Higher Education: Making Education Beyond High School Work for All

Executive Summary and Introduction

• The federal government treats higher education as a surefire investment, but this isn’t always true. Many colleges leave their students worse off financially, contributing to the student debt crisis.
• A reform-minded president could hold low-quality colleges accountable by requiring colleges that receive federal funding to publish student outcomes data and meet certain performance benchmarks.
• Congress can restore rationality to the federal student loan system by limiting the amount students can borrow and holding colleges financially responsible for unpaid student loans.
• At the same time, both Congress and the executive branch should take steps to open federal funding streams to high-quality alternatives to traditional four-year college, such as apprenticeships.

For generations, society has told high school students that college is a great investment. The case is familiar: college graduates typically earn more money than their peers without degrees, and a college education is necessary for the 21st century labor market. For low-income students especially, college has been sold as a path to the middle class. As a result, the share of the population 25 and older with a four-year degree rose from 21 percent in 1990 to 38 percent today.

But the consensus that college is a “golden ticket” to a better life has fallen apart. In 2023, a Wall Street Journal poll showed that a majority of Americans no longer believe that college is worth the cost. Prior to the pandemic, 11 million student borrowers were behind on their federal loans. Many students, especially those who grew up in families below the median income, got a raw deal from higher education. Disillusionment with college has yielded a 12 percent drop in student enrollment since 2010.

Thought leaders debate whether college is still worth it. But that’s the wrong question. College is not a golden ticket to a prosperous life. But neither is college an outdated institution good for little but churning out woke baristas with useless degrees and six figures of debt. 

Instead of asking whether college is worth it, we should ask when college is worth it.

Higher education serves its intended purpose when the price is affordable, the coursework has labor market relevance, and the students who enroll are prepared to make the most of their education. But college leaves its students worse off when tuition is too high, the degrees have insufficient labor market value, and a high proportion of students fail to graduate.

A lot of college experiences fall into the first category. But far too many fall into the second, and that’s the direct result of federal policy mistakenly treating college as if it’s always a good investment.

The federal government lavishes $133 billion on higher education every year. Taxpayers pony up for subsidized student loans, Pell Grants, veterans’ benefits, and work-study, to say nothing of the massive tax exemption for university endowments. But those funding streams are largely agnostic to actual student outcomes.

Thousands of bad degree programs flourish because of federal money. Nearly 40 percent of students who begin college do not finish within six years, and at some schools the dropout rate is much higher. A lack of commonsense caps on federal loans to graduate students and parents of undergraduates means colleges can charge inflated prices. Moreover, the federal funding exclusion of nontraditional postsecondary options such as apprenticeships, workforce training, and industry certifications shelters traditional colleges from competition and leads to employer overreliance on four-year degrees as a signal of worker quality.

It is time for federal policy to stop treating higher education as if it always pays off. Instead, policymakers should leverage market forces to reward forms of higher education that serve students well, and penalize those that do not.

Colleges that choose to participate in federal funding streams should have “skin in the game,” meaning they should be financially responsible when their students are unable to repay their federal loans. The government should also take a step back in areas where the private sector could operate more effectively, such as lending to graduate students. Finally, policymakers should expose higher education to more competition by allowing new colleges and nontraditional education providers to access similar funding streams as traditional schools.

A reform-minded administration could take several steps towards these goals on its own. Given the scale of the problem, comprehensive reform demands congressional attention, as a look at the data on the uneven financial value of college reveals.

Why college doesn’t always pay off

Higher education doesn’t need to make every college graduate a millionaire. But we should always expect colleges to fulfill an “educational Hippocratic oath”—that is, they should leave their students no worse off financially.

Using new data on graduates’ earnings from the U.S. Department of Education’s (ED) College Scorecard, we can assess how well colleges uphold that oath by calculating return on investment (ROI) for each college degree. ROI is defined as the financial benefit of college—the expected gain in lifetime earnings—minus its costs: tuition, time spent out of the labor force, and the risk of not completing college at all. If ROI for a particular degree is negative, that degree fails the educational Hippocratic oath.

FREOPP’s estimates of ROI show that the value of higher education varies. A computer engineering degree at Princeton University is worth over $7 million. But a student who pursues a music degree at New York University can expect to be worse off by over $500,000.

Unsurprisingly, majors with more labor market relevance are more likely to pay off. Most degrees in engineering, computer science, mathematics, and economics exceed a $500,000 return on investment. By contrast, other majors such as art, music, English, and psychology have a far lower return—and sometimes no return at all.

Cost is also a factor. When colleges charge more in tuition, their degrees must yield a larger lifetime increase in earnings to make the price worth it. A degree that is positive-ROI at $10,000 per year may be negative-ROI at $40,000 per year.

This is especially true at the graduate level, where federal student loans are unlimited and tuition rates are generally much higher. FREOPP’s research shows that 77 percent of bachelor’s degrees make the typical student better off, but the same is true for just 57 percent of master’s degrees.

Colleges with lower graduation rates also tend to have a lower return on investment. Students who do not finish on time must pay for more credits and wait longer to enjoy any earnings gains from their degree, while students who drop out may be stuck with debt but no credential to help them pay it off. Half of student loan defaulters did not finish college at all.

A positive-ROI degree typically prepares students for a field with labor market relevance, charges a reasonable price, and boasts a high completion rate. Unfortunately, federal funding streams do not distinguish between programs with these characteristics, and those that are unlikely to pay off.

Because federal policy implicitly assumes that higher education always pays off, students attending accredited schools can get loans regardless of whether they’re likely to repay. Colleges have no incentive to steer students away from unaffordable debt, as they usually face no consequences when students cannot repay their loans. Policymakers can change that, however, by exposing colleges to market forces.

Hold colleges accountable for outcomes

Colleges have every incentive to enroll as many students as possible with federal money, but they face little pressure to help students graduate, keep their costs down, or offer degrees with labor market value.

The Obama, Trump, and Biden administrations have taken small steps towards changing that. Under each president, ED has released data on college graduates’ earnings through the College Scorecard, allowing prospective students to see which degree programs are likely to be worth the cost.

Executive Action 1: Increase transparency about student outcomes

A future administration could expand on this success by releasing more data on other outcomes of interest, such as student loan repayment. Prospective students deserve to know how likely they are to repay their debts before they even apply to a college. Moreover, taxpayers have a right to know which colleges are most responsible for the fiscal losses on the federal student loan program, which topped $23 billion in 2023.

Executive Action 2: Require federally funded colleges to meet performance benchmarks

A reform-minded president could go even further on his own authority. The Higher Education Act gives the Secretary of Education authority to design a “quality assurance” system for institutions that participate in the federal student loan program. The secretary could write a regulation requiring taxpayer-dependent colleges to provide their students with a minimum return on investment, or else lose access to federal loans.

Such executive actions will force the worst actors in higher education off the federal dole, protecting students from poor-quality degrees. But a more transformative approach requires changing the incentives of all colleges, not just the worst performers, and such an approach must involve Congress.

Congressional Action 1: Make colleges responsible for unpaid student loans

Colleges participating in the federal student loan program should have “skin in the game”—that is, they should be financially responsible when their students fail to repay their loans.

Such a policy, which FREOPP has proposed as model legislation, means that colleges must offer education with enough value to justify the price students pay to avoid being on the hook for unpaid debts. Colleges can align value and price by lowering tuition or offering more degrees in fields that lead to higher earnings. There is precedent: when a Texas community college accepted having skin in the game, it closed 13 poorly performing programs, expanded better ones, and saw graduates’ starting wages increase by 26 percent.

The immediate benefit of skin in the game is to make student debt more affordable. The broader benefit of such incentive alignment, however, is to increase students’ lifetime earnings by enabling them to qualify for jobs for which there is more labor market demand. The larger economy also benefits from more skilled workers and higher productivity.

Colleges protest that skin-in-the-game policies could result in significant financial liabilities. But the FREOPP plan incorporates a phase-in; during the early years of skin in the game, colleges would be allowed to waive their responsibility for unpaid student loans if they agree to withdraw the offending degree programs from the student loan system. This creates an upfront incentive for schools to improve their academic offerings by allowing colleges to escape significant liabilities if they agree to change.

Another objection is that skin in the game may lead selective colleges to discriminate against disadvantaged students who may have more need for debt or lower earnings potential. The FREOPP plan addresses this concern by using part of the savings from the skin-in-the-game provisions to expand financial aid for low- and middle-income students who enroll in high-return programs.

If a degree program yields high earnings for a reasonable price, students who enroll would become eligible for bonus Pell Grant aid of up to $5,000. The Pell Grant bonus phases out with income. This extra funding will reduce low-income students’ need to borrow and allow more people to afford high-quality programs. However, the stipulation that the aid fund only high-return programs will ensure that it does not subsidize colleges which load low-income students up with debt for little economic gain.

House Republicans led by Rep. Virginia Foxx (R., N.C.) have also introduced a skin-in-the-game policy for schools dependent on federal loans, as part of the comprehensive College Cost Reduction Act. The Foxx plan would also expand the federal government’s data-collection capacities to increase transparency around college tuition and student outcomes.

Expand the role of the private sector

Skin in the game will realign incentives for colleges that rely on the federal student loan program. Just as private lenders would not fund degree programs without a reliable return on investment, forcing colleges to change their offerings, a skin-in-the-game policy will improve college ROI by encouraging colleges to improve the economic return of their degree programs.

This represents a satisfactory imitation of market forces. But Congress should also leverage the private sector directly in order to hold colleges accountable for their outcomes, particularly at the graduate level.

Graduate degrees are among the worst offenders when it comes to ROI. Far more master’s degree programs fail to pay off than bachelor’s degree programs. What’s more, student debt burdens are higher at the graduate level: graduate students borrow more than twice as much as undergraduates, thanks to the fact that there is no effective limit on graduate borrowing. Universities exploit this to pad their budgets on the backs of graduate students; some elite colleges get more than 80 percent of their federal student aid funding from graduate loans.

One recent study found that after Congress removed caps on federal graduate student lending—crowding out private lenders in the process—universities hiked tuition by 64 cents for every dollar of additional borrowing. The federal loan expansion, however, did not increase access to graduate education for underrepresented groups. Neither was there an impact on graduation rates or students’ long-run earnings.

Congressional Action 2: Privatize graduate student loans

Privatizing the market for graduate education lending would fix many of these problems, though it would require congressional action. While the federal government is equally happy to lend $180,000 to a student pursuing a medical degree and a student pursuing a master’s degree in film, private lenders will distinguish between the two. To avoid losing money, private lenders must recognize that students in the medical program are likely to repay their loans in full, while students in the film program will only be able to afford much smaller loans, or perhaps none at all. The market discipline imposed by private lenders will protect students from low-quality degrees and protect taxpayers from having to bail them out.

Critics often object that a private student loan market cannot function because education loans are unsecured. However, this criticism is more relevant for undergraduate lending, as private lenders may not take a chance on 18-year-olds with no credit history. However, graduate students who have demonstrated their ability to complete a bachelor’s degree, and who may have employment and credit history, are much better candidates for loans—provided they enroll in high-return programs. One study estimates that 90 percent of medical students could secure private loans at interest rates below the rate offered by the federal government. Research by FREOPP scholar Jon Hartley also points to the efficacy of income-share agreements, which allow students to receive financing in exchange for a small percentage of future earnings, in expanding access to non-federal credit.

The Graduate Opportunity and Affordable Loans Act, introduced by Senator Tommy Tuberville (R., Ala.), would institute a commonsense cap on federal lending to graduate students, though it stops short of privatizing the graduate loan market entirely.

Level the playing field

Introducing market forces into higher education finance through skin in the game and partial privatization of student loans will help weed out low-quality programs propped up by federal funding. But to truly revolutionize higher education, the postsecondary education market itself must become more competitive.

Federal funding streams for education after high school are set up to favor traditional four-year colleges. Partially as a result, the bachelor’s degree is increasingly the signal employers rely on to assess job candidate quality. For instance, thirty years ago, very few administrative assistants had college degrees. Now, however, employers typically ask for bachelor’s degrees when hiring new administrative workers. Such “degree inflation” contributes to rising student debt as more and more students must borrow to attend college—but not all of them earn salaries that justify those debt burdens.

Degree inflation is partially the result of the government putting its thumb on the scales in favor of incumbent colleges. Colleges seeking federal funding must secure accreditation, which presents a steep barrier to entry even as there’s little evidence that accreditation is effective as a quality-assurance mechanism. Nontraditional programs such as short-term workforce training, competency-based learning, and apprenticeships must jump through additional hoops to enjoy federal funding.

Executive Action 3: Allow high-quality college alternatives to access federal funds

A reform-minded administration could take some steps on its own to expose the higher education establishment to competition. The Experimental Sites Initiative allows the Secretary of Education to conduct pilot programs waiving various laws and regulations governing the disbursement of federal student aid. The secretary could use this authority to allow certain nontraditional programs to bypass the accreditation process, provided they certify their quality in some other way.

Congressional Action 3: Overhaul federal student aid to support work-based learning

More comprehensive reforms are possible with congressional action. In particular, Congress can overhaul the structure of federal student aid to support college alternatives and work-based learning. Students should be allowed to use their Pell Grants for short-term training and the classroom components of apprenticeships. The federal work-study program, which subsidizes the wages of student workers, should be reorganized to support and reward on-the-job training. Congress should also create a pathway for new institutions which demonstrate strong outcomes to skip the traditional accreditation process.

Such innovation will allow students to acquire the skills they need to fully participate in today’s labor market, at a lower price point and opportunity cost. New models of education will be a special boon for the 141 million adult Americans without a bachelor’s degree, who are increasingly being shut out of middle-class jobs.

Conclusion

For decades, students have been sold on traditional higher education as the most promising path to upward mobility. That remains true some of the time, but not always, and it’s time for federal policy to recognize that. Unlike a true free market, the federal government funnels money to traditional colleges with little regard to their performance. The result: low-quality degrees proliferate, while innovative approaches to building human capital have little chance to shine.

Policymakers can fix this by introducing market forces into higher education. Colleges should be held accountable for student outcomes, ideally by making them financially responsible for unpaid student loans. The private market itself should play a greater role in higher education finance, particularly at the graduate level, in order to conduct quality control. Finally, federal funding should open to new but promising providers of postsecondary education who agree to be held to high standards.

With college enrollment dropping and confidence in higher education slipping, policymakers should seize the unique moment to build a better postsecondary education system that actually delivers on its promise of economic mobility.

Preston Cooper is a senior fellow at the American Enterprise Institute. He was previously a resident fellow with FREOPP.