Getting a Better Return on Education

President Joe Biden recently canceled some student loans and proposed free community college. In doing so, he unwittingly acknowledged an inconvenient truth about public higher education in America: many institutions promise upward mobility but leave students saddled with high debt and low earnings.

The problem is real. Almost one out of every ten students who attend a public college or university default on student loans within two years of graduation. Until the federal government addresses the underlying problems, it’s up to states to get higher education back on track.

We already know one way that works: basing a portion of colleges’ public funding on their students’ post-enrollment earnings. State governments spend about $86 billion on higher education every year—the third-largest category of state general-fund spending. State leaders thus have powerful leverage over colleges. In most states, the majority of this money flows to colleges with no accountability.

Earnings-based funding, by contrast, connects the amount of state subsidy that colleges receive to the earnings of their former students. The rationale is simple: schools with high-earning alumni provide a good return on investment for both students and taxpayers. If enough of a school’s funding is linked to student earnings, administrators will have no choice but to direct professors, advisors, and career-development staff to use their local knowledge to improve students’ career outcomes. Schools may start emphasizing job skills and connections to local businesses or professional networks; some irrelevant or insubstantial majors will likely drop away as schools specialize. Most importantly, schools will become likelier paths to upward mobility for every student—a crucial outcome for publicly funded institutions.

Depending on the school they attend, graduates holding the same degree can see vastly different career outcomes. For example, two years after graduation, the median earnings of a graduate with an associate’s degree in electrical and power-transmission installers from Texas State Technical College (TSTC) is $81,333 a year. Yet the median earnings for a graduate with the same degree from Los Angeles Trade Technical College (LATTC) is $41,937 a year. This gap isn’t due to different student demographics: TSTC has a 25 percent higher proportion of students receiving federal Pell Grants for low-income students than LATTC.