The Effect of Higher Education Subsidies

1
The Effect of Higher Education Subsidies
Regardless of family financial statuseducation
should be open to every boy and girl in America
to the highest level he or she is able to
master. -1964 Democratic Party Platform (Mumper,
xv)
2
A look at the facts

• Higher Education Act of 1965
• Established Federal Student-Aid programs
  currently in place today
• Subsidies covered 71 of educational costs in
  1991
• Put differently, students paid 29 cents for a
  dollars worth of education (Lewis)

3
Forms of education subsidies

• Operating subsidies
• Funded by state and local governments
• Help to keep tuition low for students from all
  income groups
• Means-tested and grant/loan programs
• Funded by Federal government
• Target individuals based upon eligibility
  criteria and level of financial need

4
Intended effect of subsidies
5
Does the subsidy really act to increase
enrollment levels of students who would otherwise
not attend?
OR does it benefit those who would attend even
w/o the subsidy in effect?
6
Side effect of policy Decrease in Student Effort

• Lower tuition costs reduce a parents expectation
  of academic performance
• Existence of asymmetric information
• Parents are without perfect information on their
  childs motivation level
• Conflict of interest
• Students preference for leisure at school
  differs from that of his/her parents.

7
Disincentive Effect
A student can increase his/her consumption of
leisure and still receive as much, if not more,
financial support from parents
Results in a potential loss of human capital 15
8
Grade Inflation
U.S. Department of Education estimates that
grades actually declined slightly in the last
two decades.
National Center for Education Statistics revealed
that 33.5 of undergraduates had a grade-point
average of C or below in 1999-2000
www.gradeinflation.com
9
Grade Inflation at MSU
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
1999
10
Empirical Analysis Problems w/ The Disincentive
Effect

• Grade inflation
• Student effort is hard to measure
• Level of academic effort can depend on much more
  than the cost of tuition
• Ex a students living environment, medical
  concerns

11
Conclusions

• Effect of current system is hard to discern
• Possible Solution
• Progressive Voucher System
• Higher payments given to poorer students
• Will increase competition between schools,
  forcing them to decrease costs and/or increase
  quality of instruction

12
Sources

• Grade Inflation at American Colleges and
  Universities http//www.gradeinflation.com/
• Kohn, Alfie The Dangerous Myth of Grade
  Inflation http//www.alfiekohn.org/teaching/gi.htm
  
• Mumper, Michael Removing College Price Barrier
  1996
• Lewis, Ethan Gordon Winston Subsidies, Cost,
  Tuition, and Aid in US Higher Education 1986-87
  to 1993-94 http//www.williams.edu/wpehe/DPs/DP-4
  1.pdf
• National Center For Education Statistics
  http//nces.ed.gov/
• Sahin, Aysugel The Incentive Effects of Higher
  Education Subsidies on Student Effort
  http//www.newyorkfed.org/research/staff_reports/s
  r192.pdf