Starting in fall 2027, the University of Michigan’s College of Literature, Science, and the Arts, the largest of its 19 colleges, will hide letter grades from first-semester transcripts. Freshmen will still earn grades and receive feedback, but outsiders will see only a “P” for pass or “NC” for no credit. Note the euphemism: not Pass/Fail, but Pass/No Credit, presumably to cushion even the vocabulary of falling short. The university says the policy will help students acclimate and “curb the mental health crisis” among college students. The intention sounds noble, but the economics suggest it will backfire on the very students it aims to protect.
The trouble becomes clear through a concept economists call signaling. In any market where one side knows something the other side can’t observe, transactions depend on credible signals. A job applicant knows whether she is diligent, capable, and quick to learn, but an employer cannot see any of that directly. A college degree has always served multiple purposes. It is, we hope, an education. But it is also a signal: a costly, hard-to-fake indicator of ability and work ethic. The reputation of the institution, the rigor of the major, and yes, the GPA all transmit information that employers cannot gather any other way at reasonable cost.
Cost is the operative word here, because the flip side of signaling is what economists call search costs — the time, effort, and money buyers and sellers spend finding each other and identifying good matches. Employers sifting through thousands of applications are desperate to lower those costs. This is why so many firms concentrate recruiting on a short list of campuses. Oracle’s celebrated “Class Of” sales program, for example, built its pipeline around nonstop recruiting at a core group of roughly 30 universities, big state schools like Ohio State and North Carolina alongside privates like Georgetown and Baylor.
Is that because Oracle dislikes students everywhere else? Of course not. It’s because past hires from those schools performed well, alumni networks make outreach efficient, and a known curriculum makes credentials easy to interpret. Target-school recruiting is search-cost economics in action. A reliable signal lets employers find talent cheaply, which benefits the students who carry that signal.
The whole point of a transcript is differentiation. When employers can distinguish exceptional students from adequate ones, they can hire the best fit, and the credential retains value for everyone who earned it. Michigan’s policy deliberately degrades that signal. And here is the crucial insight the policy’s designers seem to have missed: when you muddy a signal, the demand for information doesn’t disappear. It migrates — usually to proxies that are far less meritocratic than grades.
Medicine has already run this experiment and seen the perverse results. In 2022, the US Medical Licensing Exam Step 1, long the great equalizer of residency applications, switched to pass/fail reporting. Surveys of residency program directors across specialties found that most opposed the change and expected to lean more heavily on medical school prestige, research output, letters, and personal connections to sort applicants. Researchers warned the shift could paradoxically disadvantage students from less prestigious and less wealthy institutions, precisely the students the change was supposed to help. Diligent medical students naturally responded to the new environment, reporting that they now needed more research publications and extracurricular credentials to stand out.
When one signal is stripped away, students rationally invest in costlier and less accessible ones. A test score can be earned by anyone with a library card and some discipline. A research pipeline and a well-connected mentor require a lot more than just raw knowledge.
The timing makes Michigan’s move stranger still. A’s are already the most common grade in American higher education, and some elite universities award A-range grades roughly 80 percent of the time. The grading signal is compressed enough as it is. Compress it further, and employers will simply continue to shift to their own assessments, referral networks, and raw school brand, making the Michigan degree itself worth less — for high performers and strugglers alike.
We don’t have to speculate about how this ends. Johns Hopkins ran a “covered grades” policy for first-semester freshmen from 1971 until it abandoned the experiment with the class entering in 2017. Its own deans explained why: faculty found that covered grades “delay development of study skills and adaptation to college-level work.” Worse, the policy penalized students who performed well, and employers and graduate schools neither understood it nor welcomed it. The university ended nearly five decades of experimentation based on its own assessment of the evidence. The wave of schools that unceremoniously retired COVID-era pass/fail grading reached the same conclusion.
None of this dismisses the mental health struggles of today’s students. But the answer to a crisis of fragility is not to blur the mirror; it is to teach students to metabolize honest feedback while the stakes are still low.
Grades that differentiate are not the enemy of student wellbeing. They help make a degree worth earning and give a talented kid from anywhere a way to signal what he can do.
