Should Money Factor into Education Decisions?

Saw this on the facebook today. What I garner from this is that the message you’re supposed to read out of this is that when it comes to college, “Money shouldn’t be an issue.”

If only life were so simple. Who doesn’t want money to be irrelevant?

Of course, this is overly broad, and doesn’t even come close to the level of reality on which most people operate.

What if my only college acceptance letter was for a college that costs $75,000 a year — which is more than I or my family could afford?

Maybe I didn’t put much thought into where I applied to school. What if I only applied to one school? Maybe I should have considered more affordable options, than say GWU.

If I don’t put much rational thought into my education decisions, should the government still subsidize me? Should money still matter? Does government intervention, or platitudes like this, encourage people to be less rational?

Money, of course, plays a vital role in most rational folks’ decisions about higher education.

The President’s simplistic message ignores this. His defenders will say it’s geared towards people who can’t even afford what many would thinks are “affordable” colleges. This is a cop-out.

President Obama’s policies (and President Bush’s before him) make college less affordable for most people. Ironically, many middle-income families don’t even qualify for Pell Grants — there are other incentives they can take advantage of — but Pell Grants contribute to making college less affordable for their children.

What President Obama espouses is higher and higher levels of aid (Pell Grants, etc.) for people to afford college. While this is well intentioned, it is not a good way to actually make college more affordable.

Increasing Pell Grant levels — which President Obama has indeed done —  artificially drives up the demand for college by subsidizing it. It’s basic economics, and it’s something one of the few Education Secretaries I’ve liked has actually admitted.

Bill Bennett, Secretary of Education under Reagan, theorized this:

“If anything, increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase.”

Some folks have actually studied this along the lines of the Granger-causality prediction tool.

Normally, I am one to caution against equating correlation with causation, but there is some science to back this up. Of course, if you read Bennett’s 1987 op-ed, you’ll notice that he cites other causes as well. Pell Grants play a big role, but they alone are not to blame.

Joe Biden, of all people, gets this:

 By the way, government subsidies have impacted upon rising tuition costs. It’s a conundrum here. … So you are right, in a pure free-market the college tuition would have to be lower because there would be fewer people going to school, they wouldn’t have as much coming in.

As a general economic principle, however, Bennett and others are on target to say that when you subsidize something (like education) you’re going to artificially inflate the demand for it. This has a tendency to make that thing more expensive than it would under normal market conditions.

I found this Obama advertisement funny because, in some ways, President Obama’s policies — intended to lower the cost of a college education — have contributed to making it more expensive.

Reports CNN:

Although more Americans are getting help from scholarships and tax breaks, the net cost of college is eating up a higher share of the typical family’s income in 2011, according to a report released Wednesday.

No! Say it ain’t so! Sadly, it is so. Grants aren’t the only way we subsidize education, we also do it with state and federal tax dollars, tax write offs, and tax incentives.

I say scrap all of them. Yes, all of them. Even the federal loan guarantees. A little known part of the President’s Health-Care law essentially eliminates the old FFEL loan system, putting a trillion dollars or so of loans under the Department of Education’s purview. The Wall Street Journal said in an editorial that this was “The Quietest Trillion.”

We don’t have the money for that. This money — that President Obama says shouldn’t be an issue — largely comes from foreign lenders. And here I thought he felt foreign energy and trade was bad! Apparently not when it comes to lending to our future college grads. Many of whom, by the way, are under or malemployed.

There is a difference between encouraging people to go to college that otherwise wouldn’t — i.e. creating an education bubble — and doing things to that end that actually don’t serve the purpose. I’d argue our current education policies both encourage a bubble (which isn’t good for degree holders) and make it less affordable.

Ideally, the best position for government from a financial standpoint is to get out of the way. Completely.

One last thought: Few folks I know argue with the theory that our policies have created an education bubble. But some of my friends, including libertarians and conservatives, argue that we should use Pell Grants and re-tool other incentives to steer folks into fields where there are shortages — like medicine and engineering.

I disagree. Yes, we have labor shortages in fields like nursing. Much to the dismay of politicians like D.C.’s Marion Barry, Filipino and other foreign-educated folks tend to fill in to serve the need. Just like legal and illegal immigrants often fulfill shortages in the service sectors that Americans do not often choose.

My problem with using incentives like Pell Grants and other incentives to steer folks to certain fields is that it can yield an over-satiated labor force for certain fields. If we were to say, well, now Pell Grants only go to people who want to study nursing or engineering, won’t lots of people study that to take advantage of the aid?

Won’t that have a similar effect at schools that have those focuses? People who don’t qualify for the aid and want to study those subjects might choose to attend another school and study another topic. Some might be better equipped to work in that field. Picking what fields get incentives is just as bad because it is meddling in the market by government.

In short, I don’t think it is appropriate for the government to incentivize one field of study over another. While matching students with our labor market’s needs isn’t perfect — as evidenced by the number of bartenders with college degrees — I don’t think that the government would somehow do a better job.

To me, it’s fine for people to study whatever they want, even if they want to choose an obscure field of study that isn’t likely to yield consistent employment. I just don’t think we should subsidize it. Or people who study in fields we need more than others.

Ideally, we should do our part to share good statistics on the labor force, the predicted future needs of it, and let people choose their own fate. I don’t like the idea of government-steered labor forces — through incentives — and I don’t like subsidies that artificially inflate the doles of higher ed.

Then again, I’m not even sure I trust government enough to do a good enough job of predicting future labor needs.

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