As promised by Education Secretary Betsy DeVos, the Department of Education recently released what it calls a new “groundbreaking redesign” of the College Scorecard.
Launched in 2015, the College Scorecard tool was created to help families weigh the costs and benefits of their college options. But it only included institutional-level data on a range of average factors like first-year median earnings and median debt loads. The new version of the scorecard is certainly an improvement. It provides students and administrators more comprehensive information, like first-year earnings for individual majors and data on more institutions.
But, if we want to slice national student debt and the cost of college, we’ve got to do much better than college scorecards. After all, while the new scorecard does provide new information, much of what it reveals about the payoff of different majors and institutions is already generally known so it’s unlikely to cause significant changes in student behavior on its own. Despite much of this general information being available, some of the most popular college majors that students currently choose, such as psychology and general education, lead to below-average lifelong earnings for college graduates.
For a substantial change, legislators need to tackle the problems of cost at the source. That means implementing market-based reforms crafted to improve the ways students finance college in the first place. Financial aid terms should more accurately reflect the risks and rewards of different educational tracks—such as whether a history degree from a four-year private college or a law degree from a lower-tier school is a worthy investment for the student. Market-oriented financial aid rules could help control the skyrocketing costs of post-secondary institutions as well as incentivize loan financers to steer students along trajectories that are better-aligned with labor market needs.
To get a clear sense of how the cost of financing different education pathways often doesn’t reflect the difference in the quality of those individual investments, take a look at an interactive tool published by The Wall Street Journal using new Scorecard data.
It illustrates how, at any one university, the median debt held by new graduates is relatively similar across each featured major—despite the fact that the median first-year earnings for each major varies significantly. And this disparity gets even more pronounced in the long-run earnings.
It’s hard to find another sector in which the market for loans is so unresponsive to return on investment than it is in higher education. Most student loans (92 percent) come from the federal government with fixed interest rates (sometimes with overly-generous terms for how much money is doled out) and are unresponsive to a degree’s value. If lenders in both government and the private sector were able to instead provide financial aid options according to a prospective student’s educational pathway, they’d use these market signals to push students in better directions and potentially help prevent them from being trapped deeply in debt with a weak salary.
For example, financial aid could be granted in return for a fixed percentage of a student’s future income, also known as Income-Share Agreements (ISAs). This would change incentives so that investors prefer degrees and certifications that are more promising and are more cautious about assisting students pursuing less valuable degrees.
While this is an alternative financing option that has yet to catch on at most universities, that’s likely because the federal government currently holds most of the power over how financial aid is disbursed. Converting federal loans into a simplified federal ISA program would be the quickest way to harness the benefits of a more market-based college financing system. Institutions would have to adapt to this new system by making their less-lucrative programs more affordable and prove that the product they’re delivering is actually preparing students to be successful once they graduate.
Short of a federal ISA program, there are other palatable financial aid reforms to consider. For instance, requiring all students using taxpayer-funded loans to also purchase insurance on those loans (anticipating the event that they don’t finish their schooling) could eliminate the risk of default.
The market would set loan insurance rates to reflect the risk of borrowing for specific institutions and programs, ensuring that vulnerable individuals who didn’t graduate (a group that currently holds a large share of the national student loan debt) don’t have to carry debt moving forward.
For example, market signals would demand a far higher insurance premium for, say, Trump University than for the University of Michigan. More information is only really helpful when it can be used for actual change. For post-secondary education to be accessible and effective, smarter financing practices such as these are desperately needed because many adults who were banking on a good education are now just banking on bankruptcy.
This column originally appeared in the Orange County Register.