Higher Ed Economics

Higher Ed Economics

By Allysia Finley in the Wall Street Journal

Last week the University of California’s regents voted—amid protests from state politicians and students—to raise tuition by up to 5% annually for the next five years. Here is a textbook example of how government subsidies fuel price increases.

The regents claimed they had no choice but to raise tuition because state lawmakers had shorted spending on higher education. General-fund spending on the UC system is $300 million—or about 10%—lower than in 2007. Even so, the UC’s “core” budget has since doubled to nearly $7 billion thanks to a 70% tuition increase.

Since 2007 federal student loan debt has also doubled. Not surprisingly, universities have raised their prices to soak in more government loans. While speaking with UC students two years ago, Gov. Jerry Brown observed that student loans have become “a source of growing funds. Because the money is almost infinite, then the discipline on spending that money is reduced.”

California politicians have also done their part to promote tuition inflation by boosting the state’s Cal Grant program, which this year will provide $1.8 billion in aid—nearly four times as much as in 2003—to roughly 400,000 California students. Cal Grants are in part pegged to tuition costs, so universities can rake in more money from the state by increasing their prices.

And this year the state inaugurated a Middle Class Scholarship program targeting students from families with incomes between $80,000 and $150,000, which make up about a quarter of UC students. The program, to be phased in over three years, will cover up to 40% of tuition and fees for such “middle-class” families. Like the Cal Grant, the value of the middle-class scholarship is pegged to the cost of education.

So by raising tuition, the regents can extract more money from the state without harming low- and middle-income students. According to UC’s chief finance officer, Nathan Brostrom, more than half of students will continue to enjoy a free ride thanks to abundant federal, state and university aid. Only students from families with income exceeding $175,000 will pay the full tuition increase. The academics have once again outsmarted state politicians who will now give them more money to offset the tuition increase.