Posted by: Discover Scholars | September 22, 2008

Education Policy Likely to Backfire

Education is unlikely to be a major issue in the fall elections, a testament less to its unimportance and more to the prominence of other issues. However, both presidential candidates, and Barack Obama in particular, have detailed education plans in place. Though John McCain nominally supports school choice and competition, both candidates have indicated that they will make educational spending a priority item in their budget proposals. It’s likely that at least some of those spending increases will be devoted to increasing Pell grants and other types of tuition assistance.

Paradoxically, though, such increased tuition assistance is likely to result in higher tuition costs for many, if not most students. Richard Vedder reports:

The increase in Pell Grants is a way to increase our commitment to access for all, but this legislation does not cut the ties between college financial aid offices and the grant provider, does not convert the program into a full voucher system, and may merely increase incentives for colleges to raise tuition. (our emphasis)

How is it possible that more tuition assistance leads to higher education costs? The answer lies in a problem we’ve discussed multiple times — the tying of financial aid and other tuition assistance to the schools that students attend. Whether such assistance comes in the form of Pell grants, government-guaranteed student loans, or other forms of government aid, schools simply absorb these increases into their tuition prices.

In the case of student loans, this works by keeping their cost — that is, the interest rate on the loan — artificially low by law. The increased tuition that comes from this cheaper credit just forces students to borrow more. In simplest terms, because the interest portion of repayment is artificially low, students can borrow more principal and have the same debt they’d have if rates were higher. In this scenario, schools benefit massively, while the gains to students are far less clear.

You might say that this would all be fine, so long as the increased money flowing to schools went into improving their quality.  But as Vedder again points out, diminishing returns to colleges’ investment results in this money more often being put to less productive uses:

The massive government student loan program, for example, has enabled colleges to raise costs a lot –and much of the increase in university spending has gone for dubious things like vast new administrative bureaucracies, massive public relations offices, fancy buildings that lie fallow (to use an expression I use a lot when I teach medieval economic history) much of the year, and expensive affirmative action programs that violate the basic meritocratic nature of American society.

Because any government aid, whether in forms of subsidized loans or Pell grants, simply drives up tuition, concepts like those of become even more important. By subsidizing students, we empower them to choose among schools, forcing those schools to lower tuition and improve instruction, rather than charge more and spend on frivolous perks.

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  1. […] education. There also are reasons for why education costs have increased faster than awarded aid. . Our post on Monday explained how one factor contributes to both problems: artificially low interest rates provide a […]

  2. […] costs are caused by preventable factors (the tying of financial aid to individual schools, artificially low interest rates, and crowding out effects from government grants) numbers like this that are significantly larger […]

  3. […] Government Aid Doesn’t Work Last Monday, we quoted Richard Vedder’s claims that increases in government financial aid often lead to higher student tuition rather than […]

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