Did Federal Aid Break the Education Market?

George Leef, writing for The John William Pope Center For Higher Education Policy, contends that federal student aid has failed the US education sector and has resulted in students learning less than they used to while paying much more in costs.

The federal government’s major student aid programs began as part of President Johnson’s Great Society in 1955. The reasoning was that as graduation improved the economic worth of an individual to the nation as well as themselves so by subsidizing the cost of education and making it affordable to more people the nation would benefit.

Opposition to federal student aid was negligible. The idea sounded so good.

Leef argues that the practical experience of and result from the federal aid program has been much different than expected with several unforeseen negative side effects.

If President Johnson had said, “Let’s subsidize students to go to college so that colleges can charge much more and students can decrease their learning effort,” he would have gotten no support for the legislation. Nevertheless, it seems that we have achieved both of those undesirable outcomes.

Leef’s idea is not new. In 1987, quarter of a century ago, the Secretary of Education at the time, William Bennett, argued that a combination of the federal student aid program and greedy colleges exploiting the system were responsible for the rising cost of tuition.

Leef’s commentary comes after a recent paper by Andrew Gillen and published by the Center for College Affordability and Productivity, called ‘Introducing the Bennett Hypothesis 2.0’. Gillen argues that the original hypothesis that federal aid enables colleges to increase charges was correct. He also refines the hypothesis to state that not all aid is created equal. For example federal aid specifically targeted at low income student doesn’t lead to an overall increase in degree charges.

Gillen also explores the relationships between tuition caps and selectivity. Basically, if a school has a tuition limit set by the state government then the result of an increase in federal aid is simply that the school can be more selective of which students are admitted. However if no tuition cap exists and a school is also free to price discriminate amongst it students then there exists a recipe for revenue maximization.

Leef draws a comparison between the effect of federal interference in the housing market (where the results are now apparent) and federal interference in the education sector (where the results are becoming apparent).

Prior to federal intervention in student aid, students in high school had strong incentives to excel so that they would have a chance at college if they wanted it. And because they paid most of the (much lower) cost, they took their studies more seriously if they eventually enrolled.

The virtues of the old education system were undermined by easy federal money in exactly the same way easy federal money undermined the housing finance system.