Rethinking Financing Higher Education

Posted for Seher Ahmad

Recently, students in California protested against state budget cuts which may result in as much as 32 percent tuition hikes in some instances. While student protests make news headlines, higher education scholars (for a while) have known that state support to public education has been on the decline for several years and that institutions are left to raise money through other means.

From the state's viewpoint, one could argue that during recessions state tax revenues may fall below projected estimates. The state supports multiple social programs (e.g. corrections, health care, and child welfare) and higher education is often the only one that can meet deficits by increasing tuition or through other channels.

Moreover, even before the deepening of the recession, trends showed that the responsibility of paying for higher education has increasingly shifted from government to individual students and/or their families. According to College Board Trends in Student Borrowing 2008, between 2001 and 2006 approximately 60 percent of bachelor's degree recipients were using loans as a way to finance their education.

Recently, I came across a not very nuanced though compelling argument made by Peter Schiff (1). He argued that the reason educational institutions can charge such high prices is because the market can bear it, and the market can bear it because the government is offering low interest student loans. Moreover, if one was to trace the growth in federal funding of higher education, one would find that while the cost of a college degree has gone up, the value of a college degree has decreased. In order to examine his analysis I decided to appraise his claims using two widely known theories in economics: (1) theory of economies of scale, and (2) theory of supply and demand.

The theory of economies of scale states that (over a long period of time), as the demand for a good increases, the fixed cost per head to produce the good decreases. The concept applies to higher education in that higher education too moved from an elitist model to a mass model where substantially more people are being well educated.

The theory of supply and demand states that equilibrium is reached when the demand meets supply. If cost is too high, consumers refuse to buy the product, ultimately driving costs down. In the case of higher education, assuming that it is a "necessity" for the masses, then families and individuals will pay as much as they can. By contrast, the institutions too will be relying on them to bring in revenues. Let's assume that 90 percent of students at MSU would not be able to go to school if they weren't federally funded in some way (2). Next let's say that the state can no longer continue any of its programs, and the majority of students have to drop out. Therefore hypothetically there is no one going to school anymore. In order to stay open, the school will have to slash prices to get at least some revenue flowing. In essence, my analysis supports Peter's claims. I too believe that lack of a third party (the government) will help bring prices down in the long run.

While this analysis seems counter-intuitive especially from a "humanistic" viewpoint, it does make sense and forces us to examine some of our assumptions about higher education (the value and the necessity of a college degree as well as the role of government in making it both accessible and affordable for the masses).

1. Peter holds a degree in business administration and a concentration in finance from Berkeley.
2. Underlying hypothesis: federal funding has expanded access and made college affordable.