Financial Responsibility in the Higher Education Compact

Introduction

According to recent Pew Research Center polling, seven in 10 Americans believe the higher education system is headed in the wrong direction. Majorities of Americans also give colleges low marks on “keeping tuition costs affordable” and “preparing students for well-paying jobs.” Higher education’s sorry public image gave the Trump administration political fuel to propose its Compact for Academic Excellence in Higher Education. The agreement between institutions and the federal government would bind signatories to a set of commitments, including tuition freezes, in return for maintaining benefits such as “access to student loans, grant programs, and federal contracts” and “preferential treatment under the tax code.”

The net tuition students pay has nearly doubled in real terms since 1990. The Case for Financial Responsibility

The compact targets real problems in higher education, especially growing college costs. The net tuition students pay has nearly doubled in real terms since 1990. Many institutions do not provide economic value commensurate with the prices they charge.

Many institutions do not provide economic value commensurate with the prices they charge. Most Americans pursue higher education for one overriding reason: to earn more money. While universities like to tout the intangible benefits of personal growth and intellectual exploration, surveys consistently show that students’ decisions are overwhelmingly economic. College has been sold as the surest route to financial security, a golden ticket to the middle class. Parents, policymakers, and school counselors have reinforced this belief for decades, telling young people that a college degree is the only reliable path to a good life.

But the evidence tells a more complicated story. As a Foundation for Research on Equal Opportunity analysis shows, the financial return on college is highly variable. While some programs deliver impressive payoffs—particularly in engineering, computer science, and nursing—others produce meager or even negative returns when accounting for tuition, time, and forgone earnings. In fact, roughly a quarter of four-year degree programs fail to deliver a positive return for the average student. For too many, the promise that college guarantees prosperity simply does not hold up.

The gap between narrative and reality underscores why reform is needed. If students are choosing colleges primarily as an economic investment, they deserve to know the likely financial return before they enroll. Yet higher education remains one of the least transparent markets in the economy—students commit to tens of thousands of dollars in debt without clear information on what their degrees will be worth. Policies that promote price transparency and tie federal aid to demonstrable economic value would help align the system with students’ expectations. If college is going to be treated as a financial product, it should be regulated like one—with accountability for outcomes and honesty about the product.

We applaud the Trump administration’s focus on lowering costs and improving college’s value proposition. But we have deep concerns about pursuing these goals by executive fiat. In addition to legal and constitutional problems, the changes may not be durable if the next Democratic administration simply tears up the compact. Reforms of this scale must be enacted by Congress and, where appropriate, state governments.

Moreover, interventionist approaches such as the compact’s proposed tuition freeze are likely to yield unintended consequences. Market-based mechanisms—including tuition price transparency, reining in unnecessary subsidies, and accountability based on measurable outcomes—can achieve the same ends with less disruption.

A Better Solution

The compact identified two main problems regarding universities’ shady financial practices: tuition costs and inconsistent return on investment (ROI). Congress, state legislatures, and the executive branch can address these issues responsibly in several ways.

Reining In Tuition Costs

Universities that sign the compact commit themselves to “freezing the effective tuition rates charged to American students for the next five years.” In addition, if a university’s endowment exceeds $2 million per undergraduate, it must make tuition free for non-wealthy students in “hard science programs.” (The latter policy would affect only eight institutions with more than 100 undergraduate students, so it would hardly make a dent in college costs broadly.)

Freezing tuition outright solves the problem of increasing college costs for only the next five years. A five-year tuition freeze would be welcome relief for students and families in the short run. But freezing tuition outright is shortsighted: It solves the problem of increasing college costs for only the next five years; a better goal would be a more durable framework that holds down prices in the long run and doesn’t need active intervention from a sympathetic executive branch. There is also a concern that institutions could simply pass along the costs of the tuition freeze through increases in food and housing costs or other fees. The freeze is also a blunt instrument: Freezing tuition at current rates would allow expensive institutions to lock in their high prices while punishing institutions that have made concerted efforts in recent years to rein in costs, such as Purdue University. These universities, where tuition has actually declined in real terms, would be unable to raise their tuition even modestly, compromising their ability to continue delivering a quality education.

The Trump administration should work with Congress to remove the incentives that feed runaway inflation in college tuition. Instead of capping tuition outright, the Trump administration should work with Congress to remove the incentives that feed runaway inflation in college tuition. Several avenues are worth exploring.

First, policymakers should ensure that the prices institutions charge are transparent. Currently, students do not know what they will pay for college until they apply and receive a financial aid offer letter, which undercuts price competition among institutions. Instead of this opaque system, Congress should require institutions to give prospective students a binding indication of their net tuition prices before they even apply. Students interested in knowing the price they’d pay at a particular institution could submit their Free Application for Federal Student Aid to the school before applying. The institution would then give the prospective student a binding net-price offer covering all four years. This would put more negotiating power into the hands of students by revealing the prices they’d pay much earlier in the application process—allowing them to walk away from a bad offer before they even apply. This requirement would increase the administrative burden on institutions, but that cost is justified given the confusion caused by the opaque pricing that defines the status quo.

Next, Congress should simplify and streamline the student aid system. New caps on federal student loans in the One Big Beautiful Bill Act (OBBBA) are an excellent foundation on which to build. The parent PLUS loan program, a federally funded credit line open to most parents regardless of ability to repay, has been shown to inflate tuition costs. It should be wholly eliminated.

Finally, Congress should expand on the excellent work already done to hold colleges accountable for poor outcomes in OBBBA by introducing price accountability. While the law currently terminates higher education programs’ eligibility for federal student loans if their graduates’ earnings are too low, the accountability system could go further by encouraging institutions to increase the ROI of lower-earning programs of study by lowering those programs’ tuition costs. Programs for which the net-price-to-earnings ratio after graduation is too high would lose access to federal student loans, a powerful incentive for schools to either improve graduates’ outcomes or—more likely—cut tuition prices to reach an acceptable ratio.

Improving Colleges’ ROI

The compact also seeks to improve the value proposition of higher education. Signatories commit to “publicly post[ing] statistics about average earnings from graduates in each academic program.” We support this policy, though we believe it should be done through the Education Department’s formal rulemaking process so policymakers can clearly spell out the content and manner of such disclosures. Moreover, policies enacted through rulemaking are on firmer legal footing and less vulnerable to lawsuits.

States also have a critical role to play on this front. As direct funders of public higher education, states can change the incentives facing schools by introducing more funding-for-performance metrics. The Texas State Technical College system is a pioneering model: The system’s funding is wholly based on what former students earn after leaving school. In addition to changing incentives for colleges through funding formulas, states should also compel institutions, by suggestion or through legislation, to switch accreditors to those with a greater focus on student outcomes.

The status quo in higher education is certainly not working. We also appreciate the compact’s emphasis on degree completion by enabling students to earn additional college credit for prior coursework and work experience. Signatories would need to accept “full transfer credits from the Joint Service[s] Transcript of military service members and veterans.” This is another welcome change, though one that we believe to be illegal unless enacted through formal statutory changes. (Section 485 of the Higher Education Act prohibits the secretary of education from requiring institutions to adopt particular credit-transfer policies.) In fact, we would encourage policymakers to go a step further: Congress should require colleges to accept transfer credits from all other institutions recognized by the same accreditor. These policies would enable students to complete their degrees faster and at a lower cost: Currently students lose, on average, more than a semester’s worth of credits when they attempt to transfer.

Financial aid packages for freshmen should include exclusively grant aid. The compact also tries to mitigate impacts on students who drop out of their programs early, and for good reason—dropouts are far likelier than graduates to default on their student loans. The compact would require signatories to “refund tuition to students who drop out during the first academic term of their undergraduate studies.” This is a laudable goal, and we would go one step further by reorganizing the federal financial aid system to block first-year students from borrowing student loans at all. Financial aid packages for freshmen should include exclusively grant aid—funded in part by institutions themselves—while aid packages for second-year students and above could include loans. Enacting this change would ensure that only students who demonstrated their ability to complete college-level work by reaching the second year of school could access student loans. In effect, it would make trying college a less risky venture for all parties involved.

Conclusion: Creating More Durable Reform

The Compact for Academic Excellence in Higher Education pursues the admirable goals of lower tuition and a better value proposition for college education. The status quo in higher education is certainly not working, and the Trump administration is right to seek radical change. But we encourage the administration to avoid policymaking by executive fiat, and instead to work with Congress and states to enact policy changes that harness market forces to correct these problems.

Restoring market discipline to higher education through a more sensible federal financial aid system and accountability for high-priced and low-performing schools will ensure that the changes sought outlast the current administration. That will make for a more durable compact—not just with colleges and universities, but with America’s 19 million university students.

Beth Akers is a senior fellow at the American Enterprise Institute, where she focuses on the economics of higher education and student-loan-policy reform. Preston Cooper is a senior fellow at the American Enterprise Institute, where he focuses on return on investment and value in postsecondary education.