Price-to-Earnings Premium: A New Way of Measuring Return on Investment in Higher Ed
April 1, 2020
Since passing the last iteration of the Higher Education Act in 2008, policymakers have become increasingly interested in looking at ways to measure the “value” provided by different federally-funded institutions of higher education—to get a better sense of which ones are giving students and taxpayers a good return on their investment, and which ones may not be delivering. Just last year, Senators from both sides of the aisle introduced plans to evaluate institutions and college programs based on whether their former students could pay back their federal loans—one possible way to measure return on investment. And outside of government, there are numerous papers and high-profile commissions that have attempted to define value in higher education. Even so, there’s still minimal consensus on how to accurately gauge the value that students get from attending a specific higher education institution or program, and many of the proposals on the table have significant political hurdles, implementation problems, or unintended consequences.
The largest federal effort to measure the economic value of higher education programs, known as “Gainful Employment,” was enacted into law in 2014. These regulations aimed to ensure that most students who attended for-profit and certificate-granting programs were able to earn enough to pay down their educational debt after attending. If the majority of graduates were obligated to spend too much of their discretionary income on educational debt payments, that program was deemed “failing” and risked losing access to federal student aid dollars to fund its operations. Yet, before this rule was ever enforced, it was rescinded by the subsequent administration, allowing thousands of low-performing higher education programs to continue receiving taxpayer funding while leaving students with debt balances they are unlikely to be able to ever repay.
While Gainful Employment has developed a stigma as being an Obama-era initiative that only covers a subset of college programs, some in Congress have expressed interest in alternative policies that would protect students from poor-performing colleges and programs, while more efficiently targeting the massive federal investment in higher education subsidized by taxpayers every year. If lawmakers wish to meet the primary expectation of today’s higher ed students—getting a good job that allows them to live a stable and financially secure life—they will have to agree on a way (or ways) to determine whether students are getting a premium on their taxpayer-funded investment.
Read the full report on Third Way’s website.
The Price Earnings Premium (“PEP”) reports and metrics were originally developed with and for thirdway.org
