Money Talks, So Should You

Homecoming King: What Obamacare can teach us about lowering college costs

Jim McLaughlin
by Jim McLaughlin, Dimespring 30

Much of this year’s political news will center on arguing about and preparing for the Patient Protection and Affordable Care Act, also known as the ACA or Obamacare. The biggest parts of Obamacare take effect Jan. 1, 2014, and the months thereafter will teach us new ideas about what we can try  or avoid  in solving another industry wound up in our generation’s next pending economic crisis: higher education.

You can’t fight the bursar — alone
Generally speaking, most college students are on their own for seeking funding for their college costs. True, some assistance is available through private scholarships, parents’ savings and school discounts for highly desirable students, but without this, the typical alternative is a student loan that puts an individual student, and often a cosigner, in debt before they’ve gotten an income.

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The trouble with student loans (OK, one of the problems) is that each only goes to one student, who has little or no bargaining power over a university. Tuition higher than you think is reasonable or affordable? No sweat, the school will just give your spot to some other freshly indebted student.

But imagine if thousands or tens of thousands of students said, “Lower our tuition, or we’ll take our business elsewhere.” That’s a force of reckoning for an institution dependent on enrollment.

The social network, insurance edition
This is very similar to how health insurance has worked in our country for several decades. Picture the Acme Company, which has thousands of employees who, like most Americans, choose a health plan that is partly funded by their employer. When Acme shops for health plans to offer its employees, health insurers scramble over each other to claim all those new customers and offer discounts to the company to get their business.

Let’s say Acme chooses plans from the Klutz health insurance company, who offered Acme a discount and in exchange now has thousands of new customers. Now, Klutz can bargain with hospitals by saying, “I’ll make my customers pay less if they use your services instead of hospitals you compete with, as long as you agree to not charge me (Klutz) as much for their hospital bills.” Health systems that agree to this become part of Klutz’s “network,” and customers must pay more to go to systems that are “out of network.”

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The power to slow rising costs, or not
Insurance companies have to make sure they take in more than they spend, so they push hard to make sure medical prices stay low. If a healthcare provider doesn’t comply with the insurer’s pricing terms, it can lose a lot of patients and customers from the insurer’s network.

But student loan lenders have the opposite incentive. The more money they lend out, the more money they make in interest payments. If college was more affordable, there’d be less need for lenders at all, so lenders don’t push colleges to lower prices in the same way insurers do for providers. For this reason, students can’t depend on lenders to have their backs when it comes to enforcing colleges to restrain price growth. But maybe students could organize their own college networks, the same way health insurers do, with a little outside help.

What’s this got to do with college, bro?
What if instead of every student acquiring his or her own individual loan, they joined a group plan similar to a health insurer that could boost their bargaining power over the university? That group could be established by a non-profit, a government body or an ad hoc group of students themselves  all that’s important is that they agree to act together and use their numbers to negotiate better terms with the school. It could work something like student government, only much better because it would involve people’s real money  and a lot of it.

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Free flow of information
Thinking back to the Acme example, the only ones who don’t seem to have much power over anyone are the employees. Obamacare attempts to address this through health insurance shopping websites called exchanges, where people can buy coverage after screening for subsidies and tax credits, and they can compare plans among competitors to find the best deal, making insurance companies keep prices low to stay competitive.

If similar exchanges existed for colleges, students would be able to compare schools and programs by price, amenities, graduation rates, average starting income, employer-partnerships, scholarships available, etc., that would put prospective students in a stronger position to choose higher-value schools.

Young and asset-less college students can be as vulnerable to the high cost of college as elderly citizens are to medical costs. Both systems have more than a little room for improvement, but only one of them is in the midst of a major legislative overhaul. Perhaps that could be sidestepped if students banded together instead of paying for school individually.

United we save. Divided we default.

Jim McLaughlin is a member of the Dimespring 30, a community of bloggers sharing their thoughts, experiences and perspectives on personal finance.