Thursday, May 10, 2012

The Case against Student Aid

For decades, Federal Financial Aid (FFA) programs have been implemented and expanded to make higher education "affordable" for students. The ostensible merits are obvious: loans, grants, and work-study schemes allow students to purchase education without much need for cash or other sources of private funding — a supposed benefit to students who otherwise might not be able to pay for college.

However, as Bastiat instructed, "It almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa." Surely, to the credulous eye, the immediate consequences of FFA have solidified its standing as a model of successful federal intervention. Virtually all students who are admitted to college qualify for FFA, which has helped fuel a substantial increase in matriculation rates. This illusory victory is but a distraction from the later and disastrous consequences that Bastiat warned of.

The unintended consequences of FFA are numerous, indeed. Skyrocketing tuition, high default rates, and pathetic graduation rates — to name a few — are all byproducts of a system that incentivizes inefficiency, largess, and misguided decisions. Oddly, while many students aren't legally permitted to take a sip of alcohol, they are systematically encouraged to contract into years of, essentially, indentured servitude. It is evident that the aggregate result of FFA is net harm.

Even statists, to an extent, are recognizing some of the negative effects of FFA. President Obama warned college officials in his recent State of the Union address that "If you can't stop tuition from going up, the funding you get from taxpayers will go down." While it is mildly encouraging that he implicitly endorses the Bennett Hypothesis — former education William Bennett's assertion that FFA enables colleges to "blithely" raise tuition — his proposed solutions, including increasing campus-based aid to $10 billion and a bubblegum $1 billion "Race to the Top" competition, only offer ever greater federal intervention. In essence, he wants to reward the meth addict for switching dealers.

Naturally, the only solution to eliminating the harmful effects of FFA is to abolish the programs altogether. Of course, this logical proposal is sure to be met with a great deal of skepticism. Perhaps this is understandable. After all, if one were to assume that nothing would change in the absence of FFA — that college officials, students, and other primary actors would exhibit precisely the same actions as they do today — then skeptics might possess a façade of rationality.

Such assumptions, however, are simply fallacious. Abolishing FFA would, in essence, change the laws of physics as we know them in the world of higher education. As Mises wrote, "Rational conduct means that man, in face of the fact the he cannot satisfy all his impulses, desires, and appetites, forgoes the satisfaction of those which he considers less urgent."

Each actor in higher education, therefore, would reprioritize its actions as it strives to, in Mises's words, "substitute a less satisfactory state of affairs for a more satisfactory one."

It is instructive to evaluate how college officials and students might adjust their actions to determine the effects of abolishing FFA. The effects of these actions, including lower tuition rates, increased institutional efficiency, and most importantly, better outcomes for students are overwhelmingly positive.

Institutional Actions

The Department of Education (DOE) spends about $30 billion annually on subsidies for higher education, almost all of which is distributed in the form of student loans and grants — $9.6 billion and $17.4 billion, respectively. Much like the housing boom, where easy credit fueled a bubble, this has stimulated demand for higher education. Between 1986 and 2006, a period in which FFA programs were greatly expanded, enrollment increased by 48 percent. This surge was accompanied by a 21 percent real increase in cost between the 1995–96 and 2005–06 academic years.

To be certain, the precise effect that FFA has on tuition is difficult to ascertain. The elasticity of supply, for example, differs greatly among institutions — a price increase at Princeton may not have the same effect on demand as a similar increase at Arizona State University. It can be reasonably concluded, however, that FFA generally leads to higher tuition costs. As Boston University professor Peter Woods explains, FFA is "seen by colleges and universities as money that is there for the taking … tuition is set high enough to capture those funds and whatever else we think can be extracted from parents."

Unquestionably, the abolition of FFA would drastically decrease demand for higher education at current tuition levels. Many potential students would possess neither the willingness nor ability to pay these artificially inflated prices — and rightly so. This would place immense pressure on most colleges to respond with substantial tuition cuts. Failure to do so would result in rather desolate campuses. Since state subsidies generally account for a substantial amount of institutional funding, college officials would also be under immense political pressure to adjust their prices. After all, they would be hard pressed to justify any funding without students.

It's evident that abolishing FFA would result in lower tuition rates. Failure to do so would be, essentially, suicidal for the majority of colleges. But how could they possibly persist without their usual injections of inflated revenue?

It is of little debate that inefficiency and largess are rampant throughout higher education. According to Bowen's law, named for Howard H. Bowen, "Colleges raise all the money they can and spend all the money they can raise." Unlike profit-seeking entrepreneurs, and much like any bureaucracy, their budgets have little regard for optimizing the relationship between expenses and quality. As Bowen explains,
The question of what ought higher education to cost — what is the minimal amount needed to provide services of acceptable quality — does not enter the process except as it is imposed from the outside.… The duty of setting limits thus falls, by default, upon those who provide the money, mostly legislators and students and their families.

Abolishing FFA would force colleges toward greater, albeit still bureaucratic, efficiency. Significant cuts in expenditures could be made painlessly with virtually no effect on their core service. Administrative bureaucracy would be a logical starting point for this. In 2007, it accounted for approximately 26.1 percent of the total workforce in higher education, an increase of 15.2 percent from 1997. Administrative bloat has significantly outpaced growth in spending on instruction-related activities. It has been estimated that a mere 5 percent reduction in administrative bureaucracy would save $1.78 billion annually.

Yet even more obvious ways exist to eliminate waste. For years, colleges have been engaged in a virtual arms race, growing to resemble amusement parks rather than institutions of higher learning. Rock-climbing walls, gourmet-dining commons, and lavish fitness centers have all become commonplace. Washington State even boasts the largest jacuzzi on the west coast and the University of Vermont has a $70 million student center. Oddly, such luxuries are rarely questioned in commentary on escalating tuition prices — while likely not a significant cause, per se, they are undoubtedly symptomatic of a greater problem. Although such grandiosity is highly effective at luring marginal students, it is inconsequential in the mission to educate and thus wasteful. Ending this madness would be another step towards greater efficiency on college campuses.

Perhaps most importantly, academia is in dire need of a cultural revolution. With insurmountable pressure to "publish or perish," teaching is but an afterthought for many faculty. As Walter Block and Roberto McGee noted, "receiving an award for good teaching is considered the kiss of death for an untenured professor." It is unsurprising then that teaching loads plummeted an astounding 36 percent between 1987–1988 and 2003–2004. It has been estimated that such reductions have increased costs by $2,850 per student at public four-year colleges.

Of course some research is indeed productive. However, it is highly unlikely that many of the 21,674 scholarly publications written on Shakespeare between 1980 and 2006, for example, had a demonstrable impact on student success. Colleges have much to save — and students even more to gain — when college officials reprioritize the work of their faculties.

Clearly, significant opportunities exist for colleges to become substantially more efficient. Abolishing FFA, and the necessary tuition cuts that follow, would force officials to eliminate many of the expenditures that are peripheral to educational quality. Additionally, student actions would also respond to these changes.


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