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Let’s Make Colleges Better at Serving Their Students

A growing chorus of voices is calling for universities to have more “skin in the game,” that is, stronger incentives for desirable outcomes. This is discussed most often with regard to student loans. Much of the blame for the student loan problem rests on college admission and retention policies.

Many schools accept numerous applicants they know are very unlikely to graduate. At some schools the six-year graduation rate is under one-third: There are at least two dropouts for every student earning a bachelor’s degree. This tragedy creates unrealistic expectations and then shatters them.

How might colleges be given a stronger stake in avoiding this problem? One way is to make them liable for part of their students’ defaulted loan balances. (Schools could be left off the hook for the default rate expected to arise from job-hindering illnesses and accidents.) If schools bore some of the costs of student loan defaults, this would induce them to become more selective regarding admissions, a change that many people would view as inconsistent with the ideal that higher education should reduce inequality.

To these people I ask: How are justice and opportunity promoted by a system that assures such large numbers of college dropouts? Shouldn’t we focus on educating students well and helping them obtain gainful employment? “Skin in the game” is a powerful inducement to help achieve these twin goals.

How else might schools develop stronger incentives for better outcomes? In 1955, economist Milton Friedman proposed that schools invest directly in their students by lending them funds to be repaid after they graduate and start earning more income. As in so many other policy areas, it took a while for academia to catch up to Friedman’s ideas. Today, Purdue University and some others have implemented Friedmanesque income-share agreements (ISAs).

Under such programs, the school pays some or all the cost of attendance in exchange for a share of a student’s future income. If the students fare well after graduation, the university benefits. Highly endowed private schools could devote some portion of their endowments to similar programs.

Adam Smith also knew about incentivizing educational excellence. In The Wealth of Nations (1776), he noted that professors at Oxford University were more effective teachers when they had skin in the game. Students paid them a fee, so the more students a professor had, the greater his income. Today, however, professors’ compensation often has little correlation to clearly identifiable performance indicators.

In contrast, corporate executives and other high-level employees in the for-profit business world typically have much skin in the game, in the form of performance bonuses, stock options, and the like. Admittedly, it is more difficult to implement performance incentives in higher education, because the “bottom line” of universities is often difficult to define and measure.

But since part of the mission of our great research universities is to make important discoveries, few tasks seem more appropriate than discovering efficient ways to improve students’ lives in the classroom and beyond. Surely, “skin in the game” will play a role in restoring the promise of higher education. Without it, we will continue down the road of burdensome debt loads, academic mediocrity, and shattered dreams.

Richard K. Vedder is a Senior Fellow at the Independent Institute, Distinguished Emeritus Professor of Economics at Ohio University, and co-author (with Lowell Gallaway) of the award-winning Independent Institute book, Out of Work: Unemployment and Government in Twentieth-Century America.

From Richard K. Vedder
CAN TEACHERS OWN THEIR OWN SCHOOLS?: New Strategies for Educational Excellence
In Can Teachers Own Their Own Schools?, Richard Vedder examines the economics, history, and politics of education and argues that public schools should be privatized. Privatized public schools would benefit from competition, market discipline, and the incentives essential to produce cost-effective, educational quality, and attract the additional funding and expertise needed to revolutionize school systems.

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