Wednesday, February 14, 2007

"Today was a good day for students"

Or so the breathless newsreader on my car radio said when he recently reported that the new House Democratic majority had fulfilled one of its campaign promises by passing legislation designed to lower the interest rate that students pay on their federally subsidized college loans. But it is such good news?

The price of attending college has soared in recent years – for small colleges and large, for liberal arts colleges and great universities, for good schools and bad. Why? To learn why you could do a lot worse than to consult the work of the Ohio University economist Richard Vedder. (See here for an entire 2004 book on the subject.) His argument is that these loans, and other outright grants from the government, amount to heavy subsidy of college tuition. College, like most heavily subsidized goods, becomes a good for which consumers are relatively indifferent to price. Why pay much attention to what the tuition is when taxpayers are picking up a significant amount of the tab? Colleges thus differentiate themselves not on price but on such frills as the football stadium, the state-of-the art-gymnasium and other features of the so-called “student centers” (which in my day were just called student unions and were none too flashy). Research is also separately subsidized through various public and private grants-making organizations, and so much of it is of little lasting impact even as it consumes a great amount of faculty time, which is taken away from, among other things, improving one’s teaching. It is striking how much rising college costs resemble rising health-care costs, health care also be a good whose consumption is heavily subsidized by taxpayers.

Colleges have several other problems that are not related to the Vedder thesis. They are, for example, institutions that can engage in nearly perfect price discrimination – what happens when a producer charges a different price for consumers with different willingness to pay, thus extracting more of their surplus and making more money. When a would-be student applies for financial aid, he must reveal incredibly detailed information about his parents’ finances. This allows the college (particularly his private) to set different tuition rates in the form of different levels of financial aid for students of various means. So not everyone pays the sticker price; the fact that George Washington University apparently has the highest tuition of any major school in the country at approximately $39,000 does not mean that everybody writes a check in that amount. But they do write a check that comes close to the maximum they are willing to write. And so colleges are in a better position to extract income for their consumers than most producers are. But the problem of rising costs overall (as opposed to the maximum price) is one that is almost certainly substantially attributable to the separation of the decisions of consumers – students – from the consequences of those decisions, i.e. the full social cost of providing a college education. In that sense, anything that increases the subsidy will make the problem worse.

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