Tuition Subsidies Probably Make Students Better Off
Sunday’s New York Times brought news (along with many other unhappy things) that some NY Fed economists seem skeptical of the Clinton campaign’s Bernie-ish proposal to subsidize college education. The gist is that, when student-loan programs in the past have gotten more generous, college tuitions have gone up, too. So, no point in student-loan programs, then, right (except in lining the pockets of us academics…muchos gracias for that)? Not so fast.
As it happens, I testified next to these guys at a congressional hearing last Fall. At the hearing, I thought, they were much more careful to say that it was unclear what the policy significance of their finding was. In the story, at least as the reporter tells it, they seem to embrace the claim that much of the benefit of the program is captured by educational institutions, with little gain for anyone else.
Could be, but unlikely. Of course, it is possible that, for every dollar of new federal aid Betsy receives, Rent Extraction University (REU: school song, “La Vie Boheme”) raises her tuition by a dollar. But that would be an exceptionally silly way for REU to go about its business. Surely, if REU does that, someone will quickly notice that Betsy and her friends are just treading water, and away will go the new aid program. (The phenomenon of grant recipients spending money on what the grantor wants, not their own preferences, is widespread, and known in the lit as the “flypaper effect.”)
Instead, what REU should do is to raise tuition across the board, say, by the amount of the mean aid amount per student. Betsy’s net costs will still go down. Arnaud, who pays the full sticker price and needs no financial aid, will pay more, and given the lifetime benefits of a degree he’ll do it happily. Constance finds that the new price is a bit beyond her parent’s 529-plan savings, and takes out a subsidized loan. Net of the government’s assistance, she stays in roughly the same place, financially, that she was before.
Let us also assume that REU does not just march into Washington Square Park, don an “fsociety” mask, and burn this new tuition money, but instead does something socially useful with it. Maybe that thing is just private consumption for Arnauld, Betsy, and Constance, and generates no spillover benefits. Even so, Betsy and Constance are better off, and Arnauld is no worse off, as a result of the tuition- & subsidy-funded purchase.
For evidence that this is what happens, see this paper, which finds that California’s merit aid programs increase attendance, shift enrollment to private schools, and increase earnings for newly eligible recipients ten years after enrollment. It could be that national programs perform differently. For instance, perhaps when there are thousands of schools getting the benefit instead of hundreds, each school is more tempted to offset the government benefit dollar for dollar (e.g., to avoid annoying Arnauld’s parents). But it seems to me that, with the California evidence, the burden of proof now rests on skeptics to show more than that tuitions rise.
I’d also note that, even if colleges raise Betsy’s tuition dollar for dollar, if that money is spent on consumption for Betsy, her welfare still increases by the full amount of the government subsidy.
Perhaps you are a higher-ed skeptic, and you think that even under my story any new money for education will just fuel some kind of arms race in which the only net result is that professors / university administrators everywhere are paid more. That could be true (though again, the California ten-year earnings finding is a problem for that claim), but if it is you have much bigger fish to fry than some little tuition subsidy program. And, by the way, if it were true, keep in mind we’d also be “racing” with other nations for top talent, so it’s possible there are some U.S. benefits to pure arms race spending.
