We've heard many worthy proposals to tackle the growing problem of student debt from across the political spectrum, including Sen. Elizabeth Warren (D-Mass.), Rep. Tom Petri (R-Wis.), and Reihan Salam and researchers at the American Enterprise Institute. And just last week, President Obama issued an executive order expanding student loan relief by allowing more borrowers to cap their payments at 10 percent of their incomes, his latest effort to get the cost of college under control.
But there's already a policy in effect that might serve as a valuable model for lowering the sticker price of higher education: ObamaCare.
ObamaCare enacted several provisions aiming to contain the escalating cost of health care. One such program is known as hospital value-based purchasing. Under this program, Medicare withholds 1 percent of all reimbursements owed to hospitals. It then grades hospitals based on certain quality-of-care metrics, and gives back a portion of that 1 percent to each hospital based on its grade.
This rewards hospitals for providing good care, while penalizing those providing bad care. In 2013, 1,231 hospitals were net winners, receiving more than their 1 percent share back. However, there were even more net losers: 1,451 hospitals were penalized, receiving only a fraction of their 1 percent shares.
Conditions in our higher-ed system are ripe for this kind of innovative policy fix. As in health care, the government has for too long indiscriminately shelled out money for college with little eye toward the quality its dollars are buying. Just as Medicare makes the government the most significant payer in health care, federal student loans give the government a central role in financing higher education — a position of purchasing power that the government could leverage into lower costs and better quality.
The federal government provides $150 billion per year in student aid. Of the $1.2 trillion in outstanding student debt, $1 trillion is in federal loans. While student debt doesn't directly trigger personal bankruptcies in the same way medical debt has (because student debt can almost never be discharged), its other ill effects on the economy have become clear. In 2012, 70 percent of students graduated with debt, accumulating an insane average debt load of $29,000 apiece. This debt burden then crowds out spending by young people on big-ticket items like homes or cars.
All of which gives the government a strong interest in controlling the rise in student debt and ensuring that its money is buying good educational outcomes. If we imported value-based purchasing into higher ed, the Department of Education could withhold a slice of the federal financial aid due to each college or university for tuition. It could then reapportion this money to schools based on their performance on a set of quality criteria, such as tuition cost, four-year graduation rates, alumni default rates, and job placement success. Based on their performance, exemplary schools would earn bonuses while others would be hit with penalties.
President Obama has outlined a new federal effort that could lay the foundation for this kind of pay-for-performance program. He announced plans to rate colleges based on their performance across three broad measures of quality: access (such as number of Pell grant recipients enrolled), affordability, and student outcomes.
For now, these ratings will just be a publicly available "College Scorecard" that can inform the college decisions for new applicants. But Obama wants Congress to tie this system to federal financial aid awards. He has proposed nudging the demand side of the higher education market, whereby "[s]tudents attending high-performing colleges could receive larger Pell Grants and more affordable student loans."
But we should also incentivize the supply side of the market — the schools themselves — to contain costs and improve quality. Introducing ObamaCare-like nudges would be a powerful way to make schools take quality and affordability seriously.
Obama's instincts are right. He wants to move us toward a system that pays for performance in higher education rather than just paying for quantity — an instinct that, as Ezra Klein wrote, "bring[s] the cost-control theories of ObamaCare to the higher-ed sector."
In practice, these cost-control theories might look a lot like ObamaCare's new quality incentives for hospitals. We ought to reform our social contract with colleges and universities so that it's more than a blank check. It should be informed by how successful colleges are at providing a quality education that doesn't shackle young people with excessive debt.