The Free Tuition Model: Escapism that Ignores the Higher Ed Reality

Public anxiety about college costs — a nearly constant theme in U.S. domestic politics for the past 25 years — is at an all-time high. This shouldn’t come as a surprise to anyone in this industry.

After all, college costs have soared over the course of the past three decades, outpacing not only the general rate of inflation but also (more alarmingly) real earnings for many families. Despite significant increases in federal student aid, the gap between family resources and cost of attendance has widened and been filled with ever-increasing amounts of educational borrowing. Against the backdrop of public apprehension about rising inequality, the symbolic crossing of the $1-trillion mark in student loan debts stirred up a wide-ranging debate about the future of access to higher education and how it should be financed.

There’s no question a serious policy discussion on a radical overhaul of the American higher education financing system is long overdue. The policies and practices that have produced today’s unsustainable system are vestigial remnants of arrangements that made sense a few decades ago, when they were first put in place, but no longer make sense today. Changes in state funding practices, institutional operations and student demographics have so altered American higher education that a modern financing arrangement in sync with today’s reality is urgently needed.

But here, the story takes a most curious turn. In lieu of sober technical responses to the vexing challenges that confront higher education, the proposals that have received the greatest public and policy attention are frivolous escapist fantasies that proclaim the possibility of free college for all.

Variants of “Pay It Forward” (PIF) and proposals to make the first two years of higher education (both at community colleges and public universities) free are cropping up with enough frequency to justify some attention, despite the fact that none of them represents a sound or economically sustainable model. Virtually all of these proposals rely on back-of-the-envelope calculations that take snapshots of existing programs and current cash flows and blithely suggest that a politically and operationally untenable reordering of these could make all or significant chunks of college free.

In assessing the credibility of these proposals as serious policy remedies, some thoughts may be worth pondering:

All Are Not Equal

On the one hand, in the case of some proposals, “free” may be the ideal number because it is within everybody’s price range, but shouldn’t people who have the means to pay all or part of the cost be asked to contribute more than those who don’t?

Future High Earners Will Opt Out

The flip side of this phenomenon is the problem of “adverse selection” with plans (such as PIF) that provide tuition-free opportunities in exchange for an assessment against future incomes. This version of “free” would induce students with good odds of high future earnings to opt out of these plans by either borrowing through private-label loan programs or by attending private or out-of-state institutions. As disproportionate numbers of likely future high-earners exit the system, the cross-subsidies that might have made it self-financing would collapse, and PIF schemes would gradually tailspin into insolvency.

Can Supply Meet Demand?

In the absence of any type of co-pay or out-of-pocket costs, how will the various proposals alter behavior, and what are the likely consequences of such changes? The proverbial giant sucking sound that most of these proposals ignore in their macro-level cost estimates is the sound of surging demand at the newly free venues. Simple rules of economics suggest this will either drive up costs or require access to be rationed.

This was the problem that afflicted European higher education for decades: because higher education was fully subsidized, their national systems had very tight restriction for access and could not be easily enlarged until tuition revenues became available.

Understanding the Cost of Higher Ed

Free tuition is not the same thing as free college. After all, a significant component of total cost consists of living expenses, which are three times tuition in the case of public two-year institutions, and slightly greater than in-state tuition in the case of public four-year institutions.

This means beneficiaries of PIF-policies, who agree to future assessments against their incomes, may actually end up with two repayment schedules: a PIF assessment and monthly payments on loans taken out to cover living expenses.

Tempting as it might be to assume the dollars available from various sources would be easily transferrable to — or sufficient for — a radically different arrangement, how realistic is that assumption?

How Would The Free Tuition Model Weather a Recession?

A prime example of this is the assumption in various PIF proposals that the states would continue to subsidize public institutions as they would have under current law. However, year-over-year fluctuations in tuition have served as a powerful political pressure point on legislators who have grudgingly provided more funding or tolerated tuition hikes to cover greater-than-expected operating costs.

In PIF’s case, the financing assumptions are even more destructive, in that the early cohorts’ entire tuition costs would have to be publicly funded on the assumption that their post-attendance assessments would fully cover tuition costs for subsequent cohorts. What would happen during periods of high unemployment or high inflation if revenues fall short or expenses exceed estimates? With the “free” edict in place, either the state would have to cover costs or institutions would have to absorb cuts, which could affect quality and access.

Some Questions to Consider

Finally, we must examine some of the jaw-dropping assumptions in the proposal that could render the entire subsequent narrative untenable. How reasonable is it, for example, to remove subsidies from the last two years of college in order to make the first years free? Will the proposed policy enlarge or shrink the size of students, and does it really cover costs accordingly? Are any price mandates issued as a condition of participation economically tenable? How will the significant number of students who take longer than four years — or those lifelong learners who are returning to college — be treated?

Conclusion

None of the above is to question the value of these thought experiments as at least putting possibilities on the table that might be worth pondering, but the random laundry list of challenges should serve as cautionary notes against full-on embrace of these proposals without greater discussion and more analysis.