I see that the House is getting ready to vote on a cut in student loan interest rates. That’s a stupid move for two reasons:
- It’s just going to make college tuition more expensive.
- Colleges don’t need subsidies.
As evidence for the first point, consider this from Reason Magazine:
In a 2005 Cato Institute paper, Hillsdale College political scientist Gary Wolfram reviewed the relevant studies and concluded “there is a good deal of evidence suggesting that federal financial assistance has the unintended consequence of increasing tuition for all students.” One study found public and private four-year colleges increased net tuition (taking internal aid into account) by 68 cents and 60 cents, respectively, for each additional dollar in Pell Grants. Another study found private colleges raised net tuition by 72 cents for each additional dollar of federal loan aid.
Different types of schools respond differently to increases in subsidies, and price hikes can take several forms, including cuts in state funding and internal aid as well as increases in the official tuition. But the general effect is pretty clear: When someone else is paying part of the tab, consumers do not worry as much about the cost, so the cost tends to be higher. This phenomenon creates a vicious circle in which subsidies push up prices, leading to demands for increased subsidies, which push up prices again.
In short, government subsidies drive up the cost of tuition (which can happen because citizens feel less of the burden of paying for tuition) which in turn drives up the demand for more subsidies. It’s a vicious cycle, and one that needs to come to a halt.
As for the second point, the truth is that most of our universities in this country are friggin’ rich and could be doing more to hold down tuition expenses.
According to The Chronicle of Higher Education (sorry, subscription needed for link):
• 50 colleges and universities have endowments towering above one billion dollars.
• 227 colleges and universities have endowments ranging from $100 million to $900 million.
• 141 colleges and universities have endowments that surpass $50 million.
The average rate of return on these million- and billion-dollar endowments is 10.9 percent.
Why do colleges need to be subsidized by our tax dollars when they’ve already got plenty of money with which to provide their services to students? If government subsidies for tuition ended these colleges aren’t about to allow themselves to be priced out of business. They’ll dig into their bank accounts and cut back on expenses until tuition is at a point where students can afford it without government assistance.
Rather than increasing the subsidy for college tuition by using our tax dollars to buy down interest rates our political leaders should be looking to scale back tuition subsidies for the sake of making college more affordable.