For the 2003-04 academic year, tuition increases at four-year public colleges and universities averaged 13 percent, while inflation was only 3 percent. Tuition in the current academic year has risen more than 10 percent. Clearly this is a problem, and politicians are struggling to find a solution.
Last fall Rep. Howard McKeon (R-Calif.), chairman of the principal House subcommittee on higher education, floated a plan that would punish colleges that raised prices faster than inflation by cutting off their access to some federal financial aid programs. McKeon later dropped the proposal, which many said amounted to price controls for higher education.
Then, in a speech this summer in Chicago to the Rainbow/PUSH Coalition, Sen. John Kerry outlined a plan surprisingly similar to McKeon's; instead of a stick, Kerry would use a funding carrot to induce states to keep tuition increases at their state universities under control. Under his plan, states could tap new federal grants from a pool of up to $5 billion per year for higher education if their tuition increases are in line with inflation.
Although the full details of Kerry's proposal have not yet been worked out, the fact is that price controls for higher education are not a case in which the devil is in the details. The defect is in the design. Such price controls have a fundamental flaw: They focus on the list-price tuition, that is, the price paid by students who do not qualify for any financial aid. This is the wrong target. Tuition at state schools is heavily subsidized for state residents. That discount currently goes both to families who need it and to high-income families who don't. And there is no evidence that students in the latter group are choosing not to go to college because tuition at state universities is rising. It's the people at the other end who may lose access to college.
Kerry could achieve a worthier goal -- increased access to higher education -- at far smaller fiscal cost by funneling money into larger federal Pell Grants or by enlarging the matching grant program that encourages states to augment their own aid budgets. Aid could be extended further into the middle class by raising the income thresholds at which families can qualify.
A close analysis of the effects of price controls on higher education also shows that they are likely to have truly perverse effects. They give states the incentive to raid their own financial aid budgets in order to hold down increases in list-price tuition.
To understand this argument we first have to ask why public colleges and universities are raising tuition so rapidly. While there's no single answer, the failure of state appropriations to keep up with costs has been an important factor in most states. When a university finds its costs rising more rapidly than its state appropriation, it faces two choices: cut the quality (or size) of its educational program or raise its price.
Price controls add no new alternative, unless they cause schools suddenly to become more efficient. In fact, universities are always seeking ways to become more efficient -- by substituting inexpensive computers for expensive secretaries, for instance -- but there are no magic bullets. The easy ways to cut costs, such as larger class sizes or lower faculty pay, will reduce quality over time.
The states' fiscal crisis means significant new money for higher education is not on the horizon. States have increasing responsibilities for health care costs and face growing demands for higher spending on matters as diverse as K-12 education and neglected highway infrastructure. The design of the price controls hints at where this money might be found: in the states' own financial aid programs. If states shift money from financial aid over to the schools' general budgets, the schools can moderate their list-price tuition increases without lowering quality.
States spend about $5 billion per year on financial aid. Although they could reclaim much of the total from Kerry's grants, using these funds to hold down tuition for students -- many of whom have no demonstrated financial need -- is not a responsible use of scarce federal funds in a time of burgeoning budget deficits. Under any reasonable scenario, the need for aid money is going to rise substantially in the near future. Yet with price controls, the total amount of aid money available is likely to shrink over time unless the federal program continued to expand.
McKeon has backed away from his price-control proposal, and Kerry should do the same. While there are many flaws in higher education financing, the price paid by students from high-income families at state-supported colleges and universities should not be high on anyone's list of problems to fix. And attempts to fix this problem that reduce access for students from low- and middle-income families come at much too high a price.
The writers teach in the economics department at the College of William and Mary. Robert B. Archibald is the author of "Redesigning the Financial Aid System."