The Volokh Conspiracy - The Case Against Government Subsidies for College Tuition:

The supposedly unbearable cost of college tuition is a hot issue in this year's presidential election. Both Barack Obama and Hillary Clinton include it in their stump speeches, as did some of the Republican candidates. Politicians are outbidding each other in proposing to increase various government subsidies for tuition payment. If government doesn't act, they claim, the middle class and the poor won't be able to afford to send their kids to college.

In reality, college is getting more affordable, not less, once you take into account the rapidly increasing income gains from getting a college degree. Far from being an essential way of helping the poor, government subsidies for college tuition are likely to harm them for the benefit of the relatively affluent.

I. The increasing benefits of college education are more than enough to pay the increasing costs.

Nobel Prize-winning economist Gary Becker has some important correctives to the conventional wisdom on the cost of college. It is indeed true that tuition rates have risen greatly over the last 30 years. But, as Becker notes, "the benefits from a college education in the form of higher earnings, better health, better educated children, and many other aspects of life have grown much faster than tuition has" (see also this excellent article by Becker and his colleague Kevin Murphy). This 2002 Census Bureau study shows that a worker with a bachelor's degree can expect to realize almost $1 million more in lifetime earnings than one with just a high school diploma. The same study shows that getting a master's or professional degree will increase your income still further (adding an additional $2.3 million in the case of a professional degree). And these figures don't include the additional income you can generate by investing some of that extra $1 to 3 million over the course of your life. If you invest even 5% of it at a reasonable rate of return, the power of compound interest will net you an additional several hundred thousand dollars of added wealth by the time you retire. The Census Bureau and Becker and Murphy both emphasize that the relative benefits of going to college have increased greatly over time, much faster than the increase in tuition costs.

Even at the most expensive private universities, four years of tuition, room, and board is unlikely to cost more than $180,000 or so (the approximate cost of four years at Harvard at maximum tuition rates). And, as Becker notes, many students (especially the poor) don't pay the full sticker price because of widely available financial aid and merit scholarships. The income gains of getting a higher education far outstrip the tuition. The vast majority of students can therefore afford to pay for college by borrowing against their future incomes, and still have an enormous income gain left over. Thus, there is no reason for government to subsidize college tuition on the grounds that it is "unaffordable" - even for those students who are unfortunate enough to have to bear the full cost themselves, without parental assistance.

II. What about college graduates who go into relatively low-paying professions?

Obviously, the $1 million figure is an average that won't hold true for every college graduate. What about those who enter relatively low-paying professions? In most cases, there is good reason for income disparities between professions: the lower-paying ones are less in demand. We want the market to channel more people to higher-paying professions for which there is more of a demand and fewer people to fields where the demand is relatively low. Subsidizing the low-paying fields by having the government subsidize college tuition undermines this efficient allocation of labor and makes us all worse off by channeling too many workers into the wrong fields.

But what if you think there is some market failure that leads to undesirably low salaries in a particular profession? Perhaps the market generates too many accountants and not enough artists. Even if you think this "problem" really exists, general subsidies for all college tuition are not the right solution. Rather, you should advocate targeted subsidies specifically for the artists (or whatever other profession you think the market undersupplies). There is no reason to subsidize those students who don't go into the undersupplied field where you think a market failure exists. Subsidizing all students indiscriminately won't do nearly as much to raise the number of artists because it won't create as much of an incentive to choose art over higher-paying fields.

It's important to remember that even income gains far below the average return to going to college are still more than sufficient to pay for tuition. For example, a college graduate who increases her lifetime earnings by "only" $400,000 (less than half the average gain) has still earned enough extra income to pay for tuition several times over.

III. How government tuition subsidies harm the truly poor.

Not only are government subsidies for government tuition unnecessary, they also victimize the truly disadvantaged people in our society: those who lack the educational qualifications to go to college in the first place (usually due to a combination of poor public schooling and a flawed family environment). These people pay some of the taxes that support subsidized tuition for college students who are likely to end up far wealthier than they are. They are also indirectly harmed by the diversion of public funds to tuition subsidies and away from other priorities that might do more to advance the interests of the truly poor. Government tuition subsidies are a classic example of a policy that redistributes wealth to the relatively affluent under the guise of helping the poor.

I don't mean to suggest that the high cost of college tuition is completely justified by increasing returns to education. In some cases, tuition has been artificially increased by government-imposed restraints on competition. In my own field of legal education, for example, tuition rates have been increased by restrictions on competition created by the American Bar Association accreditation requirement for law schools. This government-sponsored cartel has an obvious interest in raising the cost of legal education so as to reduce the influx of new lawyers who might compete with ABA members. Even in these cases, however, the right solution is not to subsidize law school tuition but to end the requirement of ABA accreditation and allow new law schools to compete with the incumbents, thereby driving tuition down to competitive market levels.

UPDATE: It's important to remember that proposals to aid students that merely subsidize their loans as opposed to give them straight grants also count as subsidies. If the loan program doesn't reduce the student's interest rate below what it would be in the private sector, there is no point to it. If it does, it's a subsidy that defrays at least part of the cost that the student would otherwise have to pay himself.

UPDATE #2: The Census Bureau figures likely overstate the true income gain from going to college in so far as some of the earnings difference between college graduates and high school graduates is likely due to differences between the two groups unrelated to education levels (e.g. - the average college graduate is likely smarter and more motivated than the average high school grad and so might earn a higher income even if he didn't go to college). However, even if the "real" income gain from going to college accounts for as little as one third or one half the pay differential between college grads and high school grads, it's still more than enough to pay for the tuition. Moreover, it's likely that the real gains are a much larger fraction of the difference than that. As Becker and Murphy point out, bachelors' degree holders today earn 70% more than high school graduates, compared to only 30% more in 1980. It's highly unlikely that today's college graduates are, on average, significantly smarter and more motivated than their predecessors of thirty years (or that today's high school grads are vastly dumber and lazier and their predecessors). Most of the relative gain is likely due to a higher real return on education. Finally, check out this study by Princeton economists Orley Ashenfelter and Cecilia Rouse, which shows that most of the income differences associated with additional years of education are in fact caused by the education itself rather than by other variables such as differences in ability and family background. The authors' estimate that each additional year of education increases the student's income by about 10%, even controlling for various background variables.

	[Ilya Somin, February 27, 2008 at 12:00am] Trackbacks The Case Against Government Subsidies for College Tuition: The supposedly unbearable cost of college tuition is a hot issue in this year's presidential election. Both Barack Obama and Hillary Clinton include it in their stump speeches, as did some of the Republican candidates. Politicians are outbidding each other in proposing to increase various government subsidies for tuition payment. If government doesn't act, they claim, the middle class and the poor won't be able to afford to send their kids to college. In reality, college is getting more affordable, not less, once you take into account the rapidly increasing income gains from getting a college degree. Far from being an essential way of helping the poor, government subsidies for college tuition are likely to harm them for the benefit of the relatively affluent. I. The increasing benefits of college education are more than enough to pay the increasing costs. Nobel Prize-winning economist Gary Becker has some important correctives to the conventional wisdom on the cost of college. It is indeed true that tuition rates have risen greatly over the last 30 years. But, as Becker notes, "the benefits from a college education in the form of higher earnings, better health, better educated children, and many other aspects of life have grown much faster than tuition has" (see also this excellent article by Becker and his colleague Kevin Murphy). This 2002 Census Bureau study shows that a worker with a bachelor's degree can expect to realize almost $1 million more in lifetime earnings than one with just a high school diploma. The same study shows that getting a master's or professional degree will increase your income still further (adding an additional $2.3 million in the case of a professional degree). And these figures don't include the additional income you can generate by investing some of that extra $1 to 3 million over the course of your life. If you invest even 5% of it at a reasonable rate of return, the power of compound interest will net you an additional several hundred thousand dollars of added wealth by the time you retire. The Census Bureau and Becker and Murphy both emphasize that the relative benefits of going to college have increased greatly over time, much faster than the increase in tuition costs. Even at the most expensive private universities, four years of tuition, room, and board is unlikely to cost more than $180,000 or so (the approximate cost of four years at Harvard at maximum tuition rates). And, as Becker notes, many students (especially the poor) don't pay the full sticker price because of widely available financial aid and merit scholarships. The income gains of getting a higher education far outstrip the tuition. The vast majority of students can therefore afford to pay for college by borrowing against their future incomes, and still have an enormous income gain left over. Thus, there is no reason for government to subsidize college tuition on the grounds that it is "unaffordable" - even for those students who are unfortunate enough to have to bear the full cost themselves, without parental assistance. II. What about college graduates who go into relatively low-paying professions? Obviously, the $1 million figure is an average that won't hold true for every college graduate. What about those who enter relatively low-paying professions? In most cases, there is good reason for income disparities between professions: the lower-paying ones are less in demand. We want the market to channel more people to higher-paying professions for which there is more of a demand and fewer people to fields where the demand is relatively low. Subsidizing the low-paying fields by having the government subsidize college tuition undermines this efficient allocation of labor and makes us all worse off by channeling too many workers into the wrong fields. But what if you think there is some market failure that leads to undesirably low salaries in a particular profession? Perhaps the market generates too many accountants and not enough artists. Even if you think this "problem" really exists, general subsidies for all college tuition are not the right solution. Rather, you should advocate targeted subsidies specifically for the artists (or whatever other profession you think the market undersupplies). There is no reason to subsidize those students who don't go into the undersupplied field where you think a market failure exists. Subsidizing all students indiscriminately won't do nearly as much to raise the number of artists because it won't create as much of an incentive to choose art over higher-paying fields. It's important to remember that even income gains far below the average return to going to college are still more than sufficient to pay for tuition. For example, a college graduate who increases her lifetime earnings by "only" $400,000 (less than half the average gain) has still earned enough extra income to pay for tuition several times over. III. How government tuition subsidies harm the truly poor. Not only are government subsidies for government tuition unnecessary, they also victimize the truly disadvantaged people in our society: those who lack the educational qualifications to go to college in the first place (usually due to a combination of poor public schooling and a flawed family environment). These people pay some of the taxes that support subsidized tuition for college students who are likely to end up far wealthier than they are. They are also indirectly harmed by the diversion of public funds to tuition subsidies and away from other priorities that might do more to advance the interests of the truly poor. Government tuition subsidies are a classic example of a policy that redistributes wealth to the relatively affluent under the guise of helping the poor. I don't mean to suggest that the high cost of college tuition is completely justified by increasing returns to education. In some cases, tuition has been artificially increased by government-imposed restraints on competition. In my own field of legal education, for example, tuition rates have been increased by restrictions on competition created by the American Bar Association accreditation requirement for law schools. This government-sponsored cartel has an obvious interest in raising the cost of legal education so as to reduce the influx of new lawyers who might compete with ABA members. Even in these cases, however, the right solution is not to subsidize law school tuition but to end the requirement of ABA accreditation and allow new law schools to compete with the incumbents, thereby driving tuition down to competitive market levels. UPDATE: It's important to remember that proposals to aid students that merely subsidize their loans as opposed to give them straight grants also count as subsidies. If the loan program doesn't reduce the student's interest rate below what it would be in the private sector, there is no point to it. If it does, it's a subsidy that defrays at least part of the cost that the student would otherwise have to pay himself. UPDATE #2: The Census Bureau figures likely overstate the true income gain from going to college in so far as some of the earnings difference between college graduates and high school graduates is likely due to differences between the two groups unrelated to education levels (e.g. - the average college graduate is likely smarter and more motivated than the average high school grad and so might earn a higher income even if he didn't go to college). However, even if the "real" income gain from going to college accounts for as little as one third or one half the pay differential between college grads and high school grads, it's still more than enough to pay for the tuition. Moreover, it's likely that the real gains are a much larger fraction of the difference than that. As Becker and Murphy point out, bachelors' degree holders today earn 70% more than high school graduates, compared to only 30% more in 1980. It's highly unlikely that today's college graduates are, on average, significantly smarter and more motivated than their predecessors of thirty years (or that today's high school grads are vastly dumber and lazier and their predecessors). Most of the relative gain is likely due to a higher real return on education. Finally, check out this study by Princeton economists Orley Ashenfelter and Cecilia Rouse, which shows that most of the income differences associated with additional years of education are in fact caused by the education itself rather than by other variables such as differences in ability and family background. The authors' estimate that each additional year of education increases the student's income by about 10%, even controlling for various background variables.