Peter Orszag: More College Grads Equals Faster Economic Growth

Tuesday, 19 Feb 2013 07:59 AM

 

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As the U.S. population ages, and with the effects of the financial crisis promising to linger for some time, economic growth will be lower than we would like. This is why the federal government needs to do more to help Americans earn college degrees.

For much of the 20th century, the U.S. benefited from rapidly rising educational levels, as the economists Claudia Goldin and Lawrence F. Katz of Harvard University showed in their 2008 book, “The Race Between Education and Technology.” Over the past 30 years, however, educational attainment has risen much more slowly. From 1960 to 1985, the share of adult Americans with at least a college degree more than doubled, to 19 percent from less than 8 percent. From 1985 to 2010, though, the share rose by only about half, to 30 percent. This slowdown has exacerbated inequality and crimped growth.

If the increase had continued at the same rate as before 1985, about half the adult population today would have at least a college degree. More graduates would mean lower inequality, because the wage premium for a college degree would be reduced by the additional supply. And it would mean higher national income, because better-educated workers are, on average, more productive.

So it is important to ask what we can do to raise college graduation rates. It may be useful, in turn, to break that question down into the three stages of attaining a degree: high- school graduation, college enrollment and college completion. For now, I would like to focus on the first two stages. (A future column will examine the issue of college completion, including innovations that could reduce the cost of attendance.)
High School

The first challenge, it seems, is already being met to some degree. In a surprisingly encouraging, though little discussed, development, the high-school graduation rate has been increasing. After stagnating from 1970 to 2000, it has risen by about six percentage points over the past decade, reaching about 85 percent. The increases have been particularly substantial among blacks and Hispanics. In a new paper examining this trend, Harvard University economist Richard Murnane says many recent school reforms (such as providing support and guidance to ninth-graders) look like promising explanations, though he says the evidence is too thin to allow definitive conclusions, or to suggest exactly what we can do to sustain or expand on the recent success.

The second stage involves college enrollment. Among many considerations that influence a person’s decision to attend college, financial aid is a significant one. Aid to undergraduates totals about $200 billion a year in the U.S., and about two-thirds of students are eligible for some form of assistance. A variety of evidence suggests that every $1,000 of additional grant aid per student increases college enrollment by about three to four percentage points, according to a review of the literature by Susan Dynarski, a professor of public policy at the University of Michigan, and David Deming, an assistant professor of education at Harvard.

The reverse is also true; people who lack access to financial aid are less likely to invest in college. Michael Lovenheim and Emily Owens of Cornell University found this effect in their study of a 2001 amendment to the Higher Education Act that prevented people convicted of drug offenses from receiving federal financial aid for two years. College attendance among those affected by the rule plummeted.

It is not just the amount of aid that matters but also the complexity of the process. Students apply for federal aid through the Fafsa (free application for federal student aid), which is cumbersome to the point of being intimidating to many potential applicants, who are often unaware of the aid for which they are potentially eligible. The 2011 Fafsa poses 116 questions, almost as many as a full 1040 tax return (and many more than the simplified 1040EZ form).
Financial Aid

The cost of this complexity was demonstrated in the results of an experiment by Eric Bettinger, an associate professor of education at Stanford University, and several colleagues. Working with H&R Block Inc. tax preparers, the researchers randomly assigned potential applicants to two different groups. One received assistance in filling out the Fafsa, as well as an estimate of their aid eligibility and information about college options; the other received information about aid eligibility but no help in filling out the forms.

Those in the first group “were substantially more likely to submit the aid application, enroll in college the following fall, and receive more financial aid,” the researchers found.

Over the past few years, the Fafsa process has been simplified a bit. There are slightly fewer questions, for example, and some applicants can now transfer their tax information to the Fafsa electronically, which saves time and improves accuracy.

This may encourage the growing numbers of high-school graduates to take the next step and enroll in college. But more should be done to simplify the process of getting financial aid. U.S. economic growth depends on it.

(Peter Orszag is vice chairman of corporate and investment banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)

© Copyright 2014 Bloomberg News. All rights reserved.

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