Center Scholar Interview in Wall Street Journal

Prof. Richard Vedder on college subsidies

In a weekend interview with The Wall Street Journal, Mackinac Center for Public Policy Scholar Richard Vedder is called the "foremost expert on the economics of higher education."

Vedder directs the Center for College Affordability and Productivity at Ohio University and was interviewed to discuss President Barack Obama's recent tour of colleges and his proposal that seeks to tie financial aid to college performance. Vedder said that some of the president's ideas make "decent, even good sense," but that the plan is "not dealing with the fundamental problems."

College costs have continued to explode despite 50 years of ostensibly benevolent government interventions, according to Mr. Vedder, and the president's new plan could exacerbate the trend. By Mr. Vedder's lights, the cost conundrum started with the Higher Education Act of 1965, a Great Society program that created federal scholarships and low-interest loans aimed at making college more accessible.

In 1964, federal student aid was a mere $231 million. By 1981, the feds were spending $7 billion on loans alone, an amount that doubled during the 1980s and nearly tripled in each of the following two decades, and is about $105 billion today. Taxpayers now stand behind nearly $1 trillion in student loans.

Meanwhile, grants have increased to $49 billion from $6.4 billion in 1981. By expanding eligibility and boosting the maximum Pell Grant by $500 to $5,350, the 2009 stimulus bill accelerated higher ed's evolution into a middle-class entitlement. Fewer than 2% of Pell Grant recipients came from families making between $60,000 and $80,000 a year in 2007. Now roughly 18% do.

This growth in subsidies, Mr. Vedder argues, has fueled rising prices: "It gives every incentive and every opportunity for colleges to raise their fees."

Subsidies for colleges act as a disincentive for them to cut costs — driving up the price for students. In the meantime, there is no evidence that more subsidies lead to economic growth or job creation.

Two statistics in the interview stand out in particular: In 1970, 12 percent of college graduates came from the bottom quartile. Today that number is 7 percent. And the six-year graduation rate for most universities is about 55 percent. These numbers are despite massive increasing subsidies over the past decades.

A Wall Street Journal editorial about the Obama tour summed this up: "Politicians subsidize the purchase of a good or service, prices inevitably rise in response to this pumped-up demand, and then the pols blame the provider of the good or service for responding to the incentives the politicians created. Think housing finance and medical care."

Luckily, cheaper (and better) alternatives to traditional higher education are emerging. The only thing that can slow that down would be more government interference.