Chapter 24: Subsidize Students, not Schools

Markets do a marvelously effective job of allocating most goods or services because the consequences of decisions to buy and sell goods largely impact those doing the buying and selling—customers benefit from getting goods they like at low prices, and producers benefit from getting more for their product than it cost to make it.  Higher education suffers because the consumer–students—often pay only a small portion of the cost while avoiding the consequences of bad decisions. Government subsidies to institutions reduce the role of consumers in resolving classic economic questions: What should be produced, in what quantities, in what manner, and for whom?

A step in the direction of introducing more efficient market power into higher education would be to end institutional subsidies and increase subsidies to students in the form of vouchers or scholarships. This has been discussed above, but the advantages bear repeating:

  • Market forces likely would force greater cost consciousness amongst public institutions losing subsidies and relying on student enrollment for revenues.
  • Schools will become more student-centered, depending on student support and spending more on pleasing students and less on lobbyists.
  • Subsidies can be targeted to meet other objectives, such as promoting attendance by lower-income students, improving student academic performance, and graduating in a timely manner.
  • Vouchers will refocus general support on teaching and instruction.
  • Costs can be contained by limiting voucher increases to the rate of inflation.
  • Students are not rewarded extra grants for attending expensive schools (as with student loan subsidies).

Vouchers have had strong political opposition at the K-12 level, led by labor unions. Unions are far less heavily involved in higher education, and the use of vouchers to achieve egalitarian objectives might bring support for them from individuals historically wary of the concept. Programs such as the GI Bill, Pell Grants, Georgia’s HOPE scholarships, and the Colorado College Opportunity Fund are similar to vouchers in many respects, providing a precedent for expansion of this approach to higher education funding.

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