
something that would be done on the Internet.
    Mr. Kantrowitz. I think in many cases the negotiation that 
is going on, the bidding, it has more to do with what their 
perceptions are of the costs of college than in any real change 
in financial aid that they are receiving.
    Senator Lieberman. Very interesting. Thanks.
    Mr. Davis, I am going to read to you from your 1997 
publication, ``College Affordability: A Closer Look at the 
Crisis,'' where you write, ``Access to 4-year colleges for 
lower and lower-middle income students has diminished since the 
early 1980's. While the college affordability crisis is neither 
uniform nor universal, if college costs continue to rise faster 
than student ability to pay them from family or financial aid 
resources, the crisis will become pervasive.''
    But in your testimony today, you compared loan payback 
periods from 1975 with those in 1997 and found them to be about 
the same, so I want you to relate that paragraph from your book 
and particularly whether, I ask the question rhetorically in 
some way, whether you believe, therefore, that higher education 
is really as affordable today as it was then and that there is 
not the crisis that you thought might occur.
    Mr. Davis. No. Higher education is not as affordable now as 
it used to be. If you look at affordability in terms of paying 
the costs from current income, student financial aid, 
borrowing, and whatever resources are available to you to pay 
it in present time. What has happened, though, is that the 
payoff or the value of higher education has remained fairly 
constant and has increased, I guess you could even say it has 
increased in terms of finishing a degree.
    So the payoff, the results of going to college are holding 
up, and I think the results are what make it valuable to make 
the sacrifice to go to college. But it is not as affordable as 
it used to be, and it is especially not affordable for the 
lowest-income families.
    Senator Lieberman. Right. Dr. Somers, we looked at some 
recent data that came out from the College Board in something 
called ``Trends in College Pricing'' and I was really 
interested there to see a comparison of the average annual 
income of high school graduates as set against somebody who had 
some college and then somebody who finished the 4 years, and 
this goes back to that group we talked about in the last panel 
and maybe in some ways goes to some of the questions that the 
Chairman was asking before.
    This is average annual income in 1997 for a high school 
graduate, this was in inflation-adjusted dollars, was $23,608. 
The average income of people with some college was only 
$27,052, so it really was very little difference. And then a 
college graduate, average income was close to $42,000. So it 
leads me again to focus in on that group that starts it off, 
does not finish it, as we have heard earlier, 
disproportionately represented in, I suppose obviously, but 
poorer minority communities. They not only end up with that 
debt, do not go on to college, but are being forced to pay it 
off with a much lower income.
    It is an open-ended question to you, is what we might 
specifically do, either by way of aid programs or other 
supportive services, to try to rescue a higher proportion of 
that group from dropping out early on.
    Ms. Somers. There should be a place for everyone in post-
secondary education. It may not be at a 4-year institution. It 
may not be at Harvard. It may not be at my 4-year school. It 
may be at a 2-year school or a technical school.
    I think the problem in the relatively small gap between 
high school graduates and those with some college is those 
students who went to a 4-year school and took maybe some very 
general education courses for a year and then left. They may 
have been better served if they had taken some of those general 
education courses and then transferred to a 2-year institution 
or a technical college.
    Senator Lieberman. Yes, or they came out with some kind of 
technical-vocational training.
    Ms. Somers. Or they may have been students who went to very 
high-ticket proprietary schools and ended up with lots of debt, 
and for the little more they make than the high school 
graduates, they are paying off $20,000 or $30,000 worth of 
loans.
    Senator Lieberman. Thanks. Your comments are well taken. 
Thanks to the three of you for your very thoughtful testimony 
and some helpful suggestions. Thanks, Mr. Chairman.
    Chairman Thompson. Thank you very much.
    There is one final thing. This is a little off the beaten 
path of your subjects, but we have talked to others about this. 
In terms of the aid, in terms of what the Federal Government is 
doing, obviously the States, the loans, the schools themselves, 
and I am particularly thinking about public schools, the tax 
credits, and all of that, I think a lot of people are trying to 
figure out just where is the biggest need and what should we be 
doing.
    Senator Collins was talking about a lot of colleges seem to 
kind of assume the lower students will be taken care of because 
of all this mix of things that they have available to them, 
whether they are aware of it or not.
    Assuming that everyone was aware of all of their 
opportunities at every level, to what extent do we have the mix 
right or wrong in terms of emphasis on lower Pew-type approach, 
tax credits, ect.? Are we not concentrating enough on the lower 
end, or is it the lower end or the middle income, as Senator 
Collins suggested, that we need to emphasize? This is not 
exactly maybe on point, but----
    Ms. Somers. Philosophically, I think that the way we set up 
the Federal financial aid program in the 1960's, the emphasis 
was on access for low-income students. I think we have let them 
down. I think that we have loaded them up with loans and the 
grants are----
    Chairman Thompson. We put more money into it, but the money 
per student is actually going down a little, I guess.
    Ms. Somers. That is right. So philosophically, we need to 
put more money into those grants for the low-income students 
and the lower-middle-income students. However, politically, the 
middle class is really feeling the pinch if they are putting 
one or two or three kids through college, whether it is a 4-
year private or public or a 2-year school, and politically, 
there needs to be some assistance for the middle class, too.
    Chairman Thompson. Mr. Davis, do you have any comments?
    Mr. Davis. Yes. I think I would focus more grant aid on 
students in the early years of post-secondary education, 
especially at the 4-year level, at 4-year colleges. The other 
thing I would try to do is develop policies that create 
incentives to States to contain costs in their public 
institutions, or at least to increase their financial aid. In 
the 1970's when the Pell grant was developed and there was also 
the State Student Incentive Grant program developed and those 
were working quite well. The SSIG provided a very strong 
incentive to States to increase their financial aid packages 
and programs.
    But the Pell grant program was funded at a very high rate, 
a very rapid rate, and many of the States that had started 
financial aid programs, they looked at it and said, well, the 
Feds are going to do it with the Federal grants and why should 
we jump in? And so two different programs that the Federal 
Government was funding had two very different results and 
actually countervailing results.
    What I would love to see is a regeneration of the 
partnership between the Federal Government, the States, and the 
institutions in providing financial aid so that they supplement 
and complement each other rather than operating as if there is 
no conjunction between what each other does.
    Now, I know you have the problem of federalism, and you 
mentioned that, but there is one thing that you can do and----
    Chairman Thompson. We can do all kinds of things with 
money, though. I mean, we can provide inducements and carrots 
and sticks. You cannot tell them what to do, but----
    Mr. Davis. But you can strengthen that whole partnership, 
because it is very interesting to me that if you look at 40 
years of participation rates and you look at college-going by 
States, by State levels, the States that had miserable 
participation rates in 1960 have relatively miserable 
participation rates in 1990.
    Chairman Thompson. So you are suggesting we somehow tie 
Pell grants to the level of State support?
    Mr. Davis. You might. That is one way of doing it. I have 
no idea what is the best way, but that is one--but I do know 
that something needs to be done, because----
    Senator Lieberman. Why do you not think about it and then 
we invite a response that would encourage States more.
    Mr. Davis. OK. Thank you.
    Chairman Thompson. Thank you very much. I think these have 
been 2 excellent days of hearings. I want to thank Senator 
Lieberman again for suggesting these hearings. We have perhaps 
no real definitive answers, but I think we understand the 
situation much better. I know that I do, and it will help us in 
our role in trying to contribute something to the solution of a 
problem that affects so many people. Thank you very much.
    Senator Lieberman. Thanks, Mr. Chairman. Let me just ask, I 
have been putting this aside, I must have a mental block about 
this for these 2 days. The U.S. Department of Education has 
submitted written testimony and I would ask that it be printed 
in the record.\1\
---------------------------------------------------------------------------
    \1\ The prepared statement of the U.S. Department of Education 
appears in the Appendix on page 276.
---------------------------------------------------------------------------
    Chairman Thompson. It will be made part of the record.
    Senator Lieberman. I thank you for your leadership here. It 
has been a very educational couple of days, no pun intended, 
and at a quite reasonable cost, I would say, too. [Laughter.]
    Chairman Thompson. That depends on what we do, does it not?
    Senator Lieberman. Yes. But I look forward to working with 
you and seeing if we cannot come up with some ideas from this 
that can make the situation better. Thanks very much.
    Chairman Thompson. Thank you very much.
    The record will remain open for 1 week after the close of 
this hearing. We are adjourned.
    [Whereupon, at 12:49 p.m., the Committee was adjourned.]
                            A P P E N D I X

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