Why Increasing University Subsidies Does Not Help The Poor

 Recently here in California Governor Arnold Schwarzenegger was taken to task for reducing government subsidies to California Universities. The argument went that government subsidies help reduce University costs, which in turn helps reduce tuition, and since the poor would have a hard time paying higher University tuition, government subsidies are a boom for the poor.

While I can understand the motivation behind this argument, frankly, the argument was never very persuasive to me. For one, the majority of people that attend these Universities, especially the elite ones like the UC system, Stanford, and USC, are not poor people, but the upper and middle class. Yet since the subsidies come from tax revenue, tax revenue that can be used to help all citizens, very poor, poor, and middle class, subsidizing Universities is a method that takes from everybody but primarily helps the upper class and middle class. In the end, becoming a very inefficient way to decrease income inequality.

Second, there is no guarantee that subsidizing Universities will result in cheaper tuition for the poor. For example, Harvard, probably the highest subsidized University in the country, either by government subsidies or by direct gifts from former students, has one of the worse records of cheaper tuition for the poor. Hispanic Business writes:

Until recently, Harvard University has been perhaps the most glaring example of an elite college's failure to welcome low-income students. With an endowment of $25.9 billion -- far larger than that of any other university in the U.S. or abroad -- Harvard clearly has the resources to educate the poor.

Yet only about 10% of its undergraduates are eligible to receive federal Pell Grants, which are usually awarded to students from families earning less than $40,000 a year. At Amherst, 15% of the students get Pells, and President Anthony Marx is aiming to boost that to 25% of future classes.

But now, Harvard's controversial president, Lawrence Summers, is on a campaign to give low-income students far greater representation at America's most prestigious university. "If Harvard is only for the children of those who have been successful, we will lose the social mobility that has always been America's strength," argues the former U.S. Treasury Secretary. "I'd like Harvard to look as much like America as possible."

How far has this program gone? Hispanic Business continues:

GUARDED OPTIMISM. Harvard's program has only been in place for one full admissions cycle -- for the class that entered Harvard in September, 2005 -- but Summers and Fitzsimmons are encouraged. Last fall's entering class had 299 students from families earning less than $60,000 a year vs. 246 the year before -- an increase of 22%.

Imagine that, with a school as rich as Harvard, with a school with as many resources as Harvard, and more importantly, with a school that gets so much free money from government subsidies and private donors, Harvard could only find 299 students - and that an increase of 22% from the following year - from families earning less than $60,000/year. In addition, since the hard left at Harvard has run out Larry Summers, the founder of the program, the problem might get worse not better.

Subsidizing Universities to help the poor is analogous to having the government subsidies upper end department stores like Nordstroms and Bloomingdales in an effort to make products cheaper for the poor. A method that not only doesn't accomplish its goal very efficiently, but when it does help make products cheaper, it does so primarily for the benefit of the rich and middle class, not the poor.

Shawna Rasul, a student at the UCLA School of Law, learned this lesson the hard way, in a letter to the editor of the Daily Bruin she wrote:

I got an e-mail from the chancellor Thursday morning that gleefully described how UCLA has managed to raise $3 billion – more money than any other institution of higher education ever!

That's truly impressive, and from now on, I will hear "$3 billion" every time I walk into the lobby of my UCLA apartment building that looks like an abandoned home-improvement project.

Every time I look at the holes in the drywall and the 1970s renaissance carpeting, I'll think about the $3 billion.

When I cautiously take the elevator up to my floor and notice that the permit expired 14 months ago, I will wonder about those $3 billion. When I pay my $24,000 in student fees (which recently went up another $1,500), the $3 billion will be on my mind. While I'm pounding the pavement looking for a full-time job because the mid-year tuition increase has left me without the ability to pay my rent and bills this semester, I will reflect on the $3 billion.

But excuse me if I don't pop open a bottle of champagne and throw a party – I can't afford it.

This is why you won't find me on the picket lines asking for more funding for Universities, and instead find me squarely on the side of those who reduce University funding and instead find efficient means to help the poor pay for college tuition.

Update: Harvard economist Jeffrey Alan Miron writes on the same thing and seems to agree with my conclusion as well, his post here.

Update: Richard Vedder of the Center For College Affordability And Productivity has more. (Originally posted: 3/6/2006)

The Problems With Pell Grants

I admit it, I get uneasy feelings when people congratulate Obama for increasing Pell Grants. I don't see it as the universal positive that many others do. For three reasons.

First, Pell grants are politically cheap. Increasing funding for Pell grants takes little courage and comes with no political cost. Who disagrees with more funding for poor people to go to college? Certainly only the heartless. Whats more, it doesn't come out of Obama's own pocket, it's after all, the tax payers money. And what politician doesn't like being generous with other peoples money?

Second, it can make the problem worse. Richard Vedder, director of the Center of College Affordability and Productivity and professor of economics at Ohio University explains:

Work done at my research center reinforces findings of others that exploding student loan programs have contributed to higher tuition charges, and if Pell Grants grow more inclusive and generous, the same effect will occur with them...

The demand for higher education grows with rising federal financial assistance, but the supply grows less rapidly, pushing up prices (tuition fees). Supply is comparatively rigid because the so-called best schools attain their lofty reputation by turning away customers: college rankings are enhanced by taking very qualified bright kids who likely will graduate (and are disproportionately affluent). Dropping money out of airplanes over the houses of college students (or its equivalent) is not the solution.

Normally, this shouldn't be a difficult concept to understand. After all, who doubts that the spread of low cost mortgage financing helped fuel the housing bubble? Its the same concept here: low cost Pell grants, and especially low cost student loans, are a primary cause of University tuition increases. It's standard subsidy economics.

Third, it crowds out the private sector. The more the government funds it the less private donors will feel the need to, and thus, you replace private charity with public charity. And because public charity is less scrupulous than private charity, you make the grants less efficient. Which helps to explain why most pell grant recipients do not earn a college degree.

Arthur M. Hauptman, from the Center For American progress, explains:

Instead, we should worry more that increases in Pell Grants may lead institutions to reduce the amount of discounts they would otherwise have provided to the recipients, who are from poor families, and move the aid these students would have received to others. This possibility of a substitution effect is supported by the data showing that public and private institutions are now more likely to provide more aid to more middle-income students than low-income students.

In short, I see Pell grants as a way for Obama to escape real education reform by throwing us crumbs, just enough for us to shut up, and many do.

For more on this see this see here and here. (Originally published: 2/10/2010)