When Bernie Sanders proposed free tuition at public colleges and universities, Hillary Clinton responded with her rival plan, The New College Compact.
“Students should never have to borrow to pay for tuition, books, and fees to attend a four-year public college in their state under the New College Compact,” she declared, adding, “students at community college will receive free tuition.” The purpose of her proposal is to ensure that “costs aren’t a barrier to college.” She closed her announcement video stating that a college education is “a right.”
There are many problems with her proposal.
First, establishing higher education as a right really means that some people must pay for goods and services to be consumed by others. It doesn’t make sense that costs shouldn’t be “a barrier to college,” because prices are barriers against excess demand and wasteful consumption. That’s as true for college education as it is for pizza, movie tickets, or anything else. If students don’t pay for college, many of them will put minimal effort into learning.
Clinton also complains about the large increase in tuition, with costs rising by 42 percent in the decade 2004 to 2014. She fails to see that federal aid in the form of grants, and particularly in loans, is the major reason for tuition increases.
There is plenty of empirical evidence for this effect. A recent paper by the Federal Reserve Bank of New York noted that yearly student loan originations grew from $53 billion to $120 billion between 2001 and 2012, and found similarities to the expansion of credit that led to the housing bubble of 2008.
Suppose the federal government subsidized loans to millions of Americans, to enable more people to own iPads. Elementary economics tells us this would result in an increase in the price of iPads. The Federal Reserve report unsurprisingly found that tuitions rose in response to the federal loan programs. The study found the Federal Direct Subsidized Loans generated a 65 cent-on-the-dollar increase on college tuition, while Pell Grants generated a 50 cent-on-the-dollar increase on college tuition.
Another problem Clinton proposes to address in her New College Compact is the decline of state aid to higher education. According to her site, “The recession accelerated the trend of state disinvestment in higher education, with states spending…20 percent less per student on average than they did 7 years ago.” A Center for Budget and Policy Priorities paper, which found that 47 states spent less per student in 2014 than before the recession, supports that assertion.
Reduction in state spending, however, is a logical result of the aid that Clinton proposes. State legislators must decide whether to spend more on K-12 education or higher education. When the federal government provides billions of dollars to higher education tuition in the forms of loans or grants, state lawmakers are inclined to dedicate more dollars to K-12 education than higher education.
Thus Clinton’s proposed expansion of federal subsidized loans will lead to the unintended consequences of higher tuition costs and less state spending on higher education.
Another problem is that the Clinton proposal would lead to what Nobel laureate economist Friedrich Hayek called “mal-investment.” That is, whenever government makes something artificially less expensive, people will change their behavior. Consumers demand more, and investors put more resources into fulfilling that demand.
Consider how free or nearly free college affects young people who decide what to do after high school. Many choose to go to college, even though they would benefit more from going into other areas such as skilled trades. It is well documented that there is a shortage of skilled labor, particularly in the construction industry. For example, a recent industry survey found three-quarters of homebuilders reported difficulty in finding new employees.
At the same time many college graduates end up in jobs that do not require a college degree. A Federal Reserve Bank of New York study found that in 2012, 44 percent of recent graduates were “underemployed”—defined as working in a job that did not require a college degree. For students who are lured into college when they’d do much better learning skilled crafts, their degrees are a mal-investment.
In their 1970 book Academia in Anarchy: An Economic Analysis, James Buchanan and Nicos Devletoglou argued that students who were not qualified for college, or who didn’t have a strong interest in pursuing education, were induced to attend college by subsidized or free tuition. In the decades since the problem of poorly prepared and weakly motivated students in college has grown far worse. Clinton’s proposal will only exacerbate it.
One result of marginally interested students is lower quality of education, as we saw in a recent national survey by the American Institutes for Research. It found that 30 percent of students who earned two-year degrees, and remarkably, 20 percent of students who completed four-year degrees, possessed only basic quantitative literacy skills. That means they’re unable to estimate if their car has enough gasoline to get to the next gas station or calculate the total cost of ordering office supplies.
That’s not much learning for the huge cost of college investment.
Without acknowledging many students learn very little in college, Clinton’s program would require colleges and universities to “be accountable for improving outcomes and controlling costs to ensure that tuition is affordable and that students who invest in college leave with a degree.” That sounds good, but the government can no more guarantee outcome improvement than it can guarantee anything else. Dictating better results while at the same time undermining student motivation is bound to fail.
Finally, Clinton states on her Web site: “Too many colleges are loading up students with debt for programs that don’t let them climb the economic ladder. And when things go wrong and students default on their loans, it is students and taxpayers who end up holding the bag.”
That’s pretty accurate.
Unfortunately her proposed solutions will not solve the cost and value problems in our higher education system, but will instead make them worse.