Economy, Regs, & Taxes

'Free' Money Doesn't Make College More Affordable

Contrary to Lamar Alexander, government aid raises costs.

Jim Harrington · Jul. 8, 2015

Over the weekend, Sen. Lamar Alexander (R-TN) penned a Wall Street Journal opinion piece in which he claims that college is not too expensive — because of all kinds of free money from the government. Tell that to middle-class families paying the full bill.

Alexander discusses some costs of attending college in modern America, and, while he admits that school can set you back a few bucks, he says not only are costs not as bad as advertised but there are numerous ways to pay for most of them.

“Public two year colleges … are free or nearly free for low-income students,” Alexander writes, and “community college tuition and fees average $3,300 per year.” Coincidently (or not), the average Pell Grant is also $3,300, though it can be as high as $5,775, depending on need. Even better, students can get 12 semesters of them, and since a grant needn’t be repaid, recipients are relieved of the need to find summer employment.

Using the University of Tennessee at Knoxville as an example of four-year schools, Alexander says tuition and fees average about $11,800 per year. Besides Pell Grants, students in Tennessee and some other states also have access to Hope Scholarships. For each of the first two years, the recipient gets $3,500, then $4,500 for years three and four. He says other “[s]tates run a variety of similar programs — $11.2 billion in financial aid in 2013, 85% in the form of scholarships.” Scholarships needn’t be repaid either.

Alexander extolls the virtue of government subsidies, but, if necessary, the student also has access to loans secured by the government. The College Board estimates that students from four-year schools will have an average of $27,000 in debt when they graduate, about the same as a new car loan.

Nationally, the current outstanding total of these loans is $1.2 trillion.

In closing, Alexander offers “five steps … to make it easier for students to finance their college education:”

  • “Allow students to use Pell grants year-round…”
  • “Simplify the confusing 108-question federal student-aid application…”
  • Allow colleges to counsel students against too much borrowing.
  • “Require colleges to share in the risk of lending to students…”
  • Cut federal red tape that costs millions.

But recently published research doesn’t support Alexander’s love of federal college subsidies to students. In fact, according to David Lucca and Karen Shen of the New York Fed and Taylor Nadauld of Brigham Young University, tuition goes up 65 cents for every dollar of new loans or grants. “[W]hile one would expect student aid expansion to benefit recipients,” the pair say, “the subsidized loan expansion could [be] to their detriment, on net, because of the sizable and offsetting tuition effect.”

The study supports the Bennett Hypothesis, offered by William Bennett, education secretary under Ronald Reagan. He surmised that more government student aid meant universities could “blithely” raise tuition rates without enrollment suffering. Soaring student debt rather proves the point.

According to the Washington Examiner, researchers measured “differences in tuition changes at schools that had more or fewer students [taking advantage of increased] student loans, using data from the Department of Education. Not only did tuitions rise when Congress increased aid availability, but for-profit colleges saw their stocks jump.”

And if you think it’s expensive now, wait until Barack Obama makes it free.

Weighing in with his three-essay series in 2008 on the economics of college, economist Thomas Sowell explained why the cost of college tuition is so high.

“There are two basic reasons,” Sowell said. “The first is that people will pay what the colleges charge. The second is that there is little incentive for colleges to reduce the tuition they charge.”

Sowell discussed the notion of cost: “The inadequacy of resources to produce everything that everyone wants is the fundamental fact of life in every economy. … This means that the real cost of anything consists of all the other things that could have been produced with those same resources.”

Universities ignore the fact that, by constantly raising tuition and thus taking billions every year from the economy, they are simply reallocating resources that perhaps could be used more effectively than a four-year degree in gender studies. And because students can always get the funds to pay for tuition, colleges will always raise it.

As Sowell notes, “In a normal market situation, each competing enterprise has an incentive to lower prices if that would attract business away from competitors and increase its profits.”

But college isn’t the normal world. In fact, some who have tried to lower tuition have been “advised” against it by the American Association of University Professors because their accreditation might be revoked.

Higher education is a very high-stakes business, and, while academics may have the reputation of being soft, they won’t take cutting student aid without a fight. Today it’s more about building magnificent temples to academia and creating world-renowned reputations than passing on knowledge.

Click here to show comments

It's Right. It's Free.