Subsidizing Higher Education Is Not Creating Widespread External Benefits

by
Gary Galles
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President Biden’s student debt relief proposal created a storm of controversy. That is not surprising, since it was a transparent (and apparently successful) attempt to buy the votes of an important Democratic constituency, even though it created a target-rich environment for critics.

It is sharply pro-rich at the expense of those far poorer, from a party pretending to stand for the opposite. It is very costly to everyone else (the National Taxpayers Union put the average burden at just over $2500 per taxpayer). The income cutoffs, designed to make it appear it is less pro-rich than it is, are misleading because most affected are in the early parts of their careers, when their incomes are lower, even though their average lifetime incomes (wealth, in present value terms) are likely to be far higher. It will encourage more people for whom the costs of going to college exceed the benefits to go anyway. It will raise the cost of college further, transferring many of the benefits claimed for students to the providers of education.

Oral arguments to Constitutional challenges to Biden’s plan will be heard at the Supreme Court in February, with much at stake.

What I have found surprising, however, is that the arguments and evidence for how ineffective, poorly targeted, inequitable and probably unconstitutional the student debt forgiveness plan is have not gone one seemingly obvious step further–to ask why we subsidize higher education so heavily in America, even without the currently proposed additional debt relief. After all, student loan forgiveness would only be the ex post icing on the cake of very large subsidies of other people’s money that already go to higher education.

Thirty-one years ago, a Congressional Budget Office study found that tuition subsidies alone averaged more than 80 percent of the cost of providing an education at 4-year public colleges and universities. And despite claims by Elizabeth Warren and others that there has been reduced investment of in higher education, the evidence does not support that.

And that is just one part of what Gordon Tullock called “a highly regressive scheme for transferring funds from the people who are less well-off to those who are well-off.” Economists Edgar and Jacqueline Browning put it similarly, in their classic Public Finance and the Price System: “Subsidies to higher education effectively benefit the brightest and most ambitious young people, and this group will on the average have the highest lifetime incomes even without assistance.” So, the question becomes whether the supposed benefits of college attendance to others in society are great enough to justify the huge subsidies. And careful thinking makes that highly doubtful.

As Peter Passell has written:

“The prospect of heavy debt after graduation would no doubt discourage some students from borrowing,” but “that may be the wisest form of restraint. Someone has to finally pay the bill, and it is hard to see why that should be the taxpayers rather than the direct beneficiary of the schooling.”

An important thing to recognize in this situation is that subsidies supposedly going to students increase the market demand for education, so that the incidence (who actually captures the gains from subsidies) is often quite different than claimed. As Adam Smith noted over two centuries ago, education subsidies increase college demand and go in large part to education providers in better wages and working conditions.

Market forces (in addition to serious barriers to entry into becoming an accredited and respected higher education provider) largely transform student aid into education provider aid. The case made for higher education subsidies to the rest of us has also long included a thicket of highly questionable arguments.

Many have argued that subsidizing higher education results in higher productivity, benefiting others. But competitive labor markets mean that higher productivity is captured by the workers in higher compensation, not by others in society. Consequently, it does not justify subsidies from others. It has also been argued that subsidies are justified because they increase the supply of skilled workers, lowering costs. However, the greatest part of that “gain” is actually a transfer from existing workers forced to accept lower wages for their skills than otherwise, not a net gain to society.

Still others have argued that added education provides cultural benefits to society. Again, however, such benefits primarily accrue to the students themselves (e.g., the ability to appreciate art), providing little or no justification for public subsidies from others.

There are other problems with the “external benefits” argument for government provision of education. “Skate” or “Easy A” classes do not provide substantial external benefits because they do not teach much of value. In contrast, law, medical, and dental training may teach a great deal, but as mentioned above, the benefit of such training goes to graduates in higher incomes, not society.

Furthermore, one must confront the fact that courses in some fields actually seem to make students less productive in the eyes of many potential employers. It is hard to see external benefits rather than external costs to others in such areas. Sizable external benefits to others would also require, at a minimum, that schools successfully teach valuable truths and skills and that students retain such wisdom past graduation, yet both conditions frequently go unmet.

There may be some social benefits, though difficult to articulate and measure, that one might argue justifies government higher education subsidies. But most plausible illustrations come at lower levels of education, not college (e.g., learning your ABCs and basic times tables in primary school), with few if any added benefits from higher education subsidies.

And even if there are some benefits to others from further education, those benefits to others would have to be greater than the costs imposed on others to fund the subsidies, a comparison few proponents consider seriously. With current subsidies already very large, before any consideration of loan forgiveness, costs are often far larger than benefits. And given our tax burdens and the vastly expanded future tax burdens implied by the recent explosion of government debt (that will also now need to be financed at much higher interest rates), the arguments for leaving the money in citizens’ hands, where they could always invest in added education if they believed it was the highest valued use of their funds, become even stronger.

Arguments against President Biden’s student loan forgiveness plan are plentiful and powerful.

The substantial number of Swiss-cheese arguments long put forward in defense of higher education subsidies also lay bare what is only sensible as an effort to buy millions of votes from what has become a major Democrat interest group.

But those same arguments should also confront the massive higher education subsidies that would remain even in the absence of loan forgiveness. That would also bring us back to the Constitution. Not only does our supposed “highest law of the land” fail to grant the President unilateral executive power to cancel loan debts, nowhere does it enumerate education as a legitimate function of the federal government. We need less government involvement in both dimensions, not more in either.