Cato Institute
Policy Analysis
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No. 531
January 25, 2005
Routing
Making College More Expensive
The Unintended Consequences of Federal Tuition Aid
by Gary Wolfram
Executive Summary
Also, when large numbers of students begin
As Congress debates the reauthorization of the
to rely on the federal government to fund their
Higher Education Act, it should heed Friedrich
higher education, and the federal government
Hayek's warning that democracy is "peculiarly
uses this financing to affect the behavior of state
liable, if not guided by accepted common princi-
and private institutions, we should be concerned
ples, to produce over-all results that nobody want-
about how the resulting loss of independence of
ed." One result of the federal government's stu-
our colleges and universities affects the ability of
dent financial aid programs is higher tuition costs
voters to form opinions about public policy that
at our nation's colleges and universities. Basic eco-
are independent of the government's position.
nomic theory suggests that the increased demand
Rather than expand the current system,
for higher education generated by HEA will have
Congress should consider a phase-out of federal
the effect of increasing tuitions. The empirical evi-
assistance to higher education over a 12-year
dence is consistent with that--federal loans, Pell
time frame. As the federal government removes
grants, and other assistance programs result in
itself from student assistance, we should expect
higher tuition for students at our nation's colleges
several things to happen. First, sticker tuition
and universities.
prices should decline. Second, the private market
The diversity of objectives, resources, and
should respond to the phase-out of federal assis-
types of governance among the thousands of col-
tance. That response would likely take three
leges and universities makes it difficult to ade-
forms: additional private-sector loans, additional
quately measure the exact amount by which
private scholarship funds, and perhaps most
tuitions rise in response to federal student assis-
importantly, the expansion of human capital
tance. Therefore, estimates of the amount vary in
contracts. Human capital contracts, first sug-
the literature. Congress can at best know that its
gested 40 years ago by Nobel Laureate Milton
policies increase tuitions and that some portion
Friedman, would allow students to pledge a por-
of the federal assistance ends up being captured
tion of future earnings in return for assistance in
by state governments and by the colleges and
paying their tuition.
universities.
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Gary Wolfram is George Munson Professor of Political Science at Hillsdale College in Michigan.