Equity Implications of State Tuition Policy and Student Loans

Abstract

Many economists have for some time now advocated tuition increases, complemented by expanded student loan programs, at state-supported colleges and universities. The present system of state support, it is argued, does not contribute to economic efficiency in at least two senses. First, relative prices, facing the student consumer, between the public and private education sectors distort the true cost ratios in the two sectors. Second, the social benefits of higher education are doubtful (or of low value); therefore it is improper to drive a wedge between public and private rates of return to higher education. Most recently, the attack on subsidized state tuitions has rested on equity grounds: Not only do we have an inefficient system, but the poor are paying for it. Thus, many economists-and, more important, legislators -have argued that substituting loan programs for subsidized tuition will not only cure inefficiency but also will improve the equitability of our system of financing higher education. This paper is focused only on the equity effects of removing state tuition support and introducing loan finance. The efficiency arguments either are self-evident or depend heavily on the political and social values one brings to the evaluation of social benefits. The discussion of equity effects of a low-tuition policy has been flawed in three ways: 1. The distribution of benefits and costs has been measured in terms of transfers from the taxpaying public to children whose parents are of prime earning age, thus failing to specify the permanent income of beneficiaries and payers. 2. The criterion of equity being used has not been made clear. If transfers are intergenerational, what constitutes equity? Is the gain in income by some to be weighted differently from the losses of others?