Making College More Expensive: The Unintended Consequences of Federal Tuition Aid

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As Congress debates the reauthorization of theHigher Education Act, it should heed FriedrichHayek’s warning that democracy is “peculiarlyliable, if not guided by accepted common principles,to produce over-all results that nobody wanted.”One result of the federal government’s studentfinancial aid programs is higher tuition costsat our nation’s colleges and universities. Basic economictheory suggests that the increased demandfor higher education generated by HEA will havethe effect of increasing tuitions. The empirical evidenceis consistent with that—federal loans, Pellgrants, and other assistance programs result inhigher tuition for students at our nation’s collegesand universities.

The diversity of objectives, resources, andtypes of governance among the thousands of collegesand universities makes it difficult to adequatelymeasure the exact amount by whichtuitions rise in response to federal student assistance.Therefore, estimates of the amount vary inthe literature. Congress can at best know that itspolicies increase tuitions and that some portionof the federal assistance ends up being capturedby state governments and by the colleges anduniversities.

Also, when large numbers of students beginto rely on the federal government to fund theirhigher education, and the federal governmentuses this financing to affect the behavior of stateand private institutions, we should be concernedabout how the resulting loss of independence ofour colleges and universities affects the ability ofvoters to form opinions about public policy thatare independent of the government’s position.

Rather than expand the current system,Congress should consider a phase-out of federalassistance to higher education over a 12-yeartime frame. As the federal government removesitself from student assistance, we should expectseveral things to happen. First, sticker tuitionprices should decline. Second, the private marketshould respond to the phase-out of federal assistance.That response would likely take threeforms: additional private-sector loans, additionalprivate scholarship funds, and perhaps mostimportantly, the expansion of human capitalcontracts. Human capital contracts, first suggested40 years ago by Nobel Laureate MiltonFriedman, would allow students to pledge a portionof future earnings in return for assistance inpaying their tuition.

Gary Wolfram

Gary Wolfram is George Munson Professor of Political Economy at Hillsdale College in Michigan.