Mr. President, Tuition Subsidies Are the Affordability Problem, Not the Solution

In 2008, then-Senator Barack Obama pledged to make college more affordable. President Obama kept his promises to increase grants and expand loan forgiveness, but the cost of attending college continues to rise. As the College Board Advocacy & Policy Center reports today, tuition at public universities rose 4.8% this year. While tuition didn’t grow as fast as in previous years, tuition continues to rise faster than inflation and growth in family income. And, as we know, student debt is exploding. Graduates of the class of 2011 carry an average of $26,600 in student loan debt, up 5% from the class of 2010.  Nationwide debt from student loans exceeded $1 trillion this year,  surpassing all other forms of debt that Americans carry, including credit card debt and auto loans.

The Obama administration’s plan to make college more affordable has involved a massive increase in taxpayer subsidies to students. Even after adjusting for inflation, federal subsidies to higher education have more than doubled in the last decade to over $49 billion in 2011-12. The largest increase occurred in 2009-10 when the federal government’s share of tuition aid dramatically increased from 33% to 44%, with federal spending growing 167% from $26 billion to $44 billion.

Four-year degrees are increasingly expensive but the payoffs are not guaranteed. To pay off the student-loan debt and earn a decent return on investment for the time and money spent on college, graduates expect access to more and better-paying jobs. Increasingly, this hope is in vain. The New York Times reported last year that 22.4% of college graduates under age 25 were unemployed. An additional 22% were working in jobs that did not even require a college degree where their average annual income was under $16,000. Those fortunate enough to find jobs have discovered starting salaries down 10% on average from $30,000 in 2007-2008 to $27,000 in 2009-2010. Moreover, some studies have shown that four-year college students who rank near the bottom of their class earn about the same as those graduating near the top of two-year community colleges, further calling into question the universal value of a bachelor’s degree. It is no wonder then that Pew Research finds that 57% of Americans no longer believe that college is worth the money.

So is more money the answer? Actually, it is a part of the problem since colleges raise tuition in response to increased tuition aid. As my colleague Neal McCluskey explained in his testimony before Congress:

 According to data from the College Board, between the 1981-82 and 2010-11 school years, inflation-adjusted aid per full-time equivalent student — the bulk of which came through the federal government — rose from $4,418 to $13,914, a 215 percent increase. Meanwhile, real tuition and fee costs at four-year colleges grew roughly apace. At four-year public institutions prices expanded from $2,242 in 1981-82 to $8,244 in 2011-12, a 268 percent ballooning. At four-year, nonprofit private institutions prices rose from $10,144 to $28,500, a 181 percent leap.

It is, of course, difficult to conclude definitively from simple aid and price comparisons that aid fuels price increases. But a growing body of research controlling for variables outside of aid supports the hypothesis that aid has an appreciable inflationary effect, though study results vary by type of aid and institution.

It should come as no surprise that subsidies raise prices. Fortunately, there are now a growing number of innovative alternatives to traditional four-year colleges that have the potential to dramatically reduce costs while providing a quality education. Instead of subsidizing the expensive, inefficient and too-often ineffective status quo, government should just get out of the way.