Investing in students

Thomas Sowell on the subject: Sowell

Why does college cost so much?

There are two basic reasons. The first is that people will pay what the colleges charge. The second is that there is little incentive for colleges to reduce the tuition they charge. …

[An alternative to funding college education for the poor] would be to allow students to sign enforceable contracts by which lenders would pay their college or university expenses in exchange for a given percentage of their future earnings.

That way, students would be issuing stocks to raise capital, the way corporations do, instead of being limited to borrowing money to be paid back in fixed amounts — the latter being equivalent to issuing corporate bonds.

Last week I read Thomas Sowell’s three-part essay on this. I found the above ideas intriguing. Here are some other parts that summarize his ideas:

Part I:

The general thrust of human interest stories about people with economic problems, whether they are college students or people faced with mortgage foreclosures, is that the government ought to come to their rescue, presumably because the government has so much money and these individuals have so little.

Like most “deep pockets,” however, the government’s deep pockets come from vast numbers of people with much shallower pockets. In many cases, the average taxpayer has lower income than the people on whom the government lavishes its financial favors. …

Prices force people to economize. Subsidizing prices enables people to take more resources away from other uses without having to weigh the real cost.

Without market prices that convey the real costs of resources denied to alternative users, people waste. …

Whether someone goes to college at all, what kind of college, and whether they remain on campus to do postgraduate work, are all questions about how much of the resources that other people want are to be taken away and used by those on whom we have arbitrarily focused in human interest stories.

This is not just a question about robbing Peter to pay Paul. The whole society’s standard of living is lower when resources are shifted from higher valued uses to lower valued uses and wasted by those who are subsidized or otherwise allowed to pay less. …

How many people would go to college if they had to pay the real cost of all the resources taken from other parts of the economy? Probably a lot fewer people.

Moreover, when paying their own money, there would probably not be nearly as many people parting with hard cash to study feel-good subjects with rap sessions instead of serious study.

There would probably be fewer people lingering on campus for the social scene or as a refuge from adult responsibilities in the real world.

Part II:

…education is not a Good Thing categorically in unlimited amounts, for people of all levels of ability, interest and willingness to work.

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Nor is there any obvious way to set an arbitrary limit. These are questions that no given individual can answer for a whole society.

The most we can do is confront individuals with the costs that their choices are imposing on others who want the same resources for other purposes, and are willing to pay for those resources.

Those who cannot bring themselves to face the tough choices that reality presents often seek escape to some kind of fairy godmother — the government or, more realistically, the taxpayers.

When the idea of conscripting taxpayers to play the role of fairy godmother for some arbitrarily selected favorites of the intelligentsia, “the poor” are often used as human shields behind which to advance toward their goal.

What will happen to the poor if there are no government subsidies for college?

If this argument is meant seriously, rather than being simply a political talking point, then there can always be some means test used to decide who qualifies as poor and then subsidize just those people — rather than the vastly larger number of other claimants for government largesse who advance toward the national treasury, using the poor as human shields.

Another option would be to allow students to sign enforceable contracts by which lenders would pay their college or university expenses in exchange for a given percentage of their future earnings.

That way, students would be issuing stocks to raise capital, the way corporations do, instead of being limited to borrowing money to be paid back in fixed amounts — the latter being equivalent to issuing corporate bonds.

Not only would this get the conscripted taxpayers out of the picture, it would also make it unnecessary for parents to go into hock to put their children through college.

Still, the financially poorest student in the land could get money to go to college, with a good academic record and a promising career from which to pay dividends on the lender’s investment.

More fundamentally, it would confront the prospective college student with the full costs of all the resources required for a college education.

Part III

Why does college cost so much?

There are two basic reasons. The first is that people will pay what the colleges charge. The second is that there is little incentive for colleges to reduce the tuition they charge. …

In any kind of economic transaction, it seldom makes sense to charge prices so high that very few people can afford to pay them. But, with the government ready to step in and help whenever tuition is “unaffordable,” why not charge more than the traffic will bear and bring in Uncle Sam to make up the difference? …

The criteria used by most accrediting agencies are based on inputs — essentially spending — rather than results for students.

Competition among academic institutions therefore seldom takes the form of lowering their costs of operation, in order to lower tuition. The incentives are all the other way.

Competition often takes the form of offering more upscale amenities — posh lounges, bowling alleys, wi-fi, finer dorms.

None of this means better education. But, so long as the customers keep buying it — with government help — the colleges will keep selling it.

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