Q&A: Will Colleges Support Debt-Free Higher Education?

AP Photo/Ron Edmonds

Washington College president and former chairwoman of the Federal Deposit Insurance Corporation, Sheila Bair. 

This summer, I argued that Democratic proposals for debt-free higher education will draw opposition from the colleges themselves, which are well served by the status quo. That’s because making public colleges and universities free would force costs down throughout the system, and reverse the incentives that cause tuitions to rise. But this prediction drew a sharp retort from a vocal, albeit unlikely, critic of liberal debt-free college plans: Sheila Bair, the former chairwoman of the Federal Deposit Insurance Corporation and now the president of Washington College, a 1,450-student liberal arts school in Chestertown, Maryland.

During President Obama’s first term, Bair frequently clashed with her colleagues over Dodd-Frank regulations and housing policy, eliciting cheers from progressives. But since becoming Washington College president last year, she has questioned the wisdom of making public four-year colleges and universities tuition-free, a position that puts her at odds with those same progressive supporters.

Bair and I spoke by phone recently about what it will really take to make college affordable for all American students. We also discussed who Bair, a Republican, might vote for in November, even as the GOP undergoes a painful identity crisis. This is an edited transcript of that interview.

David Dayen: Let’s get into this question of higher education reform. I understand you weren’t happy with my story, and I don’t presume that I always have all the answers, so why don’t you give me your pitch?

Sheila Bair: Well, I’ve been a college president for only a year, so I don’t pretend to have all the answers either. But there’s been a bit of a backlash to higher education generally because of the atrocious abuses in the for-profit sector. Then people look at private schools that cost $50,000 to $60,000 a year. They’re not differentiating the two. People should be careful about who’s at fault. Private nonprofits have the lowest default rates. Granted, that’s because more upper-class kids go to them. I’ve been working on that here; our minority population was at 12.8 percent, now it’s up to 15 percent, we’re trying to go up to 25 percent, by raising money for need-based scholarships.

But in terms of the student debt problem, private nonprofits are the last place to look. This movement for free education is being driven by horrible abuses and high debt levels. Plus, as a reminder that I am a Republican, I don’t think we can afford it. The plan that Clinton put out there calls for raising taxes on the wealthy. I thought back to Dodd-Frank, where we asked for a $50 billion assessment on the largest banks to pay for resolution authority, and we got it, and [then-Treasury Secretary Tim] Geithner ditched it. So it’s a question of commitment. I think it’ll add to the deficit, our kids will pay for it later, because interest rates won’t stay low forever.

Liberal arts colleges are unique in the U.S., they’re high-touch, small faculty, they specialize in undergraduate education, the students have the ability to do research with their professor. It’s not a cheap way to provide education, but it’s a high-quality way. The challenge is to make sure it’s broadly accessible. And I think you can do it with scholarship funding. It bothers me that these schools with multibillion-dollar endowments don’t have huge scholarships. But to me, the no-brainer choice is to go to a grant system instead of subsidies; you can calibrate it so the public system would be free, but give people the choice to put that money toward a private nonprofit as well.

I get what you’re saying about the style of teaching. I went to a big public university but for two years I was in a program with the same 30 students, so I had the small school experience in a big school. But I think we have a diverse enough student population that private schools would not just disappear. Look at it this way, U.S. News has been giving out their college rankings forever, and yet somehow students still attend the lower-ranked colleges. I guess I’m more optimistic than you. Of course, I’m in my living room and you’re a college president.

We’re going to survive, but it will become more elitist. It’s hard to compete with free college. Right now, I’m focused on first and second year retention rate. We went from 82.5 percent up to 86, which is actually good, because retention is a hard needle to move. And in looking where students go, they don’t drop out completely, they go to the University of Maryland system. So we have that dynamic already. If it was free to go there, we’d be dead. The other thing is that some of these schools, we’re ranked No. 100 among liberal arts colleges, which is not a bad ranking, but while some schools are not as well-ranked, they’re in local communities, and the economies in those towns rely on the colleges.

I’m just thinking that it’s not like we’ve never tried such a system. The University of California was free tuition for many decades for in-state students. Stanford and USC didn’t go away. I know they’re on a different level than a small school like yours, but look at the Claremont Colleges, Pomona-Pitzer. We have a model here and the private schools did OK. I think there’s room in a big country for the public schools and the privates to work.

That may well be the case. I would still go to grants rather than direct subsidies. You can make it tuition-free, and calibrate the grant level so it would be free for public universities. By the way, their student default rates are higher than for nonprofits. My feeling is you’re always going to have that need for financial aid. A grant system is a better way to preserve choice. You can grow the pie without having a negative impact on private schools. Another point here, if there’s a paradigm shift to public universities, we will have a resource allocation problem. That means more expense involved in building more dorms, hiring more faculty. If enrollments shrink, there will be a reallocation. That’s a significant risk.

I don’t know that the big public universities are endlessly expandable, some of these schools already have 50,000 undergrads. That’s what the rest of the public system, the smaller state colleges and community colleges, are for. And I think if a public option drives costs down, publics and privates would benefit from more students with the ability to attend college. And isn’t it also true that a lot of faculty wants to be in a position to teach a smaller-sized class and have that liberal arts experience?

They do, but we have to be able to pay them. I went to a public university, the University of Kansas, went there for college and law school. Overall, I think I got an excellent education from KU, but the first few years were tough. We didn’t have college within a college program. And I was miserable the first couple years. For most part classes were held in large lecture halls, taught by teaching assistants. It’s a cheap way to provide education, but what’s the quality of the experience? The smaller, more intimate option should be available and accessible to everybody.

What do you think of the idea that the status quo drives increasing tuition costs, because students don’t feel the cost of taking out a student loan up-front?

Well, I can say that we’re focused on affordability, how to support lower-income kids. But there’s something to that, it’s easy to raise tuition because you can raise money through federal student loans to pay for it. It’s not the only explanation, but it’s a material driver of tuition increases. I think we need a skin in the game requirement, so colleges have to pay some of the cost when loans go bad. And then we need to let everyone have an income share default option, where students just pay a share of their income for a period of time, 10, 20 years, no more than a certain percentage. Not the way the administration is doing it, because some have negative amortization. We have to go to an equity model, I would like that to be the default option. The income share option gets a bad rap, because traditionally it was private investors trying to do it. For government to do it makes a lot of sense. The way we do it now, you get lower payments but you’re still accumulating interest. It should be that whatever you make, you pay a small percentage. I don’t think that’s bad. And if government is doing it, you can build it into the tax system, a check-off at the end of the year.

Well that last part I do agree with, because we have these student loan servicers sitting in the middle collecting the payments now, and I can’t understand why they exist. You mean on a federal loan, the government can’t just take a payment themselves? Isn’t that the entire purpose of the IRS?

And the biggest servicer is Navient of all people! How does the Department of Education get away with this? They’re giving kids loans they don’t have any hope of repaying. It drives me crazy. I think we have to get rid of the bureaucracy. It’s so much easier for the students.

One thing you mentioned up top, do you still consider yourself a Republican?

I don’t support the Republican candidate, but I’m too old to change stripes at this point. I also think you still need bipartisan support for a lot of things. To me it’s better than giving up.

But you’re not voting for Donald Trump.

Oh God no, of course not! But I’m also concerned with Hillary Clinton and her ties to Wall Street. So I may vote for the libertarian, I don’t know what I’ll do.

This story has been updated.

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