The cost of American higher education is reaching dizzying heights. Average tuition for attending a private, nonprofit four-year college or university in 2013 was $40,917 per year, while a public four-year college cost $18,391 yearly—figures representing a five-year increase of 14 percent and 20 percent, respectively. To pay the fattening bill, students are taking on more loan debt than ever before. The average debt burden for students graduating from four-year programs in 2012 grew to $29,400, up more than 25 percent from just four years earlier. Total student debt outstanding in America now exceeds $1 trillion. Defaults are spiking.

Illustrations by The Heads of State

Blame bad public policy for much of this unaffordability. The federal student loan program, which disburses funds to students based on the price of attendance at their chosen college, provides no incentive for the schools to keep costs low—in fact, the incentive runs the other way, giving schools the confidence that they can spend lavishly on new dorms, fancy research labs, and phalanxes of administrators, while passing the costs on to students. The program has clearly helped enable tuition to outpace inflation for decades.

Smart federal reform—gradually reducing loan amounts or fining schools, say, if a certain percentage of their students defaulted on loans—could help push college costs down again or at least keep them from rising so fast. So far, though, Congress’s efforts to improve college affordability have been either small-bore, such as lowering the interest rates slightly on student loans, or quixotic, such as Senator Elizabeth Warren’s attempt to secure for students the same near-zero interest rate that the Federal Reserve charges big banks—and have not attacked the actual cost structure of the schools.

The federal government’s inaction, however, has created an opening for state-level policy innovators. Either because they’re more responsive to constituents or can exert direct control over public colleges and universities, governors and state legislatures on both sides of the partisan divide have proposed bold measures to make students’ degrees a better investment. The proposals vary in soundness and scope, but at their best, they offer promising solutions for easing higher ed’s affordability crisis. Once again, the states are emerging as the laboratories of American democracy.

Some states are proposing to get rid of pay-as-you-go tuition altogether. Citing the “increasing unaffordability of college education,” Oregon’s legislature unanimously approved a plan last summer—“Pay It Forward, Pay It Back”—that would make tuition free for resident students attending the state’s public universities and community colleges. In exchange, the students would sign “binding contracts” requiring them to pay a percentage of their future income, over a set number of years, to the state. Oregon’s Higher Education Coordinating Commission (HECC) will determine how much students will pay and for how long, and come up with a funding source for the first 15 to 20 years of the program. After HECC works out the details, it will send its recommendations to the 2015 legislative session. The plan will launch initially in a few pilot schools.

Given the good deal that Pay It Forward offers students, it’s no surprise that the program emerged from a classroom—one belonging to Portland State University professor Barbara Dudley. A cofounder of Oregon’s left-wing Working Families Party, Dudley wanted to offer a senior capstone class on a subject that was, in her words, “relevant to the community.” So she chose the economics and politics of student debt, asking her students to propose a solution to the growing tuition burden. After reviewing research from Seattle’s Economic Opportunity Institute, the students came up with Pay It Forward. Kevin Rackham, one of Dudley’s former students, tells me that he lobbied for the idea “because of my experience with debt, because I know how much this debt is going to impede my ability to do things like buy a car and house and start a family.” After developing Pay It Forward further with the Oregon Students Association and the Working Families Party, Dudley’s students approached a group of state legislators, who introduced a bill based on their suggestions.

Dudley says that lawmakers are now trying to figure out how to pay for the program. The most likely scenario, she says, is that Oregon will create a bond fund to finance it. After the state raises the initial money, it would deposit it into a “revolving fund,” which would disburse the tuition allocations to students and into which graduates would deposit repayments. For the initiative to work, voters would need to approve a ballot measure later this year, allowing Oregon’s treasurer to issue bonds for “human infrastructure” projects. As of now, the treasurer can issue bonds only for physical infrastructure, such as roads and bridges.

When I asked Dudley whether Pay It Forward is a response to federal inaction on school affordability, she replied: “Big time.” She’s confident that legislators across the country will begin to adopt similar measures. Michigan and Florida are considering comparable plans, and Washington State passed a bill authorizing its own Pay It Forward initiative this past March. Washington’s plan differs from Oregon’s in that only resident students graduating from high schools with large proportions of lower-income students are eligible. But the students can attend both public and private universities—including institutions outside the state—and still get funding. As in Oregon, students will pay back a percentage of their income to the state after they graduate.

The Pay It Forward plans might rectify one of public higher education’s major failings: that states often see little return from the generous investments they make in education. Economist Milton Friedman illustrated this point in 1968 by discussing his own “horrible example.” As a New Jersey resident, he received a “partial tuition scholarship to Rutgers,” but once he graduated, he never returned to his home state. “What did the poor taxpayers of New Jersey get out of it?” he wondered. “Is there any reason why I should not have been required to repay New Jersey taxpayers?” At a time when many public colleges try to close their budget gaps by recruiting large numbers of out-of-state students, many of whom leave the state after graduation, Friedman’s question is especially relevant.

Not that these Pay It Forward programs are without flaws. Traditional student loans are settled only after students repay the debt in full, with interest. By contrast, under the Oregon and Washington State initiatives, at least as they’re currently conceived, students meet their obligation once they satisfy the terms of the contract that they signed before enrolling in college—that is, the repayment terms are fixed. But say a student’s contract requires him to pay back 2 percent of his income for ten years of postcollege employment. It doesn’t matter whether he works as a barista or as an investment banker: once those ten years are up, he has settled his obligation, regardless of whether the amount he has repaid to the state comes close to what he received. Thus, students are encouraged to study whatever they please, even if the job prospects for the chosen field are dim or not lucrative. Taxpayers could wind up on the hook if repayments fall short. The Pay It Forward initiatives also do nothing directly to curb tuition increases: college administrators might even spend more recklessly, knowing that students will attend their institutions, regardless of cost. Still, by aligning student outcomes with returns to the state, Pay It Forward seems like a step in the right direction.

Though it’s tempting to dismiss the no-tuition-up-front idea as a typical left-wing project, Republicans in some of America’s reddest states are endorsing it as well, including Governor Bill Haslam in Tennessee. Haslam has pursued higher-ed reform throughout his political career. As mayor of Knoxville during the 2000s, he created the “Knox Achieves” program, which offered scholarships and mentoring to city residents hoping to attend community college. When he became governor in 2011, Haslam launched “Drive to 55,” an initiative that aimed to increase the number of Tennesseans obtaining some postsecondary certificate or degree to 55 percent (from 32 percent) by 2025 by better preparing students for college, improving graduation outcomes, and “tying education directly to workforce needs.” According to Richard Rhoda, executive director of the Tennessee Higher Education Commission—the “coordinating body” for the state’s private colleges and universities—Haslam views higher education as a “means to the end” of improving the state’s economic health.

This philosophy has inspired the new Tennessee Promise, which Haslam proposed in his February state of the state address this year. It provides free tuition to Tennessee students who attend two years of a state community college or school of applied technology. Haslam’s policy staff justifies the focus on these kind of institutions by pointing to the skills that the schools teach, their relative low cost, and their robust support system for remedial students. Students who complete their two years can then transfer into four-year programs as juniors, enabling them to reduce their overall tuition. The Tennessee Promise will also enlist college graduates to serve as mentors for participating students, many of whom will be the first in their families to attend college.

The Tennessee Promise will be a “last-dollar scholarship”—that is, the state will provide whatever funds that students still need after other financial aid and grants are taken into account. In contrast with the federal government’s student-aid programs, the plan’s funds can be used only for tuition, not to pay for books or other intangibles that constitute a school’s overall “cost of attendance.” As with the federal programs, though, funding will not go directly to the students but instead to the schools that they choose to attend.

Haslam proposes to pay for the Tennessee Promise, which will cost an estimated $34 million a year, through state lottery reserves and an endowment that the General Assembly created in 2013 to fund the lottery. The governor looks to keep administrative expenditures low by limiting the amount of new bureaucracy that accompanies the program; instead, he wants the state to partner with nonprofit groups that will help participating students apply to—and complete—college. Despite Haslam’s promise on costs, however, some legislators are grumbling about the program’s generosity, which they see as excessive. They’ve got a point: the criteria to receive the scholarships aren’t demanding. Students only have to apply to college in their senior year, meet all application deadlines, and enroll after senior year for consecutive semesters. Then, to stay in the program, they must spend at least 12 hours in class each semester, maintain “satisfactory academic progress” (usually a 2.0 GPA), and complete eight hours of community service.

Haslam’s press secretary, David Smith, brushes aside these concerns. He points to Tennessee Achieves, or tnAchieves, a nonprofit granting scholarships to students at Tennessee’s community or technical colleges, the eligibility criteria for which served as a model for the Tennessee Promise. The data on the nonprofit program’s first five years indicate that, compared with peers at similar institutions, tnAchieves students have higher year-to-year retention rates and maintain Tennessee’s HOPE scholarship, which has tougher requirements, at higher rates. It’s not clear, though, that the trend will hold for Tennessee Promise’s much larger number of students. We’ll probably learn the answer soon: Tennessee’s House and Senate Education committees have signed off on the legislation, and the program seems headed for implementation.

Tennessee also won’t require students to repay the state a portion of their future incomes. When I ask Rhoda why the governor opted for such a generous approach, he chuckled, saying that Haslam was “just a good guy—a man of the people.” Governor Haslam’s good character notwithstanding, his program does nothing to address Friedman’s critique of public higher education—students can take their free education and leave the state. And, like Pay It Forward, the Tennessee Promise does nothing to solve the problem of tuition growth. In Mississippi, a Republican proposal to make community college free for state residents is similarly limited.

For an effort that might truly disrupt traditional models of college instruction—and reduce college costs—look to Texas. Like Haslam, Governor Rick Perry has prioritized higher-education reform throughout his 14 years in office and has amassed a long list of concrete achievements. His most lasting higher-education legacy, though, might lie in his recent campaign to get schools to lower costs.

Soon after becoming governor in 2000, Perry announced his “Closing the Gaps by 2015” plan, aimed at boosting college enrollment and graduation rates by emphasizing college readiness in high school and demanding more accountability from Texas’s public universities. It was quickly adopted by the Texas Higher Education Coordinating Board (THECB), a governor-appointed body that creates partnerships between the various systems of Texas public higher education and works on questions pertaining to funding, regulation, and degree approval. Since then, THECB has seen great success in increasing the number of students who obtain associate’s degrees and is well on track to reaching its goal for bettering completion rates for bachelor’s degrees. It has made impressive strides in enrolling and graduating more minority students. Since 2000, 91.8 percent more African-Americans have earned undergraduate degrees and certificates, and the rise among Hispanics is even more impressive.

These improvements didn’t satisfy Perry, though, especially in the aftermath of the Great Recession, which made college affordability a pressing issue for many families. In his 2011 state of the state address, Perry announced his $10,000 degree challenge. Arguing that the growth of college costs called for a “bold, Texas-style solution,” he asked the state’s public and private colleges and universities to design bachelor’s degree programs with a total price tag of $10,000 or less, and suggested that college administrators “leverage web-based instruction, innovative teaching techniques and aggressive efficiency measures” to do so.

Unlike the plans in Oregon, Washington State, and Tennessee, the $10,000 challenge involves no top-down state intervention. After all, the challenge is optional—in the words of a senior Perry official, “it’s not for every school.” Yet it has already spurred innovation. The University of Texas–Permian Basin, for example, has tried to meet Perry’s challenge as well as increase interest in science, technology, engineering, and mathematics (STEM) fields. Students majoring in STEM who finish a certain number of courses and maintain a sufficient GPA each semester win a scholarship that brings down the bill for their four-year degree to less than $10,000. Texas A&M–San Antonio has created a cyber-security program that lets students with high school college credit and two years of community college complete their degree at the school, with a total cost of a little more than $10,000 (excluding books). Several other schools are offering similar options.

At first blush, Perry seems to have had little interaction with the schools that have responded to his call for innovation. “The governor won’t even know about UT-PB,” University of Texas–Permian Basin provost and vice president Bill Fannin tells me; he merely provided the initial inspiration for the school’s efforts. Fannin thinks that this is true of the other participating institutions, as well. That Perry limited his intervention to an appeal to college administrators’ sense of social responsibility, he says, is “typical of Texas,” which has tended to look to civil society, not government, to solve social problems. Perry is an accomplished and popular governor in a state that lauds individual leadership. He achieved results, Fannin adds, by using the best tool at his disposal—the bully pulpit.

In fact, Perry’s higher-education staff did get involved with some of the interested schools, and one of the most noteworthy responses to the governor’s challenge, the Texas Affordable Baccalaureate Program (TABP), emerged from a collaboration among THECB, two public universities, and nonprofits. If successful, TABP could provide a revolutionary new model for American higher ed. Through the program, students can get a bachelor’s degree in applied science, with a focus on “organizational leadership,” mostly online. The program could be completed in three years, for a final tab of just $13,000 to $15,000, its designers say. TABP is currently offered through South Texas College and Texas A&M–Commerce. Students complete 90 lower-division credit hours by working through online “modules” that involve readings, video learning, scenario-based assignments, and tutorials. Once they finish, they take 30 credit hours in upper-division courses on advanced business and managerial topics. The program culminates with a “digital capstone experience,” in which students use the skills they’ve learned to navigate hypothetical business situations.

Van Davis, THECB’s “Director of Innovations,” says that TABP is “changing the way we deliver education.” Perhaps the program’s biggest innovation is that it awards credits for mastery of material, not time spent in the classroom. The “school year” is divided into six seven-week terms, and students pay a flat fee of $750 for each term that they’re enrolled. Students are free to finish as many credits as they can within each term. If students receive an 80 or above on a module’s mandatory pre-assessment test, they can skip directly ahead to its post-assessment, where they need to score another 80 to proceed. They can proceed at their own pace, giving them significant control over the cost of their degree—a novel notion for American higher education.

TABP’s architects are striving to address some of the common criticisms of online education. To counter the argument that such programs invariably have low standards for assessment, TABP’s passing benchmark of 80 is equivalent to or higher than those at Texas’s institutions of higher education. Further, the assessments go beyond simple multiple-choice tests to include short-response and essay questions, and they might even require students to video-record and upload a speech for their instructor to assess. As for the oft-heard complaint that online students often get inadequate guidance from faculty, the program will assign mentors—“advisers on steroids,” in Davis’s term—to meet with them weekly. These meetings can involve a mere text message to on-track students or phone calls, Skype sessions, and face-to-face interactions with strugglers. To help figure out who needs assistance, TABP will provide the mentors with predictive data analytics. “The nice thing about this program,” Davis says, “is that you can have meaningful interactions without sitting across the desk from the other person.”

Another promising aspect of TABP is its emphasis on practical training. The program offers a bachelor’s in managerial sciences because its organizers looked at projections for the workforce and surveys of national employers and saw a growing demand for students with degrees in managerial and supervisory fields. The group then worked with businessmen affiliated with South Texas College and Texas A&M–Commerce to ensure that the skills that TABP provided would help students find employment in their local job markets. To that end, in addition to offering classes on business-related topics, TABP requires its students to participate in many applied exercises. For instance, students taking an applied math course will not only study statistical principles but will also analyze a real-world data set and present their interpretations to faculty members. In their final assignment, students work in groups to try to solve actual problems facing local businesses. Their final presentations will be assessed by both faculty and local firms, which might view the performances as job auditions.

Having recently finished its first seven-week term, TABP thus far enrolls only 12 students. Davis attributes this small enrollment to the fact that TABP did zero marketing, and he anticipates 250 students signing up by the end of the year. The program’s organizers hope to double enrollment every year, and they imagine that 3,000 to 5,000 students will be enrolling yearly within a half-decade. Davis also thinks that online, competency-based programs will become more widespread—many Texas technical colleges are already offering proceed-at-your-own-pace degrees, with significant online components, for example.

Perry’s “bold, Texas-style solution” seems certain to spread to other states. Florida governor Rick Scott announced a $10,000 degree challenge in November 2012, and since then, all of Florida’s bachelor’s-granting public colleges have agreed to meet it. California legislators are reportedly looking into issuing a similar call.

This new wave of reform might finally introduce a substantive alternative to traditional models of higher education. American higher ed has long needed a shake-up of the status quo, in which universities spend with abandon and pay insufficient attention to students’ financial challenges. Though some of the current state proposals don’t address rising college costs directly, these efforts still represent alternatives to federal inertia. As is often true when federal policymakers drag their feet on problems that demand solutions, states are picking up the slack.


City Journal is a publication of the Manhattan Institute for Policy Research (MI), a leading free-market think tank. Are you interested in supporting the magazine? As a 501(c)(3) nonprofit, donations in support of MI and City Journal are fully tax-deductible as provided by law (EIN #13-2912529).

Further Reading

Up Next