Financing Postsecondary Education: The Federal Role - October 1995
Fraud and conspiracy allegations, along with charges of mismanagement, have a way of making waves not just with regulators and law enforcement authorities but, in the case of nonprofit charities, with the donor public as well. Not all of this increased oversight, however, is the result of individual wrongdoing. Although the scandals make interesting front page reading, the long term effect is really more substantial, part of a growing trend in the nonprofit world that can be called an "age of accountability." And like it or not, this trend is here to stay and will have profound consequences over the next decade on all nonprofits, but it can be expected to have a significant impact on one nonprofit group: postsecondary education institutions.
The scandals mentioned above are of relatively recent vintage and have played significant roles in sparking increased regulatory and law-enforcement activities. But it was another scandal -- one involving an institution of higher education -- that drew national attention to a case involving what probably struck some as little more than an accounting exercise: Stanford University's dispute with the federal government that broke in 1991 over the use of indirect cost rates and the misexpenditure of federal research dollars by the university during the 1980s. The Stanford controversy was, in many respects, the beginning episode that brought the "age of accountability" to American postsecondary education in particular and to the nonprofit sector more generally.
The accountability trend facing today's nonprofits represents a "third wave" of accountability. The first wave of accountability washed over corporate America during much of the 1980s. Responding to shareholder demands, enhanced global competition, and cost-saving new technologies, thousands of American companies launched upon major restructuring that meant sizeable layoffs and flatter bureaucratic organizations. The result today from that first wave is enhanced productivity, higher profits, and a more competitive corporate environment in which critical response time, given the advent of desktop computers, is measured in seconds.
The next wave touched government. The Reagan Administration launched a rhetorical and, initially, a budgetary war against "Big Government," but a bipartisan consensus about the need for government reform did not actually emerge until near the end of the Bush Administration and the beginning of the Clinton years. Books such as David Osborne's and Ted Gaebler's Reinventing Government (1992) provided the intellectual justification and practical rationale for Vice President Gore's government-reform efforts in the National Performance Review. Policy analysts like Elaine Kamarck, who left the Progressive Policy Institute to work on Gore's efforts, contributed the day-to-day execution of the Clinton Administration's reinvention efforts. The November 1994 congressional elections pushed the trend even further. With the new Congress that assembled in January 1995, there was a greater sense of ideological urgency on the part of many freshman congressmen who were determined to rein in government spending, tackle the deficit, and dismantle the Great Society's legacy program by program.
Nonprofits were relatively untouched by these first two waves: most nonprofits lack shareholders in the customary for-profit sense, and the proposed federal budget cuts of the 1980s were limited, causing little economic harm. Yet, beginning in the mid-1980s, issues of accountability were emerging in ways that would subsequently have a significant impact on education reform, particularly at the elementary and secondary level and ultimately for postsecondary education institutions as well.
The education-reform debate that emerged after the 1983 publication of A Nation At Risk involved arguments for structural reform that were, for the most part, driven by accountability concerns reinforced by spending figures. To put the argument simply: with American aggregate education spending at the elementary and secondary level the highest in the world and per student spending almost at the top (well above competitors such as Germany, Japan, and Korea), why were our students doing so poorly?
This apparent inverse correlation between spending and performance formed the heart and soul of the education accountability debate as it was initially framed by the Bush Administration. The intent was, quite literally, to reorient the public policy debate away from how much we were spending on education to how we could ensure better educational performance and accountability for solid results. One crucial issue at the Charlottesville Education Summit in September 1989, for example, was whether the resulting joint communique between George Bush and the nation's governors would include calls for greater federal spending or remain focused primarily on the need for national education goals. Bush wanted to stress performance, standards, and assessments, while many Democratic governors sought higher levels of federal spending. By and large, the goals process -- with its emphasis on achievement -- carried the day, but only after several tense hours of late-night negotiations between Bush officials and then Arkansas Governor Bill Clinton.
As the national education goals process evolved after Charlottesville, the Republican administration's agenda was to focus less on "inputs" and more on "outputs" -- solid measures of achievement accompanied by reliable national (not federal) standards. Although the goals process has recently become bogged down in bureaucracy or partisanship, the effort nonetheless made significant strides in introducing accountability to education -- at least at the elementary and secondary level.
This thumbnail sketch of elementary and secondary education reform is important, particularly as a contrast with what was happening at the same time in postsecondary education. For it is accurate to observe that the third wave of accountability has only recently begun to touch postsecondary education after lagging the elementary and secondary sector for several years -- and for some very interesting reasons.
During the years when William Bennett was Education Secretary (1985-88), federal postsecondary education policy focused principally on two issues: the cost of the various federal programs and escalating student loan defaults. Interestingly, this essentially budget-driven emphasis paralleled the input-driven fixation that both the Reagan and Bush administrations were trying to alter in the elementary and secondary education context. Bennett succeeded in placing the student loan default issue on the congressional and regulatory reform agenda principally due to the occasional lurid story of some welfare recipient who had been enticed to apply for a Pell Grant voucher or sign up to receive a guaranteed student loan at some fly-by-night proprietary school that was fraudulently bilking the system for millions of dollars.
Only tangentially, however, did the great default debate raise the more complex issue of accountability for institutional and student performance and quality. It did so indirectly and obliquely through a hotly contested assertion in the proposed federal default regulations that a high default rate was, in effect, a proxy for a poor, substandard, low quality institution. The principal rhetorical focus behind this contention was on those trade schools with exceedingly high default rates.
For the first time, a major effort was made to link the number of student loan defaults with institutional quality. Many schools bristled at this characterization, arguing instead that high default rates were more appropriately linked with the sluggish economy, the (relatively) underprivileged backgrounds of some of their enrollees, or other factors. The schools didn't default, they argued, students did, and many schools contended that they should not be held accountable for their former students' failure to pay off their student loans. The alleged linkage was never proven conclusively but, for the first time, the issue of accountability for quality was beginning to stir in the postsecondary world.
The initial focus, as noted, had been on high-default institutions. But what about comparatively low-default institutions that were not proprietary in nature but that were nonetheless graduating students with low or marginal skills in basic subject areas? What about those schools whose students knew little of American or world history, and who could barely construct a literate sentence? Didn't such institutions exist and, if so, what could be done about them?
That important issue had never really been addressed until relatively recently. The student loan default agenda played itself out ultimately in a series of federal regulatory changes that within a few years helped lower the volume of defaults. And, of course, the most recent reauthorization of the Higher Education Act raised new concerns such as the idea George Bush rejected -- and which Bill Clinton readily embraced -- of establishing a less convoluted and cumbersome loan program by replacing guaranteed student loans with direct loans. Once again, issues of quality were overshadowed by concerns about program mechanics and financing.
During much of the last decade, the debates about postsecondary education policy have remained essentially input-driven: How can we reduce defaults? By how many basis points can we reduce the interest subsidy on student loans? Would the value of the Pell Grant voucher increase or decrease? Would there be an income-contingent repayment plan? Would the in-school interest subsidy continue? Would a variety of federal grant and fellowship programs survive the budget ax?
The focus has primarily been on delivery mechanisms, expanded access, and cost. (For an excellent survey of these issues, see A. Hauptman, The Tuition Dilemma: Assessing New Ways to Pay for College (1990)). By and large, these issues -- major as they appeared at the time -- were the functional equivalent of the elementary and secondary sector's preoccupation with spending until the emergence of the national education goals process. In the meantime, the consumers of postsecondary education -- by and large uninitiated in these essentially arcane and complex issues -- had experienced a different aspect of postsecondary education: rapid cost escalation far beyond the rate of inflation.
While the federal regulators were motivated by growing default costs and examples of some trade schools ripping off the system by recruiting students directly from welfare lines, another impetus toward accountability emerged from postsecondary education consumers. More and more parents (and their children) were growing alarmed over the costs of going to college. Moreover, when they paid tuition exceeding $25,000 annually at some elite (and some not so elite) schools, they wanted some assurance that their children were going to learn something that ensured their employability and that they would receive a solid educational foundation. They did not want to pay Cadillac prices four years in a row only to receive Yugo performance.
There was, however, one big problem in asking these questions: except for those elite schools where the name alone purportedly justified "prestige pricing," how could anyone measure the value added of a college education? To this day, that question haunts many institutions of higher education and lies at the very heart of the third wave of accountability now touching American higher education. The sad fact is that we don't yet know the answer.
How does one know not only the value added of a college education but, more precisely, how does one determine the comparative value of the thousands of institutions of higher education in America? Traditionally the answer has been to rely on the various government- approved accreditation agencies around the country as offering some assurance of quality. But until recently the accrediting agencies themselves have been primarily input-oriented (mirroring their elementary and secondary counterparts) and offered little in the way of concrete evidence. The accrediting agencies and many institutions of higher education respond that such questions of comparative education performance cannot be answered in large measure due to the immense variety among American postsecondary institutions. The effort itself, they say, would be meaningless.
This answer has evidently not satisfied everyone, and even the federal government -- the accreditor-in-chief of the accreditation agencies -- recently recognized a new accrediting body, the American Academy for Liberal Education, that was begun in 1992 by scholars such as Edwin O. Wilson from Harvard, Jacques Barzun at Columbia, and Elizabeth Fox- Genovese from Emory. The American Academy was needed, according to Dr. Barzun, because "students haven't learned to think, and the leading universities are leading us down into a pit." (W. Honan, "A New Group Will Accredit Some Colleges," New York Times, August 6, 1995).
American postsecondary education in the postwar years, spurred in large part by the remarkable access afforded by the Servicemen's Readjustment Act (GI Bill), has become increasingly accessible to students at virtually every income level. There has been unrivalled access to an ever increasing array of opportunities and variety of courses, but that access has not always meant access to quality, particularly when it comes to basic reading and writing skills.
The American Academy's president, Jeffrey Wallin, states: "[o]ne-third of all college courses are remedial. The students come illiterate and leave unlearned. We're against the frivolity of higher education. The core curriculum is the basis of the liberal arts curriculum, and it's in disastrous shape." (New York Times, supra.) Wallin cites the example of one midwestern university with approximately 4,000 courses that can be considered as part of its core curriculum. This situation brings to mind the reported exchange between Ralph Waldo Emerson and Henry David Thoreau. When the former boasted that Harvard now taught all the branches of human knowledge, Thoreau reportedly quipped: "Yes, all the branches but none of the roots."
The new American Academy's approach is novel because it will require adherence to 17 standards, including course requirements in areas such as science, languages, the classics, philosophy, history, politics, economics, and math. (Id.) It is quite likely that within a few years, the existing traditional accreditation agencies will have incentives to follow suit, just as the elementary and secondary sector began (albeit reluctantly) to move from input-based measures to standard-driven performance indicators.
The trends and pressures facing American postsecondary education during the next decade are fundamentally similar to the accountability pressures that another big player in the nonprofit world -- namely, charities -- is facing. As of 1993, there were more than 575,690 organizations in the United States registered with the Internal Revenue Service as tax-exempt 501(c)(3)s eligible to receive deductible charitable contributions. Competition for those charitable dollars is increasingly fierce, and charities -- including many institutions of higher education -- can no longer take for granted the beneficence they have enjoyed in the past. More donors now want to know how their dollars are being spent, what impact their contribution is having in the community, and whether the charity is keeping its administrative overhead as low as possible. Donors now often enjoy abundant choice when they contribute and are exercising that choice to support concerns ranging from health and human service charities to environmental, arts, and other "niche-marketed" charities. Charities that don't measure up are increasingly taken to task by watchdog entities such as the National Charities Information Bureau and others that provide "accreditation" going beyond what the IRS confers with its 501(c)(3) imprimatur.
For institutions of higher education, the next decade will bring similar developments, and the pressures will come from the following trends.
As a result of these forces, postsecondary institutions -- as their charity counterparts in the nonprofit sector -- will face competitive pressures that they should embrace rather than resist. Embracing change means candor and greater disclosure of the factors that constitute overhead and rising tuition costs. Schools will undoubtedly respond to these pressures in various ways. Some will resist; others will dissemble in efforts to avoid sharing information that consumers find critical in deciding among competing institutions.
We have already seen examples of several schools inflating their SAT scores and graduation rates as reported in college guides published by U.S. News & World Report, Money, Barrons, and Peterson's. According to a recent Wall Street Journal story, some schools reported one set of figures to the popular guidebook publishers while giving a different (e.g., lower) set to Moody's credit reporting services or to Standard & Poor's. (S. Stecklow, "Colleges Inflate SATs and Graduation Rates In Popular College Guidebooks," Wall Street Journal, April 5, 1995). Wall Street Journal reporter Gary Putka writes that "[i]n their efforts to woo students, many colleges manipulate what they report to magazine surveys and guidebooks in order to inflate their standing in the rankings, which are used widely by parents and students to select schools." (G. Putka, "U.S. News Addresses Flaws In College Guide -- Sort Of," Wall Street Journal, September 7, 1995).
Still other schools have only recently begun to respond to competitive pressures by using professional marketers (a practice once found primarily among proprietary institutions) to recruit students to attend their institutions. (S. Stecklow, "Some Small Colleges Hire Recruiters to Get Bigger Freshman Class," Wall Street Journal, September 5, 1995).
Competitive pressures, higher costs, and unfavorable demographics all point to a future for postsecondary institutions that will be far different from the past thirty years. Postsecondary institutions will sooner or later have to address explicitly -- and in quantifiable, objective, and measurable ways -- questions asked about the value they bring to a student's education. Those institutions that try to resist the pressure by protesting that their schools are unique, special, and cannot be measured by a common set of goals, standards, or learning objectives will find themselves playing a losing hand.
Until the Stanford scandal broke in 1991, the critics of higher education performance in America were generally either confined to or dismissed as coming from conservative-leaning academics or "ideologues." Since the late 1980s, however, these critics have been gaining more mainstream attention and followers. The late Allan Bloom at the University of Chicago published The Closing of the American Mind: How Higher Education Has Failed Democracy and Impoverished the Souls of Today's Students (1987), which became a surprise bestseller. Charles J. Sykes wrote Prof-Scam: Professors and the Demise of Higher Education (1988) and The Hollow Men: Politics and Corruption in Higher Education (1990). A young Dartmouth graduate, Dinesh D'Souza, made the issue of political correctness on the campus both a best-selling topic and a conservative rallying point in Illiberal Education: The Politics of Race and Sex on Campus (1991). A year later, former Reagan Administration domestic policy adviser Martin Anderson published Impostors in the Temple: American Intellectuals Are Destroying Our Universities and Cheating Our Students of Their Future (1992).
All of these books levelled blistering attacks on the performance of American higher education that have now resonated deeply in the popular culture. Such critics can no longer be readily dismissed, in large part because tens of thousands of education consumers find that the criticisms resonate whenever they wonder what their children are getting -- or likely to get -- from tuition charges that have been growing faster than inflation, faster than medical costs, and faster than their own disposable income. Moreover, with the founding of the National Association of Scholars in 1987 and the National Alumni Forum in 1995, it was evident that the critics of postsecondary education could now be found in academia itself and among thousands of dedicated alumni. Some donors are now demanding greater accountability in exchange for their charitable contributions to schools: even Yale discovered, to its chagrin that the multimillion dollar grant from Lee Bass could be readily revoked when the University failed to live up to the terms of the gift.
One small indicator that many of these concerns had emerged as mainstream was a brief and failed effort in 1993 to launch a goals process for higher education similar to that for elementary and secondary education. The National Education Goals Panel, established after the Charlottesville Summit to monitor progress toward the national education goals, voted unanimously in the summer of 1993 to create a new examination intended to measure what college students had learned. While the test would not rank schools or students, it would be used to help establish standards for American colleges, according to the Wall Street Journal. ("U.S. Education Panel Plans a College Exam To Establish Standard," Wall Street Journal, July 28, 1993). Although that fledgling process went nowhere, it is highly likely that unless higher education manages to reform itself, we can expect to see a serious effort to establish a national (not federal) standard-setting and assessment process for American postsecondary education within a few years.
This process, when it occurs, will represent a flowering of the accountability concept in the context of higher education. In fact, given the sector's reluctance to embrace change (it is one of the last places in American life, for example, to continue the concept of tenure), it is also likely that postsecondary education may be the last corner of the vast American nonprofit sector to recognize the staying power and seriousness of the growing consumer demands for accountability.
Chester E. Finn and Theodore Rebarber, writing about education reform in the elementary and secondary sector in 1992, offered the following observations:
For a long time we had construed education in terms of intentions and efforts, plans and inputs, institutions and services. As long as we spent enough, tried hard enough, and cared enough, we believed we would have a good education system. In recent years, however, we have been moving, albeit fitfully, to redefine education in terms of how much people actually learn....While the context is clearly different, Finn and Rebarber could just as easily have been describing the situation now facing American postsecondary education over the next decade.
A preoccupation with results implies that someone must be held responsible for producing them. This, too, is not something that the education system, left to its own devices, was apt to impose upon itself.... [T]he press for accountability is a major component of the reforms that characterize American education today. Finn & Rebarber, Education Reform in the '90s at 179 (1992).
The changes discussed above will eventually come, and the entire sector will emerge far healthier and stronger than it is today. Businesses have been restructured. The American military is now leaner and more efficient that it was 20 years ago. Government is being reinvented today. We may also now be entering a time of intense "pruning" in the case of American higher education. The branches will probably be trimmed a good bit, but the roots will then dig deeper in order to provide even greater nourishment in the future.
Charles E.M. Kolb served from 1988 to 1990 as Deputy Under Secretary for Planning, Budget and Evaluation at the U.S. Department of Education. From 1990 to 1992 he was Deputy Assistant to the President for Domestic Policy at the White House. Mr. Kolb is an attorney with degrees from Princeton University, Oxford University (Balliol College), and the University of Virginia School of Law. He has been General Counsel at United Way of America since November 16, 1992.