Rear view of graduation caps during commencement.

Standing in the Schoolhouse Portal: How the Accreditation Cartel Inhibits Higher Ed Innovation

IN THE AFTERMATH of the Great Recession, few impediments to opportunity loom larger for young people than student loan debt. Most students graduate from college with tens of thousands of dollars in debt to their names—an especially heavy burden given the difficulties they continue to face in the post-2008 labor market. Yet for all the money Americans spend on higher education, the value of a college degree is hardly a clear proposition. Given the waste, both in terms of administrative costs and frivolous coursework, at many four-year institutions, students are increasingly turning to new options like online courses to trim the fat, learning precisely what they want without wasting money to subsidize university largesse. But these options remain unconventional for a reason: Because their legitimacy is not recognized by the accreditation system bearing the federal imprimatur, they are at a major disadvantage in the higher education market.

The accreditation system persists not because it is efficient. It remains because it serves the special interests of the higher education industry. Old models remain entrenched through the arbitrary legal advantage they receive under the existing accreditation regime, and students seeking jobs that require traditional degrees have no choice but to shoulder the cost.

Given the clear need for reform, why has Congress failed to act? The answer, in part, is that the debate over higher education has become stagnant, dominated by discussions of small-bore reforms that would only contribute to the problems in the market rather than solving them. This is a debate conservatives would do well to disrupt.

The Stagnant Interest Rate Debate

For the past several decades, the higher education cost conversation has been defined by the debate over whether to increase federal student loans and grants.

Despite the fact that an open spigot of federal student aid has only exacerbated the college cost problem, Congress has consistently increased loan subsidies, expanded access to need-based grants such as Pell, and provided for generous caps on debt repayment, which can lead to a portion of a student’s loans being forgiven entirely by taxpayers. By keeping interest rates artificially low or expanding eligibility for Pell Grants beyond those students most in need, policymakers contribute to increases in college costs over time.

Big government policies like a “millionaire’s tax” to finance student loan forgiveness will do nothing to solve the college cost crisis in the long term. Similarly, other short-term fixes, such as capping monthly loan payments, will only serve as band-aids for college costs while giving license to universities to continue to spend profligately, confident that the federal government—via the three-quarters of taxpayers who don’t hold bachelor’s degrees themselves—will continue to pick up the tab.

The Failures of the Status Quo Approach

Research suggests that “institutions may indeed raise tuition to capture the maximum grant aid available.” Even President Obama admitted that subsidies are the source of the problem.

There is growing recognition among education analysts that the traditional approach is not, in fact, making college more affordable for students. Researchers at Cornell University found that increases in federal student aid such as loans and grants contributed to increases in tuition for in-state students. Research conducted by Stephanie Riegg Cellini and Claudia Goldin on for-profit colleges suggests that “institutions may indeed raise tuition to capture the maximum grant aid available.”

Even President Obama admitted that subsidies are the source of the problem when he said, in his 2012 State of the Union speech: “We can’t just keep subsidizing skyrocketing tuition.”

These policies have contributed to a vicious lending and spending cycle: Congress increases the number of students eligible for federal Pell Grants, eases repayment requirements for student loans, and makes interest rates more generous for borrowers. This easy flow of federal student aid—which is available to students regardless, for the most part, of their credit-worthiness, major, or ability to repay the loans—enables universities to continue to raise tuition, sending students back to the federal trough for more financial aid.

“Subsidies raise prices, leading to higher subsidies, which raise prices even more. Yet this higher education bubble, like the housing bubble, will eventually pop,” warns economist Veronique de Rugy of the Mercatus Center at George Mason University. “Meanwhile, large numbers of students will graduate with more debt than they would have in an unsubsidized market.”

Since 1980, tuition and fees at public and private universities have grown at least twice as fast as the rate of inflation. The result has been that 60 percent of bachelor’s degree holders leave school with more than $26,000 in student loan debt, with cumulative student loan debt now exceeding $1 trillion. As average student loan debt continues to increase, the value of a college degree declines. Many students find themselves leaving college with bachelor’s degrees that have not prepared them for challenging careers. Employers increasingly report that college graduates are unprepared to enter the workforce. And that is the reality just for the 60 percent of students who actually do graduate within six years of entering college. Those who take on tens of thousands of dollars of student loan debt without earning a degree find their ability to climb the economic ladder toward middle class stability or better is limited from the very start.

In short, the existing higher education system inhibits upward mobility by saddling students with debt without guaranteeing they have obtained the skills and competencies to achieve career success. Although a college degree has gained importance in recent decades, the payoff, after factoring in student loan debt and other opportunity costs, is sometimes below face value. Almost half of college graduates are in jobs that do not require college skills, and more than half of graduates cannot find full-time work related to their area of study.

Misguided Reform Ideas

Current policy simply is not working. It’s time for reform. But enhanced subsidies aren’t the only bad reform concept currently on the table.

Capping Loan Repayments. Some policymakers have suggested fixing loan repayments to a proportion of a graduate’s income—even automatically enrolling graduates in such a plan—or otherwise capping loan repayments even more generously than already allowed for. In order to keep college costs in check, policymakers should be doing precisely the opposite.

Such efforts would enable colleges to continue raising tuition, knowing that borrowers’ repayments would be capped. And there are several such options already in place.

Repayment caps put no downward pressure on college prices and spread the cost of attending college to taxpayers, the vast majority of whom do not hold bachelor’s degrees themselves. Payment caps are problematic also because they make students less sensitive to increases in college costs and likely encourages students to attend college who may be better off entering the workforce sooner or pursuing vocational education.

Instead of trying to figure out ways to manipulate debt repayments, policymakers should look at ideas that turn the tide of increasing college costs.

Accreditors have the authority to place an official stamp of approval on colleges recognized by the federal government—a process that favors entrenched institutions and old education models over upstart insurgents seeking to break into the market.

Federal Scorecards. Others, such as President Obama, have suggested a federal rating system or “scorecard” tied to federal financial aid. Such a scorecard would act as a college rating system to evaluate colleges on measures such as graduation rates, the number of low-income students served (i.e., the percentage of Pell Grant recipients), graduate earnings, and affordability, which would then be tied to access to federal student aid. But a government-run rating system would inevitably reflect what bureaucrats—rather than parents, students, and scholarly communities—determine is important in education.

A competing range of private outcome-based scorecards already exists, sponsored by such outlets as U.S. News & World Report, Forbes, the American Council of Trustees and Alumni, and Kiplinger’s. Each of these reflects the differing visions of quality held by different Americans, from post-graduation salary to the likelihood of a well-rounded education. These independent evaluators that parents and students have long trusted make a one-size-fits-all federal rating system unnecessary.

Transforming Higher Education

Real higher education reform would aim not to tackle the symptom—high costs—but the root of the problem: the sclerotic nature of the existing higher education sector, which is insulated from market pressures in large part by the federal accreditation system.

Currently, the Department of Education authorizes a group of organizations as federal accreditors. The process is highly selective, requiring several years of previous accreditation experience before recognition, notice in the Federal Register and public comment, and review by the National Advisory Committee on Institutional Quality and Integrity—a cartel of higher education industry insiders that submits a recommendation on approval or denial to the Department of Education before any decision is made. Once selected, these accreditors have the authority to place an official stamp of approval of colleges recognized by the federal government—a process that favors entrenched institutions and old education models over upstart insurgents seeking to break into the market.

That seal of approval is more than symbolic. It is a gateway to federal financing, as student loans and grants may flow only to those institutions that have received federal accreditation. Given the degree to which higher education financing is dominated by the federal government, an accreditation denial places an institution at a massive disadvantage in the marketplace.

This accredition system inhibits innovation in three ways.

First, it is a poor measure of quality, focusing more on inputs like the number of library books owned by institutions than on outcomes like performance and graduates’ skill attainment. In the words of a report from the American Council of Trustees and Alumni, “If the accrediting process were applied to automobile inspection, cars would ‘pass’ as long as they had tires, doors, and an engine—without anyone ever turning the key to see if the car actually operated.” After all, the existing system places taxpayers on the hook for such courses such as “Cyberfeminism,” and “Lady Gaga and the Sociology of Fame.” Because the existing accreditation system rates entire institutions, any course taught at an accredited university is an accredited course, usually credit-bearing—no matter how frivolous.

Second, it allows market players with heavy conflicts of interest to control their own competition through the bottlenecks of both accreditor licensure and accreditation of educational institutions. Aside from the obvious problem posed by allowing self-interested participants to deny entry to the market by their most threatening challengers, the current accreditation system also disincentivizes the removal of institutional accreditation attained by schools that have since lagged in performance, as withdrawal of accreditation would reduce the dues paid to the accreditation association.

Third, it entrenches outdated models of instruction, slowing down the emergence of new ideas such as online learning and course-level or skills-based certification and tilting the scales in favor of expensive tuition-based, multi-year, full-degree campus programs. Though the existing accreditation system allows some degree of more granular programmatic accreditation in addition to full institutional accreditation, program-level accreditation generally is only granted to institutions that have already received full organizational recognition by the national accreditors, not to standalone programs that operate outside fully accredited institutions.

Policy Recommendations

The current Congress will likely debate the reauthorization of the Higher Education Act (HEA). Now up for its 10th reauthorization, the HEA touches nearly every aspect of federal higher education policy. Yet some of the law’s titles and programs have outlived their purpose; others make it difficult to reform higher education financing in a way that would increase access for students and drive down college costs. Trade groups, professional organizations, accreditors, and universities have already begun to voice their concerns and recommendations for the 11 titles composing the law. Lawmakers considering the reauthorization should not put these special interests’ priorities ahead of those of students and taxpayers.

A real higher education market would promote not just those programs offered by traditional colleges and universities, but also those credentialed by businesses and other non-college institutions.

One objective for this reauthorization should be to streamline the HEA in a way that more closely adheres to its primary purpose of allocating federal student loans and grants to ease the cost of college—part of President Johnson’s goal of keeping “the doors to higher education open for all academically qualified students regardless of their financial circumstances.” That goal requires eliminating duplicative, unnecessary, or ineffective programs and titles that have accrued over the decades and considering reforms that would ensure the HEA best serves students. The following ideas offer the most promise:

Reform Accreditation. A real higher education market would promote not just those programs offered by traditional colleges and universities, but also those credentialed by businesses and other non-college institutions. Enabling aid to follow students to those individually credentialed courses could reap massive savings and transform the industry. In order to harness the promise presented by budding higher education innovations—low-cost online courses and Massive Open Online Courses (MOOCS) that hold the potential to drive down college costs significantly—the existing de facto federal system of accreditation must be reformed. Sen. Mike Lee (R-Utah) and Rep. Ron DeSantis (R-Fla.) have introduced the Higher Education Reform and Opportunity (HERO) Act. The bill would get to the root of the college cost problem by reforming accreditation. Rather than eliminating the federal accreditors, HERO would provide competition by granting states the power to establish their own accreditors, who in turn could grant approval to whole colleges and universities, degree programs, and even credential specific courses. These accredited and credentialed offerings would receive the same privileges as current institutions recognized by the federal accreditors, meaning that students would be able to apply federal loans and grants to a far broader array of programs and courses.

In order to harness the promise presented by budding higher education innovations—low-cost online courses that hold the potential to drive down college costs significantly—the existing de facto federal system of accreditation must be reformed.

This simple reform would open up a groundswell of change, allowing students to break free of the expensive, full-degree programs now offered by accredited colleges and universities and instead to chart their own path, selecting specific courses that meet their own and their employers’ needs. Employers would benefit not just from an applicant pool better able to attain the skills needed to succeed but also from the ability to offer their own training courses on a level playing field with existing accredited institutions.

Reform Pell Grants. Reforming the Pell Grant program can help better serve low-income students. Because of expanded eligibility, the Pell Grant program now covers twice as many students as it did a decade ago, instead of allocating its funding to the students who need it most. To better serve the low-income students whom the Pell program was designed to help, an income cap should be set on Pell Grant eligibility, and grants should be made available only to those students who attend college at least half time. The 12-semester limit on Pell awards (put into place in 2012) should be maintained, and the current maximum grant award of $5,830 should not be increased. Finally, Pell funding should be shifted from mandatory funding to discretionary funding, enabling Congress to have more oversight of program funding from year to year.

Eliminate the PLUS Loan Program. The PLUS program is composed of Parent PLUS and Graduate PLUS loans. Parent PLUS loans are available to parents of undergraduate students, letting them borrow up to the cost of attendance at a given college. The loans are available in addition to federal loans that are already available to the students themselves. The availability of Parent PLUS loans, created in 1980, has resulted in families incurring substantial debt while failing to ease the cost of college over time. The Parent PLUS loan should be terminated. Similarly, the Graduate PLUS loan program should be eliminated. Grad PLUS, open to graduate students who elect to take out loans to finance graduate school, enables students to borrow up to the full cost of attendance. Undergraduate and Graduate students already have access to up to $138,500 in federal loans through the Stafford Loan program, and students enrolled in school to become health care professionals can borrow up to $224,000. Borrowing above those already high amounts should not be encouraged through the availability of the Grad PLUS program.

Require the Use of Fair-Value Accounting. Fair-value accounting takes market risk into account and as a result is a more accurate reflection of the cost of federal student loans. Any loan program should use a non-subsidizing interest rate—i.e., the rate at which the program breaks even. Absent fair-value accounting, it is impossible to determine the extent to which the student loan programs are providing a subsidy to borrowers. Specifically, Congress should require the Department of Education to use fair-value accounting estimates calculated by the CBO and adjust loan rates accordingly, on an annual basis.

Conclusion

By focusing on the big picture—the drivers of college debt such as an open spigot of federal student aid and ossified accreditation policies—policymakers can reframe the discussion around higher education. It’s a conversation that’s long overdue—one that demands conservative leadership and could revolutionize how we finance and think about the college experience.


Ms. Burke is the Will Skillman Fellow in Education Policy in the Institute for Family, Community, and Opportunity at The Heritage Foundation. This article is an abridged version of a chapter in the book Opportunity for All: Favoritism to None, © 2015 by The Heritage Foundation.