Incorporating Market Forces Into Higher Education

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Gov. Bobby Jindal is expected to unveil the Louisiana GRAD Act, a proposal that will allow public universities and colleges to increase tuition without legislative interference. In turn, institutions will have to meet defined performance goals and improve their graduation rates.

Currently Louisiana’s institutions cannot raise tuition without a two-thirds approval by the Legislature. This policy distorts the market by putting an effective price ceiling on a product that a growing number of people wish to purchase.

The GRAD Act seems to be a step towards a more market-based pricing system, but it has limitations. In a market system, higher prices discourage marginal buyers. In the case of higher education, this would impact those who are less fully committed to pursuing higher education.

But our higher ed system features extensive federal intervention, which distorts the market. Higher tuition leads to more federal aid. Federal aid shifts the burden of education costs to taxpayers. The buyer is insulated from the higher cost of and the demand for education is artificially inflated.

In a true market economy, higher tuition costs will cause fewer people to apply to college. While we may initially view this as a problem, the Cato Institute argues that there are too many college students:

“While college attendance is up, overall adult literacy has barely budged. A federal assessment found that in 2003 only 13 percent of Americans 16 years old or older were ‘‘proficient’’ in reading prose, understanding written directions, or performing quantitative tasks. This dismal score was down from 1992, when 15 percent of Americans were proficient in prose and document literacy. To a significant extent, it seems a college degree may just be replacing a high school diploma as a sign of minimum competence.”

It appears that our current system of government subsidization has made education more affordable but less valuable. The GRAD Act can only have a limited impact on the market for higher education while government artificially inflates demand.

Effective policy changes would include cutting administrative spending in public institutions, reducing federal aid, and relying more on private lenders. With less government intervention tuition costs would stop skyrocketing, and might even come down. Further, reducing federal aid would not prevent dedicated students from pursuing higher education. Private lenders would have strong incentives to lend to students due to the higher value of the degree.

While higher education plays an essential role in our state and nation, the federal government should play a less prominent role it its funding.

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