President Obama is right to draw attention to the soaring cost of a college education in America. However, his proposed solution will not only fail to fix the problem but is also likely to compound it by blunting the competition that is needed to shake up the world of higher education.

Tuition and Costs Rising

It is important to focus on the cost of higher education, because gaining post-high school skills and credentials of competency is increasingly necessary for Americans to move up the economic ladder. For example, Americans with a bachelor’s degree earn about 70 percent more each year than those with only a high school diploma -- nearly double the differential of a generation ago.[1]

For those young Americans who seek a college education as the means of gaining needed skills, the rising cost of college is making it less and less affordable, especially for those from modest-income households, and many can complete it only by incurring heavy debt. Over the past 25 years, the inflation-adjusted cost of college has almost tripled, while the median inflation-adjusted family income has risen by only about 10 percent.

In 2009, more than half of those students who graduated from public colleges were in debt, with an average loan burden of $19,800. For private college graduates, the percentage in debt and the amount were even greater. Fees keep rising rapidly, soaring 8.3 percent last year at public universities and 4.5 percent at private institutions. Meanwhile, the number of administrators per 100 students at some of the top universities across the country has increased 39 percent since 1993, contributing to soaring college costs.[2]

President Obama proposes to slow tuition growth by conditioning the amount of federal campus-based aid to colleges. He also wants to create a “college scorecard” for every institution as a measure of quality. The scorecard would include such indicators as tuition, graduation rates, and earnings upon graduation.

Problems with the Aid-Tuition Linkage Proposal

While the president was cheered by students when he presented his proposals at the University of Michigan, the students should have paused to consider the implications of his approach.

Double whammy for state universities. Rising tuition in recent years is not due only to inefficiency and bloated administrations at the nation’s colleges, although these are significant long-term factors. Most state universities are raising tuition sharply to compensate for cutbacks in budget support from their financially strapped state governments. Among the hardest hit, in-state tuition in California soared 21 percent last year, and the University of California system expects to raise tuition at double-digit rates over the next few years to make up for cuts in its allotment from the state.

Moreover, the extensive and expensive system of federal aid for college has actually exacerbated increases in the total cost of college. This is because colleges can boost tuition when such assistance enables students to offset part of their costs. To be sure, better-targeted student aid can help specific groups of students afford college, but increasing total aid, as the president proposes, will tend to increase -- not decrease -- the sticker price of college.

The Outdated College Business Model