Three ways to make college more affordableNovember 29, 2012: 12:28 PM ET
With student loan balances only growing and tuition rates rising, universities must change the way they do business. Here's how they can start.
FORTUNE – While Americans are paying down most of their debt these days, student debt remains a huge burden. Some are even questioning if it has become too easy to take out an education loan.
Outstanding loan balances for the third quarter of 2012 grew to $956 billion, a 4.6% jump from the previous quarter, according to a report released this week by the Federal Reserve Bank of New York. Meanwhile, total consumer debt, which, unlike student debt, can be discharged in bankruptcy, fell during the same period.
Nearly all student loans are made directly by the government. Some lawmakers argue that the government doesn't ask enough questions to determine a borrower's ability to repay an education loan. The government demands no collateral and has no underwriting requirements, as Republican Sen. Bob Corker of Tennessee noted in July. "What we're really doing is piling up debt down the road the same students are going to have to pay off," Corker said at a Senate Banking Committee hearing, as reported by The Wall Street Journal.
In a way, it all plays out like a vicious cycle. Governments make student loans widely available. And the increase availability of loans, in turn, gives universities an incentive to spend more. Increased spending certainly doesn't help steady tuition rates.
Student loans are a problem, but it would be short-sighted to tighten lending standards on one of the few means by which young people can move up in the world. The crash of the U.S. housing market proved that banks issued mortgages all too easily without sufficient credit checks and such. And, as home prices plummeted, many Americans learned that owning a home was more of a hindrance than a path to prosperity. College, however, is still worth it; those with a degree earn more, as many studies have shown.
So rather than ask why it's so easy to take out student loans, the more relevant question to ask is what are U.S. universities doing to reduce costs? Rising costs have outpaced inflation. Over the past decade, average annual tuition for a year of community college has increased by 40% to $3,122, according to the College Board. At four-year public universities, the cost has risen by 68% to $7,692 a year during the same period.
Universities must change the way they do business. As a starting point, here are three ways campuses can make higher education more affordable.
Take the classroom online
Technology has altered countless industries. It has made everything from music to health care devices more affordable and easier to access. The business of education has been slower to catch on, but calls to make college more affordable might soon change that.
One way to teach more students without necessarily having to build more classrooms or hire more faculty is by offering more courses online, says Jeff Selingo, who makes the point in his forthcoming book, College Unbound. This doesn't mean days spent in the classroom will disappear. Students would still have face-to-face time with their professors, but they'll also learn online.
A growing number of universities currently offer so-called "hybrid" courses, such as the University of Central Florida in Orlando. Here's how it could work: Say a calculus class meets three days a week. Instead of spending all those days in a classroom, students would listen to lectures or take quizzes online for two of those days. The third day would be spent in the classroom with a professor, who would lead discussions and take questions.
This way, on days students aren't in class, the professor would spend it teaching other students. "If a university can serve more students with the same number of instructors, it can actually reduce costs," Selingo says.
Admittedly, most professors probably won't like the idea, since it would leave them with less time to write books, conduct research, and attend conferences -- all things that contribute to a university's prestige. Then again, how students fare in the years after graduation also influence a college's reputation.
Transfer credits made easy
Many students end up paying more for their degree than they have to. They take far more credits than required to earn a bachelor's degree, partly because colleges often refuse to accept credits from other institutions. To save students from having to retake similar courses, universities should make transferring credits easier.
President Obama touted the idea during his re-election campaign in his promise to cut college tuition by half over the next decade. He has proposed a grant program which would reward universities for coming up with new ideas to cut costs -- one of which could include making it easier to transfer credits from a more affordable community college toward a university degree. The president, however, will need Congress to approve such a plan.
Cut administration costs
U.S. universities have far too many administrators. Between 1993 and 2007, the number of full-time administrators per 100 students at major U.S. universities rose by 39%, while the number of employees who teach and do research rose by only 18%, according to a report by the Goldwater Institute. Spending on administration per student increased by 61% during the same period, while spending on instruction per student rose only 39%.
To be sure, students pay only a small part of administration costs, the institute notes in a report. Much of it comes from private gifts, fees, and funds from the federal and state governments.
Wherever the funds come from, it's hard not to wonder why the millions spent on administrator salaries aren't going toward scholarships or lowering tuition.