The Case against Student Aid Mises Daily: Tuesday, May 08, 2012 by Aaron Smith

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.

Student Actions

Superficially, abolishing FFA would be detrimental to the millions of students who rely on it to make college "affordable." Without federal assistance, the argument goes, students from poor and middle-class families would be unable to pursue the "American dream." This simplistic thinking, of course, fails to account for the myriad positive effects of purging FFA from higher education. Namely, the effects that would occur when students adjust their actions in a system void of terrible incentives.

Before evaluating these effects, it is worth noting the outcomes FFA has contributed to and thus challenge the primary assertion of the statists that federal intervention in higher education is good for students.

The national six-year graduation rate from four-year institutions is an abysmal 57.3 percent. For African Americans, whose well-being statists are supposedly trying to promote, this figure is 42 percent. In addition to wasted time and the dark cloud of failure for those who don't graduate, 8.8 percent of all borrowers were in default in 2009. In fact, 2 million senior citizens have student-loan debt, 11.2 percent of which are in default.

So, in a typical college auditorium with 100 students, 43 will not graduate within six years (if at all) and nearly ten will eventually fall behind on their loan obligations by more than nine months. Sadly, over 200,000 senior citizens are likely getting harassed by collection goons. All of this and the adult literacy rate has barely moved in the past 15 years, despite increasing rates of college attendance.

Failure, debt, and stagnant illiteracy — this is the American dream that FFA has helped students attain. While statists are quick to place the burden of proof on critics, their interventionists programs have achieved net harm over the past several decades. Nevertheless, it is instructive to postulate how student actions would change in the absence of FFA — and the positive outcomes that would likely result.

Currently, the "just get your degree!" mentality is quite pervasive. For this reason, a student is likely to downplay the significance of selecting a course of study. Similarly, it is commonly advised to attend the "best" institution possible — regardless of factors such as tuition and whether or not living at home is an option. Ultimately, the result of these fallacies is that, upon exiting college, a student is more likely to have poorer prospects for employment and a heavier debt burden than they otherwise would.

It is easy to see how such ill-guided advice was born. After all, it has been estimated that college graduates command a 74 percent premium in the job market. For reasons real, perceived, or some combination thereof, it is generally beneficial to have a degree. However, this does not always suggest that the knowledge and skills acquired while pursuing one are a direct cause of the wage premium or future success. It would be foolish to suggest, for example, that Steve Wynn's entrepreneurial achievements have much, if anything, to do with his English degree. The truly capable student is likely to possess the intellectual prowess and self-discipline needed to be successful regardless of official educational attainment. It is therefore thoughtless to compare college graduates and non–college graduates without accounting for selection bias.

This certainly does not imply that a college education is either a good or bad investment. For some fields, especially technical ones, it might represent the most efficient and financially rewarding option. For others, it is can be an entirely inefficient investment of time and money. This is quite obvious. Every degree type, after all, is indiscriminately given a four-year curriculum. It is rarely questioned why a student studying engineering and another studying business are to attend college for precisely the same number of years. To be certain, there are "reasons" why this is so — but none are particularly compelling.

It is clear that there are numerous factors an individual should consider when making decisions about education. Personal variables, such as interests and abilities are particularly important. Too often, these factors are ignored or given insignificant weight.

In the absence of FFA, a student would be more cognizant of their return on investment (ROI). Of course, actually having to pay for an education, and not merely buy one, would immediately increase their sensitivity to price. A magical fairy (i.e., DOE) would no longer make a student's bills disappear until they graduate or drop out. For some students, this might mean forgoing an expensive college in favor of a more economical one — others might opt to forgo college altogether.

If college is, indeed, a worthwhile investment for an individual, it might be necessary to delay matriculation in order to save money for tuition. Not only would this allow students to mature and develop an appreciation for the real world, it would be invaluable in helping them to be more prudent in selecting a course of study. True, fewer students would eventually enroll in higher education, as critics will likely point out with vigor — but is this worse than having myriad students dropping out with debt and many more graduating with impotent degrees?

A typical college student would also adjust their actions while in college. Currently, students devote an average of 3.2 hours to education on a given weekday in comparison to 3.9 hours to leisure and sports. Additionally, almost half of all full-time students abuse alcohol or drugs (subsidized by taxpayers). While these figures certainly vary by major and institution, it is reasonable to conclude that the preponderance of students could very well hold part-time jobs to cover cost-of-living expenses. Some might even choose to live at home and attend college locally. Perhaps many students could also learn to live without their iPhones, spring-break getaways, and other luxuries.

This is not to disparage college students. They are merely responding to the incentives created by FFA. Many have little choice but to act within the confines of the system — artificially inflated tuition rates in particular — which make debt and waste largely inevitable.

It is evident that without FFA, tuition would decrease and students would have greater incentive to delay college, work while in college, and live frugally (a nightmare to statists!). But what if this still isn't enough to cover the costs of higher education?

Currently, the costs of student-loan default are borne predominantly by taxpayers. If colleges are, indeed, confident that their programs will result in successful outcomes — then why shouldn't they assume this risk? Many colleges already offer institutional loans. In the absence of FFA, administrators would be incentivized to expand these programs to benefit capable students. In addition, private lenders have a strong financial incentive to assist those with promising futures. Nonfederal loans already account for about 16 percent of all educational loans.
 

Moreover, it is impossible to fully anticipate how entrepreneurs and philanthropists would respond to the abolition of FFA. Private scholarships and support from foundations would likely increase. Human-capital contracts and other innovative measures could flourish and even become the primary source of support for students. Unquestionably, such programs and others yet to be imagined will never come to fruition unless FFA is abolished. The market has incredible solutions to satisfying unmet needs and to allocating resources efficiently.

Absent FFA, students would be more responsible and prudent consumers of their education. This would be indispensable in preparing them for the real world. Until then, most will remain coddled and blissfully unaware of what awaits them in the future.

Conclusion

In the case of FFA, the later consequences that Bastiat warned of are clearly disastrous and have resulted in net harm. Abolishing these schemes in higher education would have positive effects for both institutions and students. The current culture of debt and inefficiency can be replaced by one that teaches students responsibility, hard work, and frugality. This should be embraced, not feared.

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Aaron Smith has an MBA from Texas A&M University and resides in Houston, Texas. Send him mail. See Aaron Smith's article archives.

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