Today the only way most Colorado citizens can benefit from public subsides to higher education is to attend a public university or college. Students are attracted by subsidies that enable these institutions to charge lower tuition than their private counterparts. The larger the subsidy the more likely students will choose public institution over private colleges and universities. This is true even when the private colleges and universities allocate more resources to their education. Thus, at least some students end up investing less in their college education than they would have in the absence of the direct subsidy.
The system of direct subsidies not only influences students to choose public over private institutions, it influences the kind of public colleges and universities they choose. Students prefer public four-year colleges to public two-year colleges. They also prefer public colleges that are more selective in terms of the quality of students admitted, compared to public colleges that are less selective.
Providing aid to higher education in the form of direct subsidies to public institutions can result in both inefficiencies and inequities. Direct subsidy to public colleges creates a privileged position in which they do not have to compete directly with private colleges. As a result public colleges have less incentive to maximize educational quality, while minimizing cost. If private colleges are more efficient, inducing students to attend subsidized public colleges could result in losses in public welfare.
Direct subsidies to public schools may discourage some students from investing in their education beyond what is offered at the subsidized school. If such students choose public colleges that allocate less resources to their education than private colleges, the effect of direct subsidies could cause these students to invest less in higher education than they would have in the absence of the subsidy. 
To the extent that direct subsidies to public colleges shift the cost of higher education from individuals to the society, this creates the wrong incentives. Some individuals have an incentive to consume more of the subsidized education, but have no intent to repay the cost of these subsidies, e.g. through higher taxes on their increased earnings.
Many also challenge direct subsidies to public colleges on equity grounds. Evidence for California reveals that college attendance at highly subsidized colleges is primarily a middle-to-upper income activity. Because all income groups pay taxes, direct subsidies to public colleges could in effect transfer income from low income families to middle and higher income families.
There is a growing body of evidence that students at public higher education institutions sit in lectures that are biased, and are afraid to express their views. Even when these institutions pursue policies in conflict with their moral principles, students attend them because that is the only way that they can afford a college education. We owe our young people more than this.
These distortions have led many states, most notably Colorado, to consider reforms that would replace direct subsidies with college vouchers for students. The goal is to give students a wider range of choice, and force public colleges to be more responsive to student needs.
This year the Colorado legislature will consider legislation to ‘reform’ higher education. However, some of these bills are in fact not ‘reforms’, but rather proposals to increase public subsidies, and strengthen the monopoly position of public institutions in higher education. This is clearly the case with bills that would take tuition out of the TABOR revenue limit and allow public universities and colleges to set tuition rates.
Other proposed legislation would replace direct subsidies to public colleges and universities with vouchers that could be used to offset tuition only at public institutions. These proposals would also preserve the monopoly power of public institutions in higher education. When aid to higher education is biased toward public institutions either through direct subsidies or through vouchers that can only be applied toward tuition in public institutions this creates a privileged position for public institutions. Because these public institutions do not have to compete directly with private colleges and universities they would have less incentive to improve the quality of education or reduce the cost.
The only ‘reform’ that would increase efficiency and equity is ‘privatization’, in which direct subsides are replaced by vouchers that students could use to offset tuition at either private or public higher education institutions. Clearly, there would need to be a transition period in which both private and public institutions have an opportunity to respond as the voucher system replaces the system of direct subsidy to public colleges and universities. The optimal policy would be a gradual period of privatization of higher education in which a voucher system is introduced that could be applied to offset tuition charges at either private or public institutions.
‘Privatization’ would create a level playing field in which public higher education institutions would have to compete directly with private institutions. Only then would public higher education institutions have an incentive to improve quality and reduce costs of higher education. Colorado citizens would then have the choice to use their voucher to get the best education for the money. The major beneficiaries of this reform would be low-income students.
Sam Peltzman, “The Effect of Government Subsidies-in-Kind on Private Expenditures: The Case of Higher Education,” Journal of Political Economy, vol. 81, no. 1, 1973.
Lee W. Hansen and Burton Weisbrod, “The Distribution of Costs and Direct Benefits of Public Higher Education: The Case of California,” Journal of Human Resources, vol. 4, no.2, 1969.
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BARRY POULSON is a Senior Fellow at the Independence Institute.
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