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Why Forcing Taxpayers To Cover Tuition Will Make College Worse For Everyone But The Rich


Whether you are in college, hope to go to college, or planning for your children’s education, the cost of university tuition in America is on many people’s minds. Since the end of the Second World War, more and more people have enrolled in college, more colleges have expanded or been created, and the price has gone ever upwards, far outpacing ordinary inflation. For all that time, people have looked to the government to solve the problem.

In the latest version of the tuition-payer’s lament, Amanda Ripley writes in the Atlantic of how “Americans spend about $30,000 per student a year—nearly twice as much as the average developed country.” Different countries have different customs, but a variation that severe is enough for anyone to stop and take notice. Ripley lays out the problem and its history, and even takes tentative steps beyond the standard progressive answer of demanding more government funding.

Unfortunately, she concludes only by taking the next step on the well-trod path of leftist economics, demanding that if the market players refuse to accept the incentives the government has laid out for them, then they must be made to accept them. “Ultimately,” she writes, “college is expensive in the U.S. for the same reason MRIs are expensive: There is no central mechanism to control price increases.”

This Works So Well in Health Care

The shift from government nudges to government fiat is a tale as old as government itself, but the result is also predictable. Price-fixing has never worked. In consumer goods, it inevitably leads to black markets. In education, it will just encourage the trend already evident in secondary education: separating the rich from everyone else.

Consider how high schools work. For most people, there is only one option: the public, taxpayer-financed high school run by school districts. Making education into a public good is an extreme form of price-fixing that has its benefits—namely, that no American is deprived of a high school education on account of price.

The only cost of admission is to live in the district. That has its own price constraints, since some school districts have little or no affordable housing, but is generally a levelling trend. Many on the left say we should apply this to post-secondary education: make it “free” to all.

But a closer look at primary and secondary schooling shows that K-12 public education is not as redistributionist as it appears. Government-run schools are shared equally among the middle class and the poor, but for the rich, elite academies continue to flourish. Public education’s “price control” gives people one option, but does not eliminate the other for those who can afford it. Whether because of better resources or merely the networking they foster, these schools create a two-tiered system even before students enter college.

In comparing education to health care, Ripley unintentionally makes a good point about both. Even if the government found a way to impose price controls on any college that takes federal money, it would just create just such a two-tier system, much as “Medicare for all” would, where most people get cheap, lousy education or health care and the rich get the good stuff (and, of course, hire people who also went to the “good” colleges).

Removing the rich and connected from the mainstream of education (and health care) would also ensure that those systems are never improved, because none of the people who use them would be sitting in Congress. Despite the left’s praise of the United Kingdom’s National Health Service, 10 to 15 percent of Britons maintain private health insurance. The same effect would occur in a price-fixed education or health care system in America.

Government Is the Problem, Not the Solution

Government intervention in a market always alters the market. Usually that is the aim, but the precise alteration made often spins out of control. Rather than accept their error, governments typically impose interventions on top of the interventions, and so on until the result is something as complicated and non-functioning as our current college-funding system.

This is clear from the history of price inflation in different sectors of the economy. As this chart from the American Enterprise Institute shows, inflation has not touched every industry in the same way. The cost of medical care and college education for skyrocketed, while things like software and televisions have gotten cheaper.

The most common element in the goods that have gotten more expensive: the government intervenes in their prices. The crisis in education isn’t a market failure; it’s a government-intervention-in-the-markets failure.

There are several problems. The first only recently became a widely held belief: too many people are going to college. Despite their similarities, there are important differences between education and health care. A college degree is not like an MRI scan. If you are bleeding internally, you need an MRI. If your leg is broken, it must be set.

Education’s necessity is less certain and varies more by individual. While a college education helps the average person earn more, it doesn’t make everyone earn more. We should make people think about it harder and encourage different options.

That’s a societal change people have been complaining about for a while and will not be easy to shift. The federal government has been, regrettably, one of the main drivers in credential inflation, requiring college degrees for civil service positions that once required only high school diplomas. The jobs have not gotten harder, nor does a degree in, say, French literature help a new hire do his job in the Defense Department or the Post Office any better.

A societal prejudice in favor of degree-holders has led the government to compel would-be employees to spend four years and tens (or hundreds) of thousands of dollars on a degree that in no way makes them better employees. Uncle Sam could help people entering the workforce—especially those from poorer backgrounds—by simply changing the qualifications for entry-level positions. If it worked (and it would), private companies would likely follow suit.

Loans Inflate Because the Risk-Takers Don’t Pay

Beyond the number of students attending school, there are also structural problems with tuition pricing. The Atlantic article touches on this briefly in saying that “the American government could do a better job sharing information about the quality of colleges in ways everyone can understand…. ‘You can’t force people to buy good things or bad things, but they should be able to see what the value is.’”

The free flow of information about a product helps set its price correctly, but that alone will not solve the problem. As in the subprime loan fiasco that led to the 2008 recession, the problem is that college loans separate the risk from the reward. Colleges charge whatever they want because they’ll get it. There is no risk to them.

Students borrow increasingly more and, because the government guarantees the loan, the risk is dispersed. The party paying the bill gets no signal from the market because students are told they must go to college (and are mostly too young to make good decisions about money) and politicians will never respond to increasing defaults by reducing lending. What they will do is keep squeezing the payments out of borrowers until they die.

Banks throw money at children barely out of high school because they know the government will pay them if the kids don’t.

A few changes could fix this. The first is to treat all loans equally by making all debts dischargeable in bankruptcy. The special carve-out for school loans is at odds with the way creditworthiness is assessed in America and severely distorts the incentives.

The reason is simple: the federal government does not particularly care if a bank gets stiffed by an ordinary borrower, but when Uncle Sam is guaranteeing the loan, you can bet that they will not let anyone get out of paying it. Rather than making the loans safer, this restriction encourages banks to make more bad loans, since they know they will get their money back regardless. Legally allowing a loan to fail makes banks work harder to ensure they won’t fail.

This, along with getting the government out of lending money directly to students, will create discipline in the lenders. It will force banks to reconsider how much unsecured debt they will let an 18-year-old incur. If your credit card limit is $3,000 and your student loan is giving you $30,000 a year, it should be clear there is a problem in how credit works.

Banks throw money at children barely out of high school because they know the government will pay them if the kids don’t. That much money sloshing around the system is the biggest incentive for schools to raise prices. Remove that, and the gravy train for expensive colleges will dry up.

Colleges Have Duped Us Into Thinking We All Need Them

Banks are not the only ones making bad decisions because of dispersed risk. Colleges, themselves, are partly to blame. The product they sell has been touted as a societal cure-all, one every student ought to buy.

Elite colleges have also made post-secondary education a Veblen good; that is, one where price increases make the product more attractive, not less. As with designer clothes or luxury cars, high prices in college education have come to symbolize high quality, deservedly or not, and the profusion of loan money has made students more likely to go after that perceived quality.

Requiring schools to pay if the student defaults will make them less likely to set tuition rates so high that repayment is impossible.

With near-limitless demand, how could we encourage colleges to freeze or even reduce their tuition? One step would be to make colleges guarantee government loans after the first year. This will give kids time to pick a major that will, in turn, give colleges a signal of how likely they are to be able to pay their loans. That will, in turn, shift students’ focus back to the original point of college for the middle- and working-class: getting a degree that will get you a better job.

Requiring schools to pay if the student defaults will make them less likely to set tuition rates so high that repayment is impossible. Guarantees by the school, unlike those by the federal government, are not limitless. When the government has to eat bad loans, it just runs a deeper deficit (a problem in itself). But when a school does it for long enough, they go out of business.

Making colleges have skin in the game will force them to economize and set prices appropriately. Right away, you would see different tuition rates for different degrees, which makes sense, as they are worth different amounts in the job market.

Critics on the left, including former President Obama, have aimed their complaints at for-profit colleges, but in truth all colleges have been jacking up tuition for decades. Born of intellectual snobbery, disdain for for-profit schools exposes a bigger problem: the credentialing of the credential-makers.

The federal government depends on a college accreditation system staffed by people deeply invested in the existing, flawed model of education. Removing that, and letting states choose their own methods of accreditation, will allow new models of education to compete with existing ones more easily. Sen. Mike Lee of Utah has introduced a bill that would enact this change.

The university system has grown, but it has not evolved. The system that finances it has gotten more complicated, but not better. A return to basic market discipline in funding education combined with innovation in how we educate college students will make post-secondary education more accessible, more affordable, and more adaptable to 21st-century America.