As Congress gears up to pass a bill that will reauthorize higher
education spending for the next few years, members should shift
down to a lower speed and begin to read the signs.
In fiscal year 2005, the federal government will spend more than
$70 billion on financial aid without clearly knowing what that
money will produce.
Over the last half century, federal aid to students has created
unintended consequences: skyrocketing tuition and more red tape for
colleges and universities. With the Higher Education Act coming up
for reauthorization this year, Congress should use this opportunity
to examine more efficient ways of funding higher education.
The last decade has been marked by rapidly increasing federal
aid and ballooning tuition. In current dollars, money for Pell
grants — federal grants to less affluent students — rose from
less than $5 billion in 1996 to more than $12.8 billion in
2005.
In addition, federal Perkins loans — low interest federally
guaranteed loans to roughly the same group that is eligible for
Pell grants — rose in current dollars from $892 million in 1993 to
$1.3 billion in 2004. The Federal Direct Student Loan Program and
Federal Family Educational Loans went from a combined $12.5 billion
in 1993 to $52.2 billion in 2004. Tax credits and deductions will
add another $9 billion in 2005.
Not surprisingly, this massive influx of student aid has been
accompanied by a substantial increase in tuition. In the 10-year
period ending in 2004, tuition and fees at public colleges and
universities rose 47 percent, adjusting for inflation. At private
colleges, they rose 42 percent.
And the trend is continuing. Average tuition and fees for
in-state students at four-year public colleges and universities
rose 10.5 percent in 2004-05 to $5,132. This marked the fourth
straight year where tuition and fees rose by more than 5 percent in
inflation-adjusted dollars at public four-year institutions.
Private school tuition and fees rose by 6 percent in the same
period to $20,082.
Anyone who has taken a remedial economics course knows that if
you subsidize something, more people want it. This increase in
demand will push up the price. Former Secretary of Education
William Bennett recognized this in 1987 when he argued that
increases in federal aid have “enabled colleges and universities to
blithely raise their tuitions, confident that federal loan
subsidies would help cushion the increase.”
The U.S. government has helped to create a cycle where federal
aid results in increased tuition, leading to political pressure to
further increase aid. This in turn leads to higher tuitions.
It is difficult to estimate with laser-guided precision the
amount of the increase in tuition due to federal student aid
programs. But clearly these programs raise tuition while distorting
the choices of individuals, as well as the behavior of educational
institutions and state legislatures. The subsidies also reduce the
independence of our higher education system by tying colleges up,
mummy-like, in red tape.
It therefore makes sense that Congress should reduce the federal
government’s role in funding higher education and find better ways
to harness market forces to fund college tuitions.
To an extent, this is already happening: the private sector is
providing a greater percentage of student loans. Nonfederal
borrowing has increased from seven percent to 16 percent of
education loan volume over the past five years. Nonfederal
borrowing reached $11.3 billion in 2003-04, up 39 percent in real
terms over the previous year and almost 150 percent in three years.
Private loans made up $10.6 billion of these loans.
Still, the private portion of overall student aid is low. A good
way to increase private sector help might be to allow for human
capital contracts. Nobel laureate economist Milton Friedman
suggested using something like this 50 years ago: Anyone who wants
to attend college could enter into a contract whereby he would
agree to pay a certain percentage of his salary for a specified
number of years to investors who would pay her tuition. It’s worth
a shot. This and other market-based systems would be more efficient
ways of funding higher education than the car wreck that the
federal government has made of college aid.
