Higher education is a great thing. It fosters intellectual curiosity, directs our occupational efforts into things that are economically and culturally beneficial, and enriches humanity’s standard of living. So should the cost of tuition be free to students?

President Obama thinks so. Last year he proposed that at least two years of community college should be “as free and universal as high school is today.” Presidential candidate Bernie Sanders takes it a step further, promising an initiative to make all public colleges tuition free and to lower all federal student loan interest rates, funded ostensibly by a 0.5% tax on stock trades. (Side note: Bernie markets this as a tax on corrupt Wall St. speculators, but the tax hits all stock transactions, which you can read about in the article. Most interesting to me is the irony that it will tax the endowments that colleges use to fund scholarships and financial aid.) His argument is that

“It is insane and counter-productive to the best interests of our country and our future, that hundreds of thousands of bright young people cannot afford to go to college, and that millions of others leave school with a mountain of debt that burdens them for decades.”

Fair enough. Tuition prices are going up all the time and total student loan debt is estimated at $1.3 trillion and rising. But is offering college tuition at no cost to the student the best way to resolve these issues?

Before answering, let me explain my methodology for answering big policy questions like this one. Bernie has put forward this proposal because he desires that college could be more affordable to more people. To me, his level of desire is irrelevant. What I want to know is whether or not this proposal is likely to produce the beneficial outcomes he and others are touting. Furthermore, what are the probable trade-offs that will result and do the benefits outweigh the potential negative outcomes?

The tuition is too damn high!

College tuition rates are rising fast, in fact, they are rising much faster than the rate of inflation. From 1965 to 2015, the average cost of tuition, room, and board, has risen from $1105 to $18,943. That is an increase of 1714%. Contrastingly, the consumer price index has risen by about 755% over the same time period. On average, it is increasing at over twice the rate of inflation!

Why is this particular price rising at such an accelerated rate? The most obvious answer is that the cost of college tuition is heavily subsidized. A fundamental economic principle is that if you subsidize something, you will get more of it. In this case, the subsidies to college tuition are in the form of federal programs such as grants and student loans. A recent paper from the National Bureau of Economic Research tells how computer modeling demonstrates that “expansions in borrowing limits drive 40% of the tuition jump and represent the single most important factor.” It’s relatively easy to get a federal student loan, and while this has helped many students finance a college education where they may otherwise not have been able to, it creates an economic incentive for institutions to drive up costs. Think about the economic factors that keep various costs down: sellers are competing with other firms and want to attract price conscious customers. If a business can raise prices without a loss of customers, they will, and colleges are no different.

Now, perhaps we might see where Obama’s and Sanders’ proposals offer confounding solutions. Entirely subsidizing college tuition is like treating the symptoms instead of the disease… by giving you more of the disease (I’m not aware of an actual medical analogue, but let me know in the comments if you can think of a better example). The problem of accelerating higher ed. costs will only be exacerbated by these policies, and it can certainly be expected that any proposed budgets for such programs will be woefully inadequate as an ever-expanding number of students will seek out the free money. Furthermore, the increased attention will lead to over-enrollment, resulting either in non-price rationing or expansion. As colleges will have greater incentives to enroll more students and make more money, questions of whether or not students are qualified for collegiate-level work will become even more salient.

This last point is already a major problem in higher ed. Only 55% of undergraduates receive a degree in six years. While some of this high attrition has to do with the ability to pay tuition, many students are going into college with inflated high school grades and a corresponding inflated sense of the skills needed to succeed in college, while others find that they can’t cope with the workload. This brings up questions about how we market college to young people. Who is really ready for college and who needs a degree for the type of work they want to do? Does the value of a particular degree justify the cost to obtain it?

TANSTAAFL

“There ain’t no such thing as a free lunch.”

I hate calling it “free college tuition”. Nothing is free. All it means is that the person benefiting from the college credit or degree is not paying for it. They are getting someone else to pay it for them, likely someone who has not personally benefitted from college, as is the case with most American taxpayers.

Not being financially responsible for such a large cost can be a real blessing but it can also come at a discouraging cost. Economist Thomas Miller tells a story about the downside of “free tuition”. Miller taught a brief course to university students in Paris who he found would not pay attention, would be on their cell phones during class, would wander in and out of the classroom, and were generally disruptive. Sound familiar? It seemed as though he was talking about American public high school students. What these Parisians and our teenagers share in common was that their education was being paid for by someone else. Because they did not personally experience the financial burden, they did not value it. Miller describes this as having “no skin in the game”. Students who have to pay for their own tuition, up front or in the form of loans, will value it more and have greater incentive to succeed. Making college “free” destroys that incentive scheme and makes education more expensive and less efficient.

Ultimately, the cost of college tuition is a price. Prices are not arbitrary numbers; they are signals that coordinate supply and demand. If the government were to allow colleges to set unsubsidized market prices, they would have to come down as students would be forced to be more cautious about spending their own money. Banks would be more cautious about who they lend to and the price of interest would better reflect the risk. If interest rates were higher, this would also put downward pressure on tuition prices.

As it is, the federal government doesn’t have a good argument for interjecting itself into the education market. As economist Antony Davies points out: either college education is a valuable investment, or it isn’t. If it is, there is no point in the government subsidizing it, as it already increases the earning potential of graduates who can afford student loans. If it’s not valuable, then the government shouldn’t subsidize it, because in doing so it just wastes our resources on something with little value.

Some degrees are more valuable, in terms of earning potential, than others, but the government cannot know which degrees will be more valuable in the future economy (some might not even exist yet). People will make mistakes, either as participants in a free market or as central-planning bureaucrats. The difference is how each group responds to mistakes. Market prices generate signals of profit and loss, which are not observable when the government intervenes. In other words, individuals making their own choices about how to do education will have greater dispersed knowledge through the price system and have a built-in incentive to correct errors and avoid loss. The government does not respond to correct errors because it does not incur losses as it is funded coercively through taxes, whether it does something beneficial or harmful.

What else could we do?

If highly-subsidized loans and free tuition are not the answer, then what can be done to make college more accessible to those who are prepared and would benefit from it?

The first thing would be to eliminate subsidies and wait for market corrections to bring the prices down. Ideally, this would be done in stages, but it is increasingly likely that we are looking at the eventuality of the inflated student loan bubble bursting in much the same way as the 2008 mortgage collapse.

Beyond that, some modest proposals include adjusting the current paradigm of higher ed. to better cater to non-traditional students by offering flexibility in scheduling as well as options of online classes. This would allow more students to balance their course load with work and family obligations.

Another recent development is awarding credit for demonstration of competency as opposed to logging requisite hours of class time. This is a more time-efficient model of education that also addressed the concern that students are not developing essential skills from lectures. A similar proposal would be to give credit for prior workplace learning in relation to a degree.

What is desperately needed, especially for low-income students, is financial literacy. Knowledge of budgeting, costs of college, expected earning of various professions, loans, interest rates and debt, and financial planning and saving is essential for making college and career decisions. I believe that the lack of financial education in public high schools is perhaps the greatest disservice to our young people and that increasing financial literacy would go a long way to making college realistically accessible to more people and to solving the massive household debt crisis we’re in. Saying that we’ll just get the government to pay for things is not a realistic solution.

Links:

Watch Professor Antony Davies explain the role of the federal government in creating the current student loan bubble.

Watch a classic video of Milton Friedman debating with college students about whether or not higher education should be subsidized.

Here you can read Veronique de Rugy’s take about the effect subsidized loans have on tuition prices.