Oversight and Regulation

Box 5.4 Are SCPs Cost-Effective? (continued)

For the second definition, tax rates are a critical piece. For simplicity, the same tax rate is assumed for workers at all income levels. Under this definition, by construction, fewer programs are cost-effective compared with using the first definition. For example, if a program yields a 30 percent increase in lifetime salaries and the tax rate is 10 percent, tax revenues will rise by only 3 percent. Clearly, a 3 percent tax revenue increase is less likely to surpass the program’s cost than a 30 percent salary increase. Hence, it is possible that many programs that are, on average, cost-effective under the first definition are not cost-effective under the second definition. However, any program that is not cost-effective under the first definition would not be cost-effective under the second definition. Hence, the first definition allows the policy maker to rule out programs that would not be cost-effective from a productivity or fiscal standpoint.

Perhaps the main drawback of these calculations is that they do not include other program benefits, such as improved health for the individual and her family, or the individual’s positive spillovers on her community. These types of benefits are notoriously difficult to measure. Thus, the calculations can be viewed as a lower bound of total SCP net returns.

Oversight and Regulation

Some might believe that, once students receive and process the appropriate program-level information, they will act as informed consumers, making “good” choices that will discipline the market and eliminate the need for oversight and regulation. Appealing as this sounds, it is not correct. The SCP market—and, in general, the higher education market—is not perfectly competitive, as providers often enjoy market power and many students have few or no options (see box 5.1). These “market failures” are particularly salient among SCPs given the students they serve. And, of course, the assumption that these disadvantaged students would have the time and ability to monitor programs and institutions is rather implausible. Oversight and regulation are therefore critical—not only for the sake of a well-functioning market but also for the sake of equity.15

One of the main SCP shortcomings is their large quality variation, which poses a risk to students and may account for much of the SCP stigma. Regulating SCPs and holding them accountable are critical for the existence of a competitive SCP market where only high-quality programs are offered—or, at least, one in which all programs are above a minimum quality threshold. In principle, good regulatory and quality assurance systems should perform the following tasks:

• Authorize only the entry of programs with expected high quality. The screening of new programs should be based not only on the proposed curriculum and training, but also on proposed activities to interface with the private sector, promote graduates’ employment, compete against similar programs, and perhaps provide financial aid to students. It should also be based on the institution’s record with previous programs and the expected labor market outcomes

of the graduates. The goal of screening would be to prevent programs with clearly poor prospects from entering the market. • Establish minimum standards that programs should meet. For instance, a program should provide a student with an expected salary increase relative to what she would have earned without the degree, net of tuition costs. Collecting data on recent salaries for graduates from the program, and on loan repayment where applicable, is critical for monitoring whether these standards are met.

This focus on minimum standards (the “do no harm” criterion) has been proposed recently for higher education accountability in the United States.16 • Oversee the programs periodically—not just every 5 or 10 years as is typically done for accreditation or license renewal, but annually to detect problems early and let the programs adjust as needed. The annual monitoring would focus on outcomes and “flag” programs that do not meet the minimum standards in order to follow them closely. An important outcome to monitor is program net return, which relates to whether a program’s tuition is too high relative to its outcomes. • Publish the results of periodic evaluations. This would help the students of

“flagged” programs make decisions accordingly (to intensify their own job search efforts, for instance, or switch to another program). It would also help nonflagged programs advertise their status. More broadly, it would incentivize programs to perform well every year for the sake of their own reputation, which would in turn attract or retain students. • Close poorly performing programs. This would prevent students from enrolling in those programs and public funds from flowing into them.

Importantly, the minimum standards described above are outcome based. This does not mean that relevant inputs (such as faculty size or infrastructure) or practices (such as job search assistance) should be excluded from periodic evaluations or quality assurance. Rather, it reflects a focus on the ultimate object of interest from the student’s point of view—expected outcomes—and provides incentives for programs to adjust inputs and practices to reach the desired outcomes.

When choosing outcomes for regulatory purposes, it might be argued that labor market outcomes are too narrow because students might have other, nonpecuniary reasons to pursue specific programs (see the Introduction and chapter 2 of this book). While these additional reasons are legitimate, a regulatory focus on labor market outcomes is justified by the very goal of SCPs, which is to provide skills for the labor market in a short amount of time. The focus is all the stronger when the HEIs receive public funding and/or attract disadvantaged students, as argued below.

As a regulation criteria, merely setting minimum standards might seem too lax. At the same time, it might be difficult to evaluate programs on a more granular basis—distinguishing, for instance, very good from excellent programs. Identifying the worst programs should be simpler and would facilitate the closing of programs in the lower tail of the quality distribution—those that harm

students and perhaps contribute the most to the SCP stigma. To illustrate how impactful minimum standards might be, consider the program average net lifetime returns reported in chapter 2 for Chile and Colombia. If, for example, only programs with positive returns were allowed to function, then a substantive fraction of SCPs (12 and 53 percent in Chile and Colombia, respectively) would have to be closed.

Outcome-based evaluations might seem unfair for programs whose students are particularly disadvantaged from an economic or academic standpoint. At the same time, lowering the outcome standard to adjust for student disadvantage would do a disservice to the students for whom the standards matter the most. Minimum standards are preferable to more nuanced ones, such as those based on value added, precisely because minimum standards do not require adjustments based on student characteristics. In effect, requiring a program to do no financial harm to the student is reasonable regardless of the student’s initial disadvantage. If any adjustment by student characteristics is to be made, it might be best to benchmark each program against “similar” ones—for instance, programs in the same field, in a comparable geographic location, and serving students with similar characteristics—which is akin to comparing programs based on their value added. Simulated evaluations conducted in the United States show that “demography is not destiny” because there is great outcome variation even among programs that have disadvantaged students. Although these programs have lower-than-average outcomes, some of them are well above average.17

Oversight and regulation are critical when programs receive public funding— direct funding to the HEI or indirect funding through student financial aid—to prevent money from flowing to low-quality programs. They are also critical when SCP providers enjoy some kind of market power, which is quite often. Programs in small or even medium-size municipalities, where few options are available, have market power because they are subject to little competition. Programs with publicly subsidized tuition enjoy market power as well by undercutting their competitors and absorbing the captive demand from students who cannot afford other options. Programs without tuition subsidies that serve disadvantaged students, unfamiliar with higher education, also enjoy market power, as they might be able to charge disproportionately high tuitions. Box 5.5 exemplifies how regulation (or the lack thereof) on HEIs receiving public funding has indeed affected the lowest-quality SCPs in the United States.18

The dynamism and “churn” of the SCP market (chapter 3) might pose accountability challenges, as it might be hard to ensure quality or provide information when programs open, close, and change frequently. Careful entry screening and detailed annual evaluations would alleviate these challenges. In a different but also dynamic context, this is how the most effective charter school authorizers in the United States handle these issues.19 Moreover, good regulation benefits new, high-quality HEIs. Since new HEIs do not have a past reputation, publicly recognizing those that are of high quality helps them attract students and further encourages the entry of high-quality HEIs and programs.