Cato: A Link Between Aid and Tuition Well-Established

Neal McCluskey, writing on the Cato-At-Liberty blog, takes on the assumption that the reason behind the stratospheric rise of college tuition is the decline in recent years in state financial support for their institutions of higher education. Specifically, McCluskey takes on a recent article by senior vice president of the American Council of Education Terry Hartle that claims that there is no link between the level of academic financial aid and the growing price of higher education.

Hartle writes that the recent tuition increases can be almost entirely traced to the fact that governments are drastically cutting their higher ed budgets.

Yesterday, Hartle and ACE’s Bryan Cook published a chart in a publication titled “Myth: Increases in Federal Student Aid Drive Increases in Tuition” that supposedly illustrates that it is indeed state budget cuts, not colleges’ ability to rake in money through aid, that explains tuition inflation.

While McCluskey agrees that student aid isn’t the main force behind rising tuition, it’s hard to argue that by screening students from the true cost of college, aid doesn’t play at least a contributory role in increasing those costs. Although the federal student aid program is the biggest player in the field of student aid, it isn’t the only source of it. Financial and merit scholarships are also regularly offered by state governments and various private bodies. Taken together, these kinds of financial subsidies make it easier for colleges and universities to raise tuition and disguise those hikes from the scrutiny of students and their parents.

Pretending that these factors play no role is not doing service to anyone, especially anyone seeking a solution to the problem of unaffordability of college.

With all that in mind, what does ACE’s graph reveal about the declaration that state subsidy cuts are the real culprit behind rapidly rising college prices? It shows that there’s much more to the story. And I’m not even talking about the near-total inability of ACE’s preferred bogeyman to explain private college tuition.

I haven’t been able to track down the source of ACE’s data, so I can’t reproduce the graph here, nor can I do better than eyeball where each point lies. But by my viewing, there are only two academic years in which colleges’ per-capita tuition increase simply made up for state-subsidy losses: 2004-05 and 2010-11. Every other year tuition rose well in excess of subsidy losses, ranging from a 1 percentage point net gain in 1992-93 to 7 points in 2007-08.

Tuition hikes in excess of subsidy losses can only be ascribed to institutional greed. Furthermore, by treating student loans in the same way as other loans, and requiring full repayment, both lenders and schools can decouple the cost of education from the value of education. The only way to solve this problem is to completely redesign the system underlying the student loan market. An alternative, proposed by Cato and others like Professor Luigi Zingales, in an editorial for The New York Times, would commit college graduates to pay over a set percentage of their after-college income, turning loans into co-called “equity contracts.” Students who are able to translate their college degrees into lucrative employment will be able to pay a larger chunk of money to the lender than those who choose to pursue a more modestly-remunerated career, and colleges would be forced to think deeper into price-value ratio of their degree programs.

Unfortunately, that sort of efficiency is something colleges—even, it seems, public ones!—almost certainly don’t want. They love making money, and do it most easily when government gives out dollars like water.