Making education pay off

Posted on March 31, 2006 | Type: In the News | Author: Robert Robb
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The economics of higher education are badly out of whack.

Less than a third of Americans complete a college education. Doing so, on average, results in nearly a million dollars more in lifetime earnings. Yet taxpayers pick up the lion's share of the cost.

Theoretically, socializing the cost of higher education supports the American promise of upward mobility by merit, not status. And, indeed, getting a college degree is a very effective lever for upward mobility. advertisement  
In reality, however, the most accurate predictor of whether a student completes college is whether he or she has a parent who has done so. As a practical matter, the way in which higher education is funded in the United States amounts to a wealth transfer from lower-middle-income families to upper-middle-income families.

The cost of higher education is rising much faster than inflation. There is not a sound economic reason for this. In fact, costs should be headed the other direction.

As more students attend college, economies of scale should be reducing per-pupil costs. Technology should also be reducing the cost of disseminating learning.

The argument is frequently made that local taxpayer support for higher education is an "investment" in improved economic performance. It's a very peculiar investment.

The end result of the public investment'"an educated person'"is completely privately owned and entirely mobile. A person educated by the taxpayers of a particular state may or may not deploy his or her talents in that state.

Arizona has been a beneficiary of this phenomenon. Although, on average, fewer Arizona residents go on to college, Arizona has one of the highest rates of growth in the country among those with college degrees and post-graduate degrees. We are reaping the benefit of the "investment" in higher education made by the taxpayers of other states.

The economics of higher education are out of whack because there is a disconnect between buyers and sellers. Buyers (students) are subsidized. Except for student loans, however, the subsidy isn't even directed by the buyer. It goes directly to the higher education institution.

As a result, institutions of higher education, particularly public ones, don't have to be as student-focused as would otherwise be the case. That contributes to poor completion rates, a particularly acute problem here in Arizona.

There's a way to at least partially straighten out the whacked-out economics of higher education: fund students, not institutions. A recent study by Vicki Murray for the Goldwater Institute illustrates how this might work in Arizona.

According to the study, Arizona taxpayers currently provide about $1.3 billion a year to help operate the state universities and community colleges. That works out to a subsidy of about $8,000 for each university student and $5,000 for each community college student.

This includes both Arizona residents and out-of-state students. To the extent out-of-state students are paying their own way through higher tuition, the subsidies are actually even larger for in-state students.

At present, these subsidies go directly to the institutions, in the form of state appropriations and access to the local property tax for community colleges. Instead, Murray proposes that the money go to students, to be given to whatever in-state public or private institution of higher education they choose.

So, instead of lobbying legislators, colleges and universities would get their money by competing for students through offers of better learning environments and experiences.

To ensure that taxpayers get what they are paying for, Murray proposes that students who don't complete their degree pay back the subsidy. That should reduce casual, non-serious college attendance, kids who are majoring in a good time, while also sharply increasing completion rates.

There are a couple of very useful refinements to Murray's proposal. She limits the vouchers to in-state institutions. The critical question for taxpayers, however, isn't where the education takes place, but where the fruits of the education are deployed.

So, the voucher should be available to Arizona residents irrespective of whether they attend an in-state or out-of-state college.

The subsidy, however, should take the form of a loan rather than a grant, for all students, irrespective of whether they attend schools in state or out of state. The loans, however, would be forgiven based upon years spent working in Arizona.

Arizona residents who receive degrees from out-of-state institutions would have their loans forgiven if they came back here to work. Those attending in-state schools would have to pay them back if they quickly flew the coop.

If state taxpayers are going to subsidize a college education, the state should benefit from the skills thereby obtained. Otherwise, those receiving the education should finance it out of the higher income stream it produces.

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