The $1.5 Trillion Question: How to Fix Student-Loan Debt?
By: Stephen J. Dubner, Freakonomics Radio
Tags: Education, Economy, Freakonomics, Student Loans, Freakonomics Radio

If you look at higher education as an industry, then you’d have to acknowledge that it’s been booming. Between 2000 and 2010, undergraduate enrollment at U.S. colleges increased by 37%.

As demand rose, so did the price: from 2000 to 2016, the average annual cost of college more than doubled, from around $15,000 a year to nearly $32,000. Over the past 20 years, only two other goods or services have risen in price as much as college. One is hospital services; the other is college textbooks.

Since 1985, college costs have risen four times faster than the Consumer Price Index. Why? There are a number of reasons. One has to do with what economists call Baumol’s cost disease. That’s what happens when salaries rise — in this case, the salaries of college administrators and faculty and staff — without a commensurate rise in productivity. It’s not like manufacturing, where automation creates efficiencies; colleges require a lot of real people spending a lot of real hours to get the work done.

Another reason the price of college has risen so much? College has become even more valuable. People with a college education have always earned more than those without; but between 1970 and 2015, the earnings gap between workers with and without a college degree has become an earning chasm.

It also helped, says Mitch Daniels, that the federal government, and others, were more than happy to lend money for college.

“We know empirically — it’s no longer somebody’s theory — that flooding the marketplace with third-party subsidies — grants and loans and so forth — enabled higher ed to keep raising prices,” Daniels says. “The New York Fed is the most recent of many to identify this phenomenon. And basically they find that for every dollar of new public subsidy, colleges have raised their price between 60 and 70 cents.”

So as demand for college was rising, and costs were rising, and loans were rising, student debt has also been rising — dramatically.

So what can, or should, be done to make college more affordable?

When Daniels became president of Purdue in 2013, one of the first things he proposed was a tuition freeze. While he initially planned on just a one-year freeze, tuition at Purdue has now been frozen at least through the 2021 school year. The cost of room and board was also cut by 5%.

How has Purdue managed to cut its price? The Daniels solution lay primarily in cost cutting — the same kind of cost cutting he practiced as governor of Indiana. On his first day as governor, in 2005, Daniels established an Office of Management and Budget (OMB), the same agency he’d run for the federal government. Indiana, at the time, had an $800 million budget deficit. Daniels preached efficiency and reform at every turn. He cut the state workforce and consolidated agencies. He created public-private partnerships to run highways and prisons. He repealed collective bargaining, decertified the public-employee unions, and made Indiana a right-to-work state.

On balance, Daniels was incredibly popular as governor. He won awards for his wildlife conservation efforts, and John Kasich called him “the Michael Jordan of governors.”

Now he’s being called, by the Wall Street Journal, “America’s most innovative university president” for making similar moves at Purdue. He’s trimmed the budget of some big capital projects, and killed off other projects entirely. He privatized the university’s bus service. He replaced cafeteria employees with student workers, and he sent out furniture for repair rather than buying new furniture.

Some Purdue faculty and staff have complained about the cost cutting. They say their compensation and benefits are being curtailed; that departments increasingly compete against one another for resources; and that Daniels’ pursuit of corporate partnerships, like a textbook deal with Amazon, is not good for the university.

Also controversial was Purdue’s recent acquisition of the online, for-profit Kaplan University — now called Purdue University Global, which delivered 30,000 new paying customers. Some Purdue professors worried this would tarnish their brand and spread the university too thin.

Daniels argues that his combination of cost cutting and a growth mindset is working out just fine. He points out that Purdue has grown its faculty ranks faster than the student body and that the school has one of the best student-faculty ratios in the country. Wages, he says, remain competitive. The school has also refrained from turning to less expensive staffing solutions.

“We have the highest percentage of our faculty who are so-called tenure track among American research universities,” Daniels says.