Pell Grants, Loans Drive Up the Cost of Higher Education

By Ken Blackwell, CP Op-Ed Contributor Thursday, December 19, 2013

With skyrocketing tuition, there is no denying that college is too expensive. My friend, Professor Richard Vedder of Ohio University, has produced a lifetime of work showing that colleges' hefty price is directly related to students' easy access to Federal Pell grants and student loans. Those taxpayer-subsidized funds allow universities to handsomely compensate tenured professors who rarely teach and ensure administrators at state institutions remain the highest paid public employees in America.

It doesn't take a genius to figure out this model is unsustainable. With student loans already surpassing $1.2 trillion, this is a financial bubble ready to burst. And the failure will be another burden on taxpayers because these loans are backed by the government. That is why we must insist that public colleges and universities model their business practices after private industry, such as incentivizing schools to reduce the time it takes to graduate and to reduce budgets by outsourcing services which can be performed better and more economically by the private sector.

Privatized dorm buildings, food services, and busing contracts are some good examples of public colleges and universities contracting services to save taxpayers money. But one important outsourcing idea is under attack by the Obama administration and government bureaucrats.

Smart entrepreneurs have developed a model for providing all the functions of a campus bursar's office, allowing outside institutions to handle student loans and financial aid refunds while not having to hire their own employees, which saves millions of dollars for most schools. Using the economies of scale, companies such as Higher One, which was founded by three Yale University students in 2000, offer this service to colleges and universities while quickly processing students' refund in the form of a check, direct deposit, or prepaid debit MasterCard.

The business model for these companies is one that every college would be wise to consider. Even though students receive 100 percent of their refunds, businesses like Higher One make a profit because the schools pay them pennies on the dollar of what it would cost them to manage financial aid for their students. In addition, these companies earn profit through debit cards and checking accounts with large ATM networks and small fees that are lower than other national and regional banks.

Since most of the schools that use these services are smaller institutions or community colleges, the average student age is 29. And as these older students try to improve their education and get a better job, they often do not have a bank account, so instead they are provided with pre-paid debit cards. Not only do students receive the money the same day, but the cards prevent the type of check fraud that has plagued the Pell Grant program by $1.2 billion. This is the same sort of shift we saw at the Social Security administration, when they stopped providing paper checks a few years ago. The debit card also prevents students from using check cashing services which can take up to 10 percent of their money.

But never doubt government's eagerness to oppose efficiency. The organization created out of the job-killing monstrosity known as Dodd-Frank, the Consumer Financial Protection Bureau (CFPB), headed up by Richard Cordray, wants to stop these companies from offering the debit cards. Supported by left-wing senators, such as Sen. Chuck Schumer of New York, the goal is to use the Department of Education to eliminate these third-party financial services for students, while forcing those colleges to spend millions on new staff.

While such actions are beyond ridiculous, that doesn't mean there isn't a need for some regulation. Regulators might want to prohibit these companies from providing commissions to schools to avoid improper sales pitches to students by orientation staff. And, as check fraud is so common, it is probably reasonable to require future payments to happen in more secure ways by eliminating paper checks.

These outside companies provide an important service and should not be eliminated by government decree. These companies only profit when their services are found to be valuable to individual colleges and students. With a sensible amount of oversight, the model of using innovative companies on campuses deserves the full-throated support of fiscal conservatives everywhere.

Ken Blackwell is the Senior Fellow for Family Empowerment at the Family Research Council. He serves on the board of directors of the Club for Growth and the National Taxpayers Union. He is also a member of the public affairs committee of the NRA. Mr. Blackwell is also the former Mayor of Cincinnati and a former Ambassador to the United Nations Human Rights Commission.