• Embed Doc
  • Copy Link
  • Readcast
  • Collections
  • CommentGo Back
Download
 
Routing 
 As Congress debates the reauthorization of theHigher Education Act, it should heed FriedrichHayek’s warning that democracy is “peculiarly liable, if not guided by accepted common princi-ples, to produce over-all results that nobody want-ed.” One result of the federal government’s stu-dent financial aid programs is higher tuition costsat our nation’s colleges and universities. Basic eco-nomic theory suggests that the increased demandfor higher education generated by HEA will havethe effect of increasing tuitions. The empirical evi-dence is consistent with that—federal loans, Pellgrants, and other assistance programs result inhigher tuition for students at our nation’s collegesand universities.The diversity of objectives, resources, andtypes of governance among the thousands of col-leges and universities makes it difficult to ade-quately measure the exact amount by whichtuitions rise in response to federal student assis-tance. Therefore, estimates of the amount vary inthe literature. Congress can at best know that itspolicies increase tuitions and that some portionof the federal assistance ends up being capturedby state governments and by the colleges anduniversities. Also, when large numbers of students beginto rely on the federal government to fund theirhigher education, and the federal governmentuses this financing to affect the behavior of stateand private institutions, we should be concernedabout how the resulting loss of independence of our colleges and universities affects the ability of  voters to form opinions about public policy thatare independent of the government’s position.Rather than expand the current system,Congress should consider a phase-out of federalassistance to higher education over a 12-yeartime frame. As the federal government removesitself from student assistance, we should expectseveral things to happen. First, sticker tuitionprices should decline. Second, the private marketshould respond to the phase-out of federal assis-tance. That response would likely take threeforms: additional private-sector loans, additionalprivate scholarship funds, and perhaps mostimportantly, the expansion of human capitalcontracts. Human capital contracts, first sug-gested 40 years ago by Nobel Laureate MiltonFriedman, would allow students to pledge a por-tion of future earnings in return for assistance inpaying their tuition.
 Making College More Expensive
The Unintended Consequences of Federal Tuition Aid 
by Gary Wolfram
_____________________________________________________________________________________________________
Gary Wolfram is George Munson Professor of Political Science at Hillsdale College in Michigan.
Executive Summary 
No. 531January 25, 2005
 
Introduction
Friedrich Hayek warned in
The Constitutionof Liberty
that democracy was “peculiarly liable, if not guided by accepted commonprinciples, to produce over-all results thatnobody wanted.”
1
 As Congress readies itself for reauthorization of the Higher Education Act, it should decide what the purpose of theact is and whether its component programsare accomplishing their intended goals.Indeed, the current act, along with the varioustax credits and deductions and other pro-grams such as the GI Bill, has over the yearsmoved the federal government further andfurther into the higher education marketwith insufficient debate over the goals of pro-grams, their effectiveness in meeting thosegoals, and the unintended effects on tuition.Direct financial aid began as a way of pro- viding benefits to World War II veterans whohad been seriously underpaid, then moved togrants to low-income students to expandaccess to higher education, and now includestax credits to help middle- and upper-incomeparents face the cost of high tuition. The netresult is a mixture of programs that may haveresults that Congress never contemplated. Inparticular, there is a good deal of evidencesuggesting that federal financial assistancehas the unintended consequence of increas-ing tuition for all students. Federal aid may also result in a reduction in aid by state gov-ernments to students who attend universitiesin their state and a reduction in state appro-priations to public colleges and universities.Individual colleges and universities may alsoreduce their internal financial aid when theirstudents receive federal aid. In addition, fed-eral aid reduces the independence of ourinstitutions of higher education.There are thousands of American collegesand universities, both public and private.Each institution has its own organizationalstructure and operates under different objec-tives and constraints. As a consequence, thereis no single model of the effects of federalgrants, loans, and tuition tax credits on col-leges and universities. Nevertheless, both the-oretical analysis and empirical evidence indi-cate that the federal government’s financialaid programs cause higher tuition costs,reducing the ability of some students to go tocollege and causing others to attend a collegethat is not their first choice. Basic economictheory suggests that the increase in demandfor higher education brought about by thesystem of grants and loans will increase theprice of higher education.This year, Congress should consider theeffect of federal tuition aid on college costs asit debates the reauthorization of the HigherEducation Act of 1965.
2
Rather than expandfederal aid to higher education, Congressshould phase out the current federal assis-tance program over a period of 12 years andallow the charitable sector to provide assis-tance to college students. Congress shouldfocus on developing the legal structure thatwould allow for a system of human capitalcontracts, a proposal that was suggested by Nobel Laureate Milton Friedman more than40 years ago and whose time has now come.
The System of Financial Aid
The role of the federal government inhigher education has been a topic of interestsince the Founding. George Washingtonthought that we should have a national uni- versity.
3
The federal government helped estab-lish land grant universities in the 19th centu-ry. Although we have no national university today, and the land grant universities are now primarily associated with the state of theirlocation, the federal government is heavily involved in higher education, subsidizingattendance and using incentives to affect thebehavior of colleges and universities. It doesso with grants, loans, work-study programs,and tax credits.The Bush administration’s 2005 budgetwould provide $73.1 billion in overall federalfinancial aid to students through the Depart-ment of Education under HEA, an increase of $4.4 billion over the 2004 level. The number of students receiving assistance through grants,
2
Basic economictheory suggeststhat the increasein demand forhigher educationbrought aboutby thesystem of grantsand loans willincrease the priceof highereducation.
 
loans, and work-study will reach 10 million,up from 9.5 million in 2004.
4
The primary programs that serve these students are thePerkins Loan Program, Pell Grants, FederalSupplemental Educational Opportunity Grants, Federal Work Study Programs, theFederal Direct Student Loan Program, FederalFamily Educational Loans, and Federal TrioPrograms.
5
The amount of direct student aidin the major programs provided in 2004 andrequested for 2005 is detailed in Table 1.The Department of Education has a num-ber of other programs under various titles of HEA, such as direct assistance to HowardUniversity; the GEAR UP program, intendedto prepare low-income students for collegelearning; and Aid for Institutional Develop-ment. In addition to the programs in theDepartment of Education, there are severalother programs that provide assistance tohigher education, including the Mont-gomery GI Bill.
6
The Department of Educa-tion projects tax benefits from the highereducation tax programs to be $3.5 billionunder the Hope Tax Credit, $2.2 billionunder the Lifetime Learning Tax Credit, $2.6billion for higher education expense deduc-tions, and $780 million in deductions forinterest paid on postsecondary loans inFiscal Year 2005.
7
HEA: Duct Tape andUnintended Consequences
 As may be obvious from the plethora of programs, the federal government has notthought out its proper role with regard tohigher education or developed programs thatwere designed to work together to accomplisha given goal. Indeed, as Robert Archibaldpointed out in
 Redesigning the Financial AidSystem
:Through the years, the (financial aid) sys-tem has evolved with changes in fundinglevels, adjustments in rules, and the addi-tion of programs. For the most part, thisevolution had been unplanned. On occa-sion, programs have been changed withno thought to how other programsmight be affected. . . . The financial aidsystem of today resembles somethingthat has been patched up many timeswith duct tape, bailing wire, clothespins,and spit. It is dizzyingly complex, and isnot doing its job efficiently.
8
The empirical literature is fairly consistentin showing that student aid has increased thedemand for higher education.
9
What is not
3
The empiricalliterature is fairly consistent inshowing thatstudent aid hasincreased thedemand forhigher education.
Table 1Aid Available to Students, FY2004 and FY2005 Request (millions of dollars)
Program20042005 RequestPell Grants13,04212,803Campus-based Programs:Supplemental Grants975975Work-Study1,1961,196Perkins Loans1,2631,137Leveraging Educational Assistance169-Federal Family Educational Loans38,97842,588Federal Direct Loans13,21914,329
Source: U.S. Department of Education, “FY2005 Budget Summary—February 2, 2004,” www.ed.gov/about/over view/budget05/summary/edlite-section2d.html.
 
Table 1Aid Available to Students, FY2004 and FY2005 Request (millions of dollars)
Program20042005 RequestPell Grants13,04212,803Campus-based Programs:Supplemental Grants975975Work-Study1,1961,196Perkins Loans1,2631,137Leveraging Educational Assistance169-Federal Family Educational Loans38,97842,588Federal Direct Loans13,21914,329
Source: U.S. Department of Education, “FY2005 Budget Summary—February 2, 2004,” www.ed.gov/about/over view/budget05/summary/edlite-section2d.html.
of 00

Leave a Comment

You must be to leave a comment.
Submit
Characters: ...
You must be to leave a comment.
Submit
Characters: ...