All Commentary
Wednesday, September 1, 1999

Subsidized Education

Why Do Increases in College Tuition Appear Inexorable?

Russell Madden teaches at Mt. Mercy College in Cedar Rapids, Iowa.

It’s an annual ritual. With a sense of dread tinged with resignation, college students, or their parents, wait to discover how much this year’s tuition will rise. Unlike their experience with new computers, they entertain no expectation that rates for their education will decrease. The upward spiral in prices appears inexorable.

Yet is that the way it must be?

For a student in college between 1997 and 2001, average total costs will be nearly $46,000 at government institutions, reports Investor’s Business Daily (December 8, 1998). For those in private schools, the news is even bleaker. Students face expenses approaching $97,000. Twenty years from now, graduates may well be staggered by costs of $157,000 and $327,000, respectively.

In the past four decades, the total yearly spending on higher education increased from $7 billion to $170 billion a year. Financial aid at both the state and federal levels reached $60 billion in 1998, with guaranteed student loans comprising nearly 60 percent of that aid, a six percent increase from 1997. Many people would contend that such a bump in financial aid is justified given the price hikes in tuition and other costs. Not only would they adamantly resist any attempt to lower that aid, they actively lobby for more.

Unfortunately, the first or most obvious answer to a problem is not necessarily the correct one. The reality is that government subsidies not only lead to ever greater educational costs, but also threaten the very existence of private institutions of higher learning.

Two things need to be considered in this matter: basic economic principles and individual freedom.

Supply and Demand

The price we pay for any good or service is essentially determined by relative supply and demand. Other things being equal, the greater the supply of a product with a given demand, the lower the price the supplier will ask and obtain. Conversely, when demand rises relative to supply, prices will increase.

This is as it should be. Through this process, consumers indicate the importance they attach to a certain product or service by their willingness to purchase it at a given price. This insures that economic goods flow to the people who will pay the most for them. Those who are outbid will turn elsewhere to satisfy their desires.

Under normal circumstances, when a product’s price is high and supply relatively low, more producers move into that line of work, hoping to cash in on greater returns than they might obtain producing other goods or services. This increased supply then tends to bring down prices. Left to operate on its own, supply and demand will bring goods and prices into equilibrium until all the supply is purchased by those willing to pay the price.

What happens, though, if the price of a product is artificially set below its clearing price?

If music CDs usually sell for, say, $15, there will be a given number of people willing to purchase them at that price. However, if a third party decides to subsidize music lovers to the tune of $5 per CD, more people will decide they can afford to purchase CDs. Demand will increase. Delighted producers will make more of them. Sales will increase.

Before long, producers will realize that all those people willing to buy CDs at the unsubsidized price of $15 are paying less than they are willing to pay. So the producers will start increasing their prices, say to $17 at first, then $19, then $20. After all, with the subsidy, the consumer has to pay only $15.

But some consumers who have grown accustomed to buying cheaper CDs will have to cut back on their purchases or stop entirely. They are unhappy about seeing their living standard fall. So they demand a larger subsidy, joined by the producers, who face declining sales. If the buyers succeed in getting the “music they deserve” at the price they want, the whole cycle begins again.

So it is with government programs that mask the true costs of college for students. State and federal grants, guaranteed student loans, and direct subsidies to public colleges and universities lower the apparent price of obtaining a college education. This leads to a higher demand. College administrators then feel justified in increasing tuition and fees, realizing that many if not most students are subsidized in one form or another.

The cycle is born: raise tuition; give out more aid; raise tuition again.

Lesser Students

A side effect of this policy is that it attracts more poorly qualified and less motivated students who value higher education less than others who are willing to pay the full price. Colleges have to devote more resources to remedial programs, and students in these programs have a greater dropout rate.

Another problem is that since public administrators do not have to show a profit to stay in business, they are less concerned with the satisfaction of their customers. (Remember the last time you had to wait in an interminable line at the post office or department of motor vehicles?) Administrators also have incentives to increase their budgets needlessly. After all, increased “costs” translate (through a kind of self-fulfilling prophecy) into increased subsidies.

According to the Heritage Foundation, in the 30 years since its inception in 1965, the federally guaranteed student loan program subsidized 74 million students to the tune of $180 billion. By artificially lowering interest rates and insuring banks against defaults, this program has actually raised the total cost of a college education in the long term for all students—whether they receive guaranteed loans or not.

While the short-term direct costs of subsidized loans are less than for loans obtained in a free market, the long-term result is to reinforce a cost spiral that outpaces the general price rise (as outlined above). With less attention paid to restraining spending—by administrators and students—waste and unnecessary expenses tend to increase more than they would in a market-based environment.

When combined with direct subsidies to government-owned colleges and universities, the loan program makes such institutions more attractive to students than they might otherwise be. Private colleges find it difficult to compete against public institutions whose price is lowered by taxpayers’ money.

At the beginning of this century, 80 percent of students enrolled in private schools. Now that same percentage of students enters government-owned colleges. In the past 30 years, over 300 private institutions closed.

It is as if the government decided to subsidize one supplier of CDs and not another. Who would want to buy more expensive (unsubsidized) CDs? The second supplier would soon be out of business.

When government interferes in the supply of any good or service—whether it be CDs, food, or education—it distorts the behavior of consumers and producers alike. When the product is education, this process becomes outright dangerous. A vital society depends on a diversity of viewpoints and ideas. With government largesse comes government control. But government has no business regulating ideas. That is the essence of the First Amendment to our Constitution. Political leaders should not be picking winners or losers in the realm of education. Diversity in approach, attitude, and emphasis should be left to the producers and consumers of education.

Besides that encroachment on liberty, no one has a right to anyone else’s money. The taxes diverted toward education are taken not only from those who do attend college but also from those who do not. No one should be forced to pay for something he does not use. Even less should anyone have his wealth, and the portion of his life which that wealth represents, taken from him to pay for the teaching of ideas he does not support.

Liberty, intellectual independence (personal and institutional), economic efficiency, and educational diversity and quality all argue that government subsidies and guaranteed student loans should end. Only in this way will the unceasing upward surge in tuition be moderated. Even more important, we can begin to restore respect for the freedom and dignity of each individual.