Economic Illiterates Standing Up for the Uneducated

First off, I want to say that I will poke fun at others in the most civil way possible, as much as the title of this post may seem to suggest otherwise. Ad hominem is the refuge of the indolent, and I will do my best to keep these posts free of it. Onto the illiteracy!

I have seen a blind-leading-the-blind phenomenon occur when hearing about President Obama’s free community college plan. News publications have discussed disdain for Republicans’ pushback on the issue, but they haven’t been as brazen as the vocal members of their comment boards. Among the left-of-center commentariat has emerged one specific refrain: Republicans don’t want free education because they want to keep the electorate stupid (and therefore voting Republican).

As far as conspiracy theories go, this qualifies as a slightly more elaborate plot than the banal trope of Republicans actively harming the poor. Regardless, I had a feeling that there was something ironic lurking beneath this partisan surface. As is often the case in politics, they did not disappoint.

Let’s take a closer look at Obama’s plan. Doesn’t “free” community college seem too good to be true? Obama insists that this isn’t a handout but rather something that students will have to work for. But the minimum 2.5 GPA requirement coupled with the need to only attend part-time makes me wonder how hard one really needs to work to qualify for this free education (and we’ll touch on later why a 2.5 GPA will be an increasingly inadequate threshold). Free taxpayer money is bound to benefit one group at the expense of another, but economics tells us that students aren’t the real beneficiaries in this arrangement.

When you subsidize an industry, it does two things. First, it increases demand by telling the consumers that this product is now cheaper than it otherwise would have been. Second, it tells the providers of the product that there is an infusion of money into their sector that is guaranteed by the government. How do you think a business would respond to a subsidy? They know that X amount of dollars will definitely be able to be supplied by the customer, so why not increase their prices? Financial aid packages at some schools can exceed $30,000. This is a combination of Pell grants and Stafford student loans, both of which continue to be increased over the years. Most of this is loans instead of outright grants, but the distinction doesn’t matter to colleges: they get the money up front. The years of debt is your problem, not theirs. So if I am a university, I have a disincentive to lower the costs of my school. The financial burden the family can bear is generally fixed; therefore, changing the cost of my school changes the amount of federal loans that need to be disbursed to reach the total price tag.

Let’s use an example to illustrate this. Middlebury College costs $62,993 with tuition and all else considered. A family with a household income of $48,000-75,000 will only pay $15,900 after loans and grants. What happens if Middlebury reduces their price tag by $5,000? The households in this income bracket can only still afford to pay their $16k; federal loans and grants will still cover the rest of the cost, but Middlebury gets to pocket $5k less from a family whose economic situation remains unchanged. Ask yourself, in this scenario, why would you ever cut tuition prices? Because it’s wrong and I’m a good person does not count. Regardless of your good Samaritan qualities, the education sector will continue to be filled with real people making real choices based on incentives.

It’s easy to get angry at schools that raise their prices year after year, but can you blame them? What else can we expect to happen when we feed them free money? This is why free community college is a boon for the colleges, not the students. The rise in tuition does not reflect a rise in the quality of education. If the internet has shown us anything, it’s that massive open online courses (MOOCs) like Coursera are able to deliver education in our modern age at little to no cost. No, these tuition increases go to funding lavish amenities as well as a ballooning administrative bureaucracy at schools. Instead of affordable tuition, these subsidies go toward funding state of the art athletic facilities and other resources that students do not need.

The proverbial high generated by all this free cash then takes a toll on the universities, too, as they are encouraged to over-leverage themselves when financing these opulent student centers and the like, driving them deeper into debt. They continue to do this because universities operate under the assumption that they’ll more than recoup the costs via the generous aid packages they can secure for their students. At this point, cutting rates becomes unfeasible for a higher ed institution. They have debts to repay, and cutting down on what amounts to a guaranteed revenue stream is a ludicrous proposition.

This of course ignores the total student debt which surpassed credit card debt to sit at its current $1.2 trillion dollars. We can all see how this adversely affects students, and this is complicated all the more by Stafford loans uniquely not being dischargeable under bankruptcy. Increasing subsidies merely increases the amount of debt that students will take on. Subsidizing student education has the perverse effect of convincing them to take on almost any amount of debt, regardless of how much bigger that debt burden becomes. They are increasingly insensitive to the price of an education because they themselves are not paying the cost (or get the illusion of affordability by deferring payments via generous loans). A private loan company would look at a young person with no credit history and scoff at the idea of floating an annual $30,000 loan for 4 years. The federal government, however, is not concerned with whether or not students can actually repay these loans; they just want you to see you enrolled in college. The government does not care about any aspect of the loan beyond figuring out how big of a check it needs to cut so that the student can attend.

So, how will 2 years of free tuition at community colleges exacerbate our problems? Plenty of ways!

For starters, we know that this will increase the cost of community college. Since Obama’s plan – through a combination of federal and state funds – will cover the full cost of tuition, we essentially have our above example on steroids. Instead of partial coverage, the full coverage now offered only further incentivizes colleges to raise their tuition. Additionally, Obama wants to make sure that these credits can be transferred to a four year college. Some people will of course be able to now use community college as a gateway to achieving just an Associates degree or finally be able to use this stepping stone to then enroll in a four year university. The reality, though, is that the population that would typically take the high school to 4 year college track will now increasingly opt to spend those first two years at a community college. And why wouldn’t they? The price differential between 2 years at college vs. community college is enormous; that tends to happen when one of the options doesn’t cost anything. Which leads me to wonder: how do you think four year colleges will respond to losing out on two years worth of revenue from their students? That’s right, more price increases! Why not? They know the aid packages will continue to grow. These federal and state funds will now help enrich the community colleges, too, but let’s not think that students will see much benefit in the long run.

Subsidies will also continue to make a mockery of the 2.5 GPA bar set by the administration. Grade inflation has steadily risen among four year colleges but remained relatively flat among community colleges. The infusion of loans into this relatively less subsidized system will certainly create the conditions for average GPAs to rise along with increasing subsidies. When the college’s revenue stream becomes dependent on subsidies, they are given strong financial incentives to ensure their students remain eligible for them. Failing more students means less money for your college. Individual schools may try to resist loosening academic standards, but the pressure weighs heavily on all schools to collectively lower the bar and keep the government spigot open.

If subsidies and loans aren’t the answer, then what is? Let’s try a thought experiment:

Imagine tomorrow we ended both the Pell grant and Stafford loan program. Nobody anywhere would be able to get any kind of financial aid package (excepting the GI bill). There would be only scholarships and private loan companies (who carry with them higher interest rates and restrictive qualifications). What happens to the university that charges $50k a year? Nobody can afford to attend any longer. Overpriced universities would see a dramatic drop in enrollment as thousands of families become literally incapable of financing the astronomical costs now laid bare at their feet. What can the education sector do? They could increase the supply of colleges to help bring prices down, but the restrictive and convoluted accreditation process makes this an unrealistic short term (or long term) solution. Colleges could – wait for it – lower their prices to bring supply back up! They really don’t have a choice; colleges cannot expect to stay in business for long with classrooms and shiny new dorms operating well under capacity. This would force colleges to finally confront their budgets and cut the things they don’t absolutely need. Resources would no longer be able to go toward flashy new buildings or a bloated bureaucracy. They would instead be finally forced into focusing funds on whatever is absolutely critical for giving students an education. The savings here are then passed on to students in the form of lower tuition so that universities can remain competitive in the market.

In the end, there is one maxim I must stress: intentions do not equal outcomes. I’m sure the online mob has its heart in the right place when they clamor for subsidies, but good intentions aren’t something I can chew on. Fortunately for me, the delicious irony of the economically illiterate standing up for the uneducated is enough to tide me over for now.

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One thought on “Economic Illiterates Standing Up for the Uneducated

  1. Pingback: Your Politics Are Stupid | Drink Deeper

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