Sounds great, doesn’t it? It is difficult to deny the benefits of a college education; it is even more difficult to propose policy changes that could potentially deny access to it.
A few weeks ago, the New York Fed released an updated version of its 2015 study that found a correlation between increased federal aid and rising tuition costs, hinting at causation. Simply put, the more money the government pours into student aid, the more colleges raise tuitions.
In 2015, the Wall Street Journal compared rising tuition rates to the housing bubble; federal student loans allow Americans to borrow at below-market rates without assessing repayment ability or credit.
The analysis echoes former Secretary of Education William J. Bennett’s hypothesis; increasing financial aid enables “colleges and universities blithely to raise their tuitions, confident that Federal loans subsidies would help cushion the increase.” Is that true?
Maybe it is. Let us briefly digress into economic theory. Human capital theory tells us that the more schooling you get, the more skills you earn, and therefore the better you do in the marketplace. On the other hand, signaling theory states that a degree is a signal of aptitude and ability to be a good worker.
Based on Michael Spence’s model, there are high-ability and low-ability workers, whose skills are difficult to observe by employers; thus, they require a “signal.” Within education, the degree is the signal: if you hold a Bachelor’s degree, you are more qualified for a job than someone with a high school diploma. However, federal aid compromises that signal.
As a result of increased federal aid, more students are able to go to college, and thereby attain a degree. When the government makes it easier for all students to get a degree, the degree no longer indicates skill but rather one’s ability to obtain aid; thus, the signal is compromised. As a result, employers increase their standards and turn education into a game of hoop jumping—the more hoops you jump through, the better qualified you are for a job.
Professor Bryan Caplan at George Mason University amusingly illustrates signaling theory with the example of being at a concert and not being able to see. If you cannot see, then stand up and you will see better; therefore it follows that if everyone stands up, then everyone will see better. False. Likewise with education, the more diplomas that are stamped, the more level the playing field becomes, and the more difficult it is to distinguish yourself.
There is no simple answer to this problem. Following the signaling theory, we should eliminate federal funding for higher education. However, that would eliminate the possibility of a college education for those that cannot afford it. Perhaps the answer is to reassess what constitutes an eligible recipient of federal aid.
What do you think?
Editor’s Note: Young Americans for Liberty will be hosting an open forum on college affordability on Monday, Nov. 14, during common hour. Location TBD. Pooja Bachani is part of the YAL club.