One of the most important lessons anyone can learn about politics is that when government sets out to accomplish some objective, it often winds up doing the opposite. Rent control laws, for example, are supposed to help the non-wealthy who want urban housing, but the effect of rent control is to diminish both the quantity and quality of rental housing available.
With that point in mind, let’s consider federal student aid programs. Congress has established a variety of grant and loan programs (budgeted this year at some $73 billion) which were supposed to help make college more affordable to millions of non-wealthy families. As the cost of attending college has risen, politicians have increased the amount of aid available. The trouble is that by doing so, the government gives colleges an incentive to further increase tuition charges.
That is the conclusion of many economists who have studied the financing of higher education, including Hillsdale College professor Gary Wolfram, in a newly-released Policy Analysis published by Cato Institute. His study, “Making College More Expensive: The Unintended Consequences of Federal Tuition Aid,” argues in favor of a phase-out of all federal financial aid programs, with increased reliance instead on voluntary approaches.
“Basic economic theory,” Wolfram writes, “suggests that the increased demand for higher education generated by the Higher Education Act will have the effect of increasing tuitions. The empirical evidence is consistent with that – federal loans, Pell grants, and other assistance programs result in higher tuition for students at our nation’s colleges and universities.”
But wait – isn’t federal financial aid supposed to enable students to catch up to the rising cost of college? That may be the way parents and politicians think, but to college administrators, more money available to students means more money they can capture for their never-ending plans. There is no point where their desire to spend more is satiated, so there is no point where the paying parties can ever “catch up.”
Instead of making college more affordable, the gusher of federal aid has made it possible for colleges and universities to add more degree programs (often of questionable academic or employment value), to hire more faculty and administrators whose services were not previously needed, and to expand into fields having at best a tangential relationship with education. The spending spiral naturally leads to demands for more financial aid because college is becoming too expensive, but more aid just leads to still higher college costs.
Wolfram also notes that state governments have benefited from the federal student aid programs. Based on his experience as a trustee of one of Michigan’s public universities, he observes that, “The net effect of federal grants may be that the state appropriation is reduced and tuition at state universities rises so that the state is able to capture some of the federal assistance in the form of a reduced higher education budget.” Thus, the effect of federal aid is not to make UNC campuses easier on the wallets of students and parents, but to make it possible for the General Assembly to spend more money on budget items other than higher education.
Besides the unfortunate and unintended consequence of releasing colleges and universities from the spending restraints they would face if students weren’t receiving federal financial aid, Wolfram raises another objection – that federal money necessarily means federal regulation which threatens the independence of higher education. “For democracy to work,” he writes, “it is important that the institutions that educate those who will participate in the democratic system be truly independent of the government.” Federal money always comes with strings attached, taking us away from independent institutions.
What should we do? Wolfram recommends a 12 year phase-out of current federal aid programs. The consequences? “First, we would expect sticker tuition prices to decline. Second, the private market would respond to the phase-out of federal assistance. This would likely take three forms: additional private-sector loans, additional private scholarship funds, and the expansion of human capital contracts, which are similar to owning stock in the future earnings of a college graduate.”
The blunderbuss federal aid approach has not only led to rising tuition, but has also subsidized students without regard to their academic prowess or interest. Private aid would probably be targeted much more toward students who really want to learn, rather than those just to go to college merely for the sake of getting a degree.
I think Wolfram is right. A copy of his paper can be found here.
George Leef (georgeleef@popecenter.org) is the executive director of the John W. Pope Center for Higher Education Policy in Raleigh.