Front Page Titles (by Subject) CHAPTER 1: Financing Higher Education in the United States - Can Capitalism Survive?
The Online Library of Liberty
A project of Liberty Fund, Inc.
Search this Title:
CHAPTER 1: Financing Higher Education in the United States - Benjamin A. Rogge, Can Capitalism Survive? 
Can Capitalism Survive? (Indianapolis: Liberty Fund, 1979).
About Liberty Fund:
Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.
The copyright to this edition, in both print and electronic forms, is held by Liberty Fund, Inc.
Fair use statement:
This material is put online to further the educational goals of Liberty Fund, Inc. Unless otherwise stated in the Copyright Information section above, this material may be used freely for educational and academic purposes. It may not be used in any way for profit.
Financing Higher Education in the United States
The purpose of this study is to explore certain current and expected problems in the financing of higher education in the United States. In particular, it will be directed to an evaluation of one method of solving these problems: the method of full-cost pricing of the services of higher education.86
The central thesis of this paper is that full-cost pricing has much to recommend it, both as a solution to the pressing financial problems of higher education and as a solution to other serious problems flowing from below-cost pricing. It is argued that the traditional reasons advanced to support the need for subsidy to higher education, even if accepted, do not demand below-cost pricing as the method of subsidy. A secondary thesis is that the case for subsidy has itself been both exaggerated and distorted and requires careful reexamination.
Statement of the Problem
No time need be spent here establishing the fact that the colleges and universities of this country, both public and private, do indeed face a serious financial problem. This is one of the best publicized facts in the United States today. In sum, the story is that of an industry which confronts a financial crisis because of a fast-rising demand for its services.
This statement of the problem is used deliberately to throw in sharp relief the unique character of the industry. It is one in which the service is sold for much less than its cost of production.87 It is this and this only which makes of an increase in demand a matter of deep concern rather than a reason for optimism. An increase in the size of a student body usually means a larger deficit—a deficit that must be financed through public and/or private subsidy.
To most students of the problem (including most college and university presidents) the problem is simply one of raising more money to meet the larger deficits. To only a few does it seem to be reason for a careful and thorough reexamination of the nature and purposes of higher education and of the financial arrangements most likely to promote those purposes. It is the thesis of this study that such a reexamination is badly needed. In particular, to view the problem as simply a desperate need for expanded subsidy to higher education is to ignore the many problems that are associated with below-cost pricing—problems that will not be solved even if the expanded subsidy is secured.
Note: This study is designed to concentrate attention on how educational services are priced, not on how the buyers of those services secure the funds to pay the prices asked. That is, full-cost pricing does not rule out private and/or public subsidies to individual students. There are really two questions here: One is how the service should be priced, and the other is who should ultimately bear the cost of the service. Both will be examined, but the first will receive the more careful study.
The Effect of Below-Cost Pricing on Higher Education
To subject higher education to economic analysis may seem to be laying profane hands on a sacred symbol. Such is the mystique of this industry that it must not be appraised with the vulgar calculus of the market-place.
Yet “the vulgar calculus of the marketplace” still remains as the most humane method man has yet devised to solve those problems of allocation and division which are ubiquitous and permanent in human society. This we have accepted as a people by our continued commitment to the free market form of economic organization. We profess our faith in this form of economic organization for the economy at large, but deny that it is suited to the purposes of higher education. Free market pricing is deemed appropriate for most goods and services, but is rejected in pricing the services of higher education. The reasons advanced to support this position will be examined, but attention will be directed first to certain effects of this policy on the educational system itself. The question to be examined can be phrased in this way: How does below-cost pricing affect the college and university system of this country?
The impact of below-cost pricing on higher education will be examined under four headings: problems of finance, problems of rationing,problems of motivation, and problems of educational efficiency.
Problems of Finance
To most observers the only problem presented by below-cost pricing is the financial problem—the deficits that must be underwritten by the taxpayer or the private donor. Admittedly the financial problem is a serious one. This fact is clearly evidenced in the increasing tendency for college and university presidents (even of tax-supported institutions) to be fund-raisers first and educational leaders and scholars second.
The college or university president must of necessity be a professional beggar, and the pressure of performing in this role is undoubtedly one of the factors leading to the rapid turnover of presidents in American colleges and universities.
The financial problem presented by below-cost pricing is a serious one and is rapidly becoming a problem of fantastic proportions. Given the fact of below-cost pricing, there seems to be no solution to this problem that does not involve a significant increase in the burden on the taxpayer. Nor does it seem likely that it will be eased without ever-increasing reliance on funds supplied by the federal government.
Problems of Rationing
But the financial problem is not the only problem presented by below-cost pricing, nor is it even necessarily the most serious. At least as serious is the rationing problem which comes from selling educational services at well below the price which would clear the market.
The price of a good or service in a free market is not only a source of funds to cover the costs of the good or service. It is also the instrument which answers the question of to whom the available supply is to go. That is, price rations the total number of units available among those who wish to buy the product. It does this on the principle that the product is to go to those who are willing to give up the most (i.e., pay the highest price) to obtain it.
The acceptability of this principle need not be debated here. It is important only to note that it is one device for rationing. Moreover, it is a device that clears the market and that operates without any need for the seller to choose among buyers on some personal basis.
To set a price below the market price is to create an excess of quantity demanded over quantity supplied, whether the product be sirloin steak, rental housing, or education. This in turn requires of the seller that he find some way to determine whose requests for the product are to be granted and whose denied.
The problem of rationing the available educational services is fast becoming one of the major problems of higher education. This has brought into sharp relief the issue of the rationing principle to be used. The generally accepted principle is that educational opportunities are to go to those possessed of the greatest potential for intellectual growth. This principle has an immediate rationale in that education certainly involves intellectual activity. But closer examination reveals that it can be questioned on both practical and theoretical grounds.
If the principle is accepted, the first task is to measure potential for success in college. No one who has served on the admissions committee of a college or university would argue that this is a simple task. On the contrary, it is one of the most difficult tasks of college administration. Techniques for measuring potential are being improved each year, but mistakes are still made and will continue to be made under the best of measurement programs.
Somewhat less difficult, but no less trying, is the task of determining which students are to be permitted to continue in school, once admitted, and which are to be denied further access to the services of higher education.
The rationing technique under discussion here—whether applied in the selection of students for admission or in the selection of those to continue—operates in such a way that it often appears to the rejected student as a personally discriminatory technique. The rationing system of the free market at least has the advantage of operating as does the system of justice represented by the blindfolded goddess holding the scales. It does not ask “Who are you?” or “What kind of person are you?” or “Did your mother or father attend this college?” but only “Are you willing to pay the price?” Cruel as this may sometimes seem in practice, it would appear on balance to be less cruel and less humiliating than the personalized techniques of nonmarket rationing.
But even if potential for intellectual growth and general success in college could be measured with complete accuracy and in such a way as to leave no room for personally discriminatory decisions, there would still exist serious questions of the appropriateness of this principle. It seems to rest on the assumption that large jars should be filled with the purest wine, while smaller jars should receive nothing but such rainwater as they can catch from the skies. If education is opportunity for personal growth, are we to deny it in some arbitrary way to those unfortunate enough to start from a lower level or to possess less absolute capacity for growth? Is 30 percent growth for the bright student more to be preferred than 30 percent growth for the less able student?
Is it not possible that the brighter student is more capable of educating himself than the weaker student; that in fact it might not be nonsense to say to the quick-minded student, “Go educate yourself,” and to the less-gifted student, “Come, we will try to help you”? As a matter of fact, current practice on United States campuses is moving toward independent study programs for the gifted students—a back-handed recognition of the fact that to such students the traditional apparatus of the college may not be important. This is not to argue that admission should be limited to the poor student, but only to indicate that the principle that admission should be limited to the good student can be questioned.
Suppose this same principle of making educational opportunities available only to those with high potential to benefit from those opportunities were applied to other goods and services. The sale of opera tickets would then be restricted to those who could establish ability to enjoy opera. Wine would be sold only to the recognized connoisseur, and most wives would be denied the privilege of attending baseball games with their husbands.
For almost all other goods and services we assume that the individual is the best judge of whether or not he is receiving his money’s worth. Only in education do we give to the seller the power to make this decision for the buyer.
It might be answered that this is made necessary by the fact that college students are too immature to make this decision for themselves. This answer ignores the fact that the family of the college student participates in this decision and that we permit this same family to make most other decisions for the children in the family. Why is the family less able to make decisions about education than about medical care or clothing or housing for the members of the family?
In sum, the rationing principle in current use in higher education in the United States today is questionable in both philosophy and in practice. Yet below-cost pricing makes some such arbitrary and capricious method of rationing a necessity.
Note: College faculties usually give enthusiastic endorsement to this rationing principle. Could this be because they find it easier and more pleasant to interest the already interested, to seem to produce growth in those destined to grow anyway? This is an understandable feeling, but it seems something less than sufficient as a justification for the principle.
Problems of Motivation
Under the price system, a unit of any given product goes to the one who is willing to give up the most to get it. This is a rationing principle which tends in part to be a measure of strength of motivation. It tends to weed out those who have no great interest in the product. The effect of far-below-cost pricing in higher education is to admit many who have no strong desire to be educated—thus, the curious situation exists in which professors and deans must be constantly belaboring students to take that which they profess to desire. We are in the position of a grocer who must keep close watch on his customers to see that they do not pay for the merchandise and then try to get out of the store without it.
But the effect on the motivation of teachers is equally significant. To the extent that their incomes come from sources other than student fees, they are freed from some part of the necessity to really attend to the interests and wishes of the students. It is curious how irritated teachers become at any suggestion that their product be evaluated by their customers. They really seem to desire that each teacher be judge in his own cause, or at worst that he be judged by his colleagues (who of course should not be so vulgar as to consult student opinion of his work as a teacher).
A number of the points under discussion here are well made in Adam Smith’s Wealth of Nations. Smith comments on the effect of divorcing teacher income from student fees as follows:
In other universities, the teacher is prohibited from receiving any honorarium or fee from his pupils, and his salary constitutes the whole of the revenue which he derives from his office. His interest is, in this case, set as directly in opposition to his duty as it is possible to set it. It is the interest of every man to live as much at his ease as he can; and if his emoluments are to be precisely the same, whether he does or does not perform some very laborious duty, it is certainly his interest, at least as interest is vulgarly understood, either to neglect it altogether, or, if he is subject to some authority which will not suffer him to do this, to perform it in as careless and slovenly a manner as that authority will permit. If he is naturally active and a lover of labour, it is his interest to employ that activity in any way from which he can derive some advantage, rather than in the performance of his duty, from which he can derive none.
If the authority to which he is subject resides in the body corporate, the college, or university, of which he himself is a member, and in which the greater part of the other members are, like himself, persons who either are, or ought to be teachers, they are likely to make a common cause, to be all very indulgent to one another, and every man to consent that his neighbour may neglect his duty, provided he himself is allowed to neglect his own. In the university of Oxford, the greater part of the public professors have, for these many years, given up altogether even the pretence of teaching.88
He then comments on the effect of loss of student control in the choice of teachers:
If in each college, the tutor or teacher, who was to instruct each student in all arts and sciences, should not be voluntarily chosen by the student, but appointed by the head of the college; and if, in case of neglect, inability, or bad usage, the student should not be allowed to change him for another, without leave first asked and obtained; such a regulation would not only tend very much to extinguish all emulation among the different tutors of the same college, but to diminish very much, in all of them, the necessity of diligence and of attention to their respective pupils. Such teachers, though very well paid by their students, might be as much disposed to neglect them, as those who are not paid by them at all or who have no other recompense but their salary....
The discipline of colleges and universities is in general contrived, not for the benefit of the students, but for the interest, or, more properly speaking, for the ease of the masters. Its object is, in all cases, to maintain the authority of the master, and whether he neglects or performs his duty, to oblige the students in all cases to behave to him as if he performed it with the greatest diligence and ability. It seems to presume perfect wisdom and virtue in the one order, and the greatest weakness and folly in the other. Where the masters, however, really perform their duty, there are no examples, I believe, that the greater part of the students ever neglect theirs. No discipline is ever requisite to force attendance upon lectures which are really worth the attending, as is well known wherever any such lectures are given.89
In sum, then, while the student may find it pleasant to have his education subsidized, the price he pays for this is loss of control over his education. He who pays the piper will call the tune, and if the student is not the one who pays the piper, he cannot call the tune. Moreover, the divorce of teacher income from student fees has a tendency to encourage inefficient and ineffective teaching and to encourage teachers to treat their teaching duties as a necessary evil to be disposed of as quickly as possible so as to permit them more time for more important activities. An exaggeration? Perhaps, but who can say that he has never seen such tendencies at work?
The small, private colleges have the reputation of providing the best quality of teaching in higher education. Why is this? Might it have a connection with the fact that such institutions derive 50 percent or more of their revenues from student fees? Thus, the quality of the teaching has an important effect on the revenues of the college, and the administration is forced to encourage and demand of its faculty a high quality of teaching service.
In sum, the effect of below-cost pricing is to make of our colleges a collection of students, many of whom have no real desire to make use of the opportunity and a collection of teachers who are under no real necessity to provide a high quality of teaching services.
Problems of Educational Efficiency
The problems to be examined here are usually discussed under the heading of Problems of Academic Freedom. However, academic freedom is really a misnomer. It should not be confused with freedom in the sense of those rights which are guaranteed to Americans in the Bill of Rights. It is altogether fitting and proper that a person should be free to worship as he pleases (or not to worship at all), to think as he pleases, to speak and write as he pleases without fear of reprisal by government. In fact, these rights are the very cornerstone of the free society, and they are literally worth dying for.
But to say that Paul Robeson should be free to sing the Communist Internationale is a far different thing from saying that we must pay him for singing the Communist Internationale. We may believe that William Z. Foster should be free to publish books on the communist line, but we are not violating his freedom when we refuse to buy them. Now perhaps we are missing a chance to become better educated by refusing to buy them, and that brings us to the point here. So-called academic freedom is really a question of educational efficiency, of the improved understanding which comes from being exposed to a variety of points of view.
No teacher has an inherent right to present a point of view and to be paid for presenting it. If his customers wish not to pay to hear his point of view, this may be unwise on their part, but it is not a violation of any inherent freedom. In fact, to force them through the taxing power of the government to pay a teacher to present a point of view which they do not wish presented is a violation of an important freedom—the freedom of each man to spend his money as he pleases. Consider, for example, the injustice that would be done if the trustees of a college which demands acceptance of the Apostle’s Creed as a condition of employment, were to be forced to hire or to continue to employ an acknowledged atheist, in the interest of academic freedom. Or if a Quaker college were forced to hire General Mark Clark as its president.
But insisting that what is called academic freedom does not really involve freedom is not to minimize its importance. On the contrary, even though it is really a question of educational efficiency, it is a very important question. It is important that students be given an opportunity to hear and read a variety of points of view, particularly on questions of social policy. In the words of John Stuart Mill, “There is always hope when people are forced to listen to both sides; it is when they attend only to one side that errors harden into prejudices.”
This brings us back finally to the matter of below-cost pricing. The necessity for finding funds to fill the gap between student fees and total costs is always potentially dangerous to the integrity of an institution, to its continued ability to offer a program which embraces a wide range of social philosophies and which is otherwise educationally efficient.
The reasoning runs as follows: While the piper must inevitably be subject to pressure from those who pay him, his opportunity to play a varied and personally satisfying concert is greater the more numerous the sources of his support and the less dependent he is upon the support of one payer or one group of payers. In other words, his best protection lies in a wide diffusion of the economic power which he confronts. For example, if an institution becomes dependent on a government for support, the government will be strongly tempted to call the tunes. This control can and has been used to dictate not only the “proper” social philosophies for teachers but the “proper” content of the curriculum as well. Even the assumption that the government is controlled by majority vote of the citizenry is cold consolation to an institution that prefers the point of view of the minority.
In the same way, for a private college to become dependent on a few men of wealth, or on a relatively homogeneous alumni body or on corporation giving, is to create a potential for control and dictation. Of course, a mixing of all of these with student fees does provide considerable diffusion of power, and this is the real strength of the private college as compared to the public. But even this mixing may leave a few men or a few corporations in a position to wield extraordinary influence on the policies of the college.
Note: It must be insisted that there is no violation of inherent right if these men or corporations insist on exerting the influence they possess. They have helped to pay the piper, and they have a right to call some of the tunes. But this is a situation in which the educational efficiency of the institution may not be maximized. Now sometimes these money-givers from among the Philistines have a better idea of what the college should be doing than do the faculty and administration. But there is no reason to believe that their influence will always be benign.
In sum, below-cost pricing combined with public and/or private subsidy creates a situation in which the integrity of the educational institution is not protected by that diffusion of economic power ranged against it which is the real protection of all units—households and firms alike—in a competitive market economy.
Note: The private colleges and universities—both because they depend more heavily on student fees and because they draw subsidies from a greater variety of sources—do seem more capable of maintaining an educationally efficient program than do the large, state-supported institutions. The argument is not that the public donor is more given to intervening or less tolerant than the private donor. The argument is that the public donor agency may have control of as much as 80 percent of the revenue sources of the institutions with which it is involved, whereas the private donor rarely has control over more than a small fraction of the revenue sources of the institutions with which he is involved.
But would not freeing the colleges from subsidy-oriented control and placing them under customer control be a move from the frying-pan into the fire? Is the college student really equipped to evaluate the service he is buying?90
This is a difficult question to answer. If I may be permitted to draw from my own experience as a college teacher and college dean, I would say that the student is a much better judge of the quality of the educational services he is receiving than he is commonly held to be. In the main, students are able to distinguish between those faculty members who provide excellent learning opportunities and those who provide mediocre or worse learning opportunities. The testimony on which the student has been convicted as a poor judge is the testimony of those who are themselves the object of the judging and who have traditionally resented the very practice of student appraisal.
And here again it must be remembered that the student’s family often participates in the decision-making, adding the maturity of adult critical faculties to the immediate impressions of the student.
However, the greatest benefit to be derived from customer control is that the judgment of no one customer is critical to the operation of the institution. No small group of legislators, no small groups of corporations or individuals must be placated for the institution to survive and prosper. Nor need all institutions serve the same type of customer. The critical customer can be told to go elsewhere, because no one customer is of great significance. To repeat, it is not the restraint of the power wielders but the diffusion of power under customer control that protects the integrity of the institution.
In sum, below-cost pricing inevitably creates a threat to what has been called “academic freedom” (but what might better be called “educational efficiency”). To expect those who provide the subsidies to refrain from interfering with the operation of the school is to lean upon a demonstrably weak reed. On the other hand, to do as many feel appropriate, to somehow force the donors (perhaps through the operation of an organization like the American Association of University Professors) to keep their hands off the institutions they have subsidized is to deny another important freedom—the freedom of each man to choose the purposes to which his money resources are to be put. This is particularly true when the donor is the taxpayer who does not have the immediate option of stopping his contributions. He is ordered to pay and then is told that he must not question the purposes to which his funds are to be put. Under the system of below-cost pricing, there is no way of guaranteeing so-called “academic freedom” that does not involve a denial of other freedoms—or that does not demand of the donor a superhuman restraint from directing the uses to which his funds are to be allocated.
The Arguments for Below-Cost Pricing
Two primary arguments are advanced in support of below-cost pricing. One is based upon the assumption that the benefits of higher education flow not only to the students who are the direct customers of the schools, but also to society at large—that every member of society profits from being surrounded by and led by an educated citizenry. The other is the pure egalitarian argument that the principle of equality of opportunity demands that each young man and each young woman be given the opportunity of attending college, regardless of ability to pay for the services rendered. These arguments will be examined in turn.
The Social Benefits of Higher Education
The traditional thesis is that the student captures only a part of the gain that flows from his college education. Some part of the gain flows to society at large. Thus in the Northwest Ordinance of 1787 we find the following statement: “Religion, morality and knowledge being necessary to good government and the happiness of mankind, schools and the means of education shall forever be encouraged.”
The student tends to push his purchases of education only to the point where the private gain from another unit would be equal to the cost of another unit. However, it is in society’s interest that he push his purchases beyond this to the point where the social gain from another unit would be equal to the cost of that unit. This requires that the student receive a subsidy sufficient to induce him to purchase the additional units of education.
But even if this principle be accepted, below-cost pricing does not inevitably follow. The subsidy could be provided directly to the student to permit him to pay the market price to whatever institution he chooses to attend. We have implemented our desire to provide bread to those who do not have the means to buy it, not by asking bakeries to sell all bread at below-market prices and then subsidizing the bakeries, but rather by providing a direct subsidy to the families involved. In particular, we have not insisted on the government actually operating bakeries to take care of this problem. The thesis under study does not establish a need for government-operated educational institutions, and in fact, on other grounds, there is good reason to prefer privately operated to publicly operated colleges and universities.
Nor does this thesis establish any case for below-cost pricing (or even for subsidy) of all the services now provided by higher education. It seems to establish a case only for those programs of education which contribute to the citizenship qualities of the individual. Surely those courses which are primarily vocational in nature make only an insignificant contribution to the development of the citizen.
Professor George Stigler of Columbia University has commented on this issue as follows:
The basic defense for public and private subsidy of higher education is of course that it confers large social benefits, quite aside from any benefits accruing to the individual. This defense is largely wrong, simply as a matter of fact. The majority of college students concentrate their efforts on vocational studies whose general social value is measured, comprehensibly and with tolerable accuracy, by the earnings of the graduates. In 1954, of 187,500 bachelor’s and first professional degrees received by men in the United States, 63.1 percent were vocational degrees. For women the corresponding percentage was 54.8. The largest fields were:
The general scientific and cultural values of these disciplines scarcely call for something like a 50 percent subsidy of the costs of institutions of higher learning.91
In sum, the principle of social benefit at best calls for subsidy only to the traditional liberal arts programs of colleges and universities and even there does not require below-cost pricing as the technique of implementation. Direct subsidy to the individual student would serve equally as well.
Finally, it might be argued that the social benefits deriving from formal higher education have been much exaggerated. These benefits probably come primarily at the lower levels of education, particularly in the instruction each child receives in the basic skills of communication. Once a young person has acquired these skills, a whole world of knowledge is opened to him, a world in which formal classroom education is only one of the many alternatives. It would be difficult to prove that the college graduates in this country have been better citizens (even if a measure could be found) than the high school graduates. Far from underemphasizing the importance of higher education, we may have grossly exaggerated its importance to the maintenance of our free society.
The Egalitarian Argument
The second argument advanced in support of below-cost pricing is that equality of opportunity must be assured and that this demands equal educational opportunity for all.
In the first place, it should be pointed out that this too would justify only subsidy in some form, and provides no specific support for below-cost pricing of the services of higher education. On the contrary, below-cost pricing is a technique that subsidizes the sons and daughters of the wealthy as well as the sons and daughters of the poor. If the goal is to make education available to those who cannot afford it, below-cost pricing is a very blunt and wasteful instrument.
Thus, even if the egalitarian view is accepted, far from justifying below-cost pricing, it condemns it as an inefficient means of achieving the desired end.
Education and Equality of Opportunity
But the thesis that equal access to higher education, regardless of financial ability to pay for it, is a sine qua non of equality of opportunity is not of unquestionable validity. Support for this thesis usually involves pointing to the demonstrably higher lifetime earnings of college graduates vis à vis nongraduates. The inference is drawn that the college education is itself the cause of the higher earnings.
One of the most important principles of statistics is that correlation is not the equivalent of causation. In this case, the high correlation between years of education and lifetime earnings may derive in part from the fact that those who attend college possess a generally higher potential to achieve than those who do not attend college. Thus, these same people would attain higher-income positions even if they were not to go to college. In the same way, those who attend college tend to come from higher-income families than those who do not attend college. Thus, they have such advantages as may come from a firmer financial base as a platform for the launching of a career. Finally, there is good evidence in the recent economic history of this country that a young man or woman without a college education is capable of making rapid economic progress.92
Moreover, those who wish to be educated do not face just the one alternative of formal, classroom education. Each person in our modern society is surrounded by opportunities for acquiring the knowledge, skills, and understandings that are the end-product of higher education. (One increasingly important set of such opportunities is to be found in the education programs sponsored by business firms for their employees. Moreover, there is evidence that the young adult, with some work experience behind him, makes better use of educational opportunities than does the young person of eighteen to twenty-two.)
In other words, there is no clear evidence that income-earning possibilities are a direct function of education. But even if this could be established, it would still be difficult to prove that formal college education is the only kind of educational opportunity which promotes this end.
Admittedly, there are certain professions (e.g., law, medicine, and engineering) which are open only to those with a certain minimum of formal education. But in most of these cases, the lifetime earnings of those who received the training would easily permit them to pay for their education on a deferred-payment basis. All that is needed here is a capital market that will permit the treating of professional education as an investment in personal capital.
Confirmation of this thesis is found in one unexpected place: in a book whose central thesis is that higher education must be even more subsidized than at present, including a substantial increase in federal aid to higher education. The book is A New Basis of Support for Higher Education, and the author is Thad L. Hungate, Controller and Professor of Education, Teachers College, Columbia University.
In one paragraph he says, “While students and parents may continue to finance student living costs, neither fees nor living expenses should bar a student who has met defined state standards and has been admitted to and accredited for attendance. State aid should supplement family means as needed for this purpose.” Yet in the very next paragraph he adds, “It is considered likely that each beneficiary of a college education so lifts his lifetime earnings that the increased taxes he pays will more than repay to society the initial capital it has invested in him.”93
But if his increased earnings will permit him to repay the taxpayer, they will also permit him to repay a lending agency on the private capital market! Far from establishing a case for public subsidy, this statement weakens the case for public subsidy and strengthens the case for letting each student finance his own education from some combination of current and anticipated resources.
In sum, the argument that higher education must receive public subsidy to assure equality of income-earning possibilities is questionable in both theory and practice. There is no clear evidence that a formal, college education is itself a cause of higher lifetime earnings. But if it could be proven, it would establish not a need for public subsidy, but rather a need for an improved capital market to permit students to pay for their school out of the higher earnings produced by that schooling.
1. The present system of below-cost pricing of higher education creates a number of serious problems. These include the problem of deciding which young people are to be admitted to college and then which are to be permitted to continue; the problem of low motivation of many students; the problem of motivation of faculty members created by the fact that they are not paid by their students; and the problem of educational efficiency created by the need to find resources to cover the annual deficits of colleges and universities.
2. The arguments presented to establish the desirability of public and/or private subsidy to higher education, even if accepted, do not demand below-cost pricing. They call only for subsidy in some form, and the problems associated with below-cost pricing suggest that the subsidy should be provided in other ways, perhaps through grants to individual students.
3. The arguments for subsidy to higher education are not of unquestionable validity. The “social benefit” argument seems to have been exaggerated and at best would apply only to the nonvocational types of higher education. The “equality of opportunity,” in the opportunity-to-income sense, cannot be verified by a study of the recent economic history of this country. If it could be verified, it would establish not a case for subsidizing higher education, but rather a case for an improved capital market to permit students to borrow against future earnings to meet current educational expenses.
If the arguments developed in this paper were to be accepted as valid, what policy changes would seem to be required? Would these changes not call for an unrealistic assumption of the willingness on the part of the American people to modify the traditional arrangements in higher education?
Certainly, it is true that traditional arrangements cannot be changed quickly or with ease—and this is not an unmixed evil. A certain caution in making changes is usually wise.
It is particularly difficult to secure any reduction of subsidies to special groups, and in particular to secure reduction of subsidies coming from public funds. Those who lose the subsidy lose a considerable sum per capita; those who are relieved of paying for the subsidy gain only a small sum per capita. Thus, the subsidized tend to be much more vocal and aggressive than the subsidizers.
However, there is a growing awareness of the frightening financial load of higher education to be expected in the next ten or fifteen years. Some state legislators are already demanding that the state-supported schools increase tuition charges to students.
Clearly, any changes would have to begin with the charges of state-supported schools. The private colleges and universities cannot hope to move closer to full-cost tuition charges until the tuition charges at state-supported schools are increased substantially. The differential in tuition costs already operates to place the private schools at a serious competitive disadvantage.
The first step would seem to be for state-supported institutions to set up a pattern of tuition increases designed to increase the percentage of costs covered by tuition payments. This pattern could call for a final position in which the revenues from tuition fees would be approximately equal to total costs. This could probably be done only if the state were to also provide an increasing supply of straight grants or loans to students. It would seem to be desirable to move as quickly as possible to the use of loans only to students pursuing strictly vocational courses, and to increase the ratio of loan money to grant money for all students. These loans and grants could also go to students attending privately operated colleges and universities. This would certainly be consistent with the general principle, but the private colleges would probably be able to bring students in touch with private sources of loan or scholarship money and would probably prefer to do so. In fact, there would be good reasons for the state governments to vacate the lending position as rapidly as the private money market could service the needs of students.
This paper is basically neutral on the question of whether government aid should come from local and state units or from the federal government. However, the principle of diffusion of power would seem to establish a preference for local and state units. Also, the general reduction in the financial responsibilities of government for higher education under this plan would largely dissipate the case now being made for federal aid to higher education.
It is probably unrealistic to expect that higher education in this country could be recast in the ultimate pattern implied in this study. But it is not unrealistic to suppose that progress could be made in bringing all tuition charges closer to the level of full cost, in greater use of loan techniques in the financing of all education and vocational education in particular, and in making greater use of the private capital market in the financing of investments in education. These changes would also tend to place an increasing emphasis on private as compared to public sponsorship of institutions of higher education.
If the arguments advanced in this paper are valid, all of these changes would work to the benefit of higher education and of the American society.
[86. ]The findings may or may not be relevant to elementary and secondary education. At the very least, this relevance would have to be established by a study specifically directed to those two stages in the educational process.
[87. ]A study of various collections of data reveals that the revenues from tuition charges cover from 15 percent to 25 percent of the costs at publicly controlled institutions and from 45 percent to 55 percent of the costs at privately controlled institutions.
[88. ]Adam Smith, The Wealth of Nations (New York: Modern Library, 1937), pp. 717-18.
[89. ]Ibid., pp. 719-20.
[90. ]Thus, Howard Mumford Jones of Harvard University writes, “It is a misleading function when the concept of learning is, as is too often the case, sacrificed to the concept of teaching; when, for example, adolescents are solemnly asked to rate mature scholars in terms of their entertainment value in the classroom, and an administration in turn seriously accepts these callow judgments as a factor in the keeping and promoting of scholars.” Howard Mumford Jones, “The Service of the University,” ACLS Newsletter, Winter 1956-57, p. 12.
[91. ]George Stigler, “The Economic Theory of Education,” unpublished manuscript.
[92. ]One interesting reason for one advantage of the college graduate over the non-college person is to be found in the comment of an executive of one of the large steel companies. He says that his company hires so many college graduates each year in its executive development program, not because they have found college graduates to be clearly superior to non-graduates, but because the union rules on seniority prevent them from advancing the really good men from the work force into positions of responsibility. The same rules do not govern the young college graduates hired directly into the management group, and from this follows the company search for college graduates!
[93. ]Thad L. Hungate, A New Basis of Support for Higher Education (New York: Bureau of Publications, Teachers College, Columbia University, 1957), p. 7.