Loans, Grants and Student Performance

By Richard Vedder

The other day, in discussing some results that the Whiz Kids working for me are getting doing statistical analyses (in particular, Jonathan Leirer), I opined in this space that data for over 1,000 colleges suggests a positive relationship exists between student loans and graduation rates, but a negative relationship is present between the magnitude of grants made to students and the probability that they will graduate within six years. In short, subsidies to university students (grants) actually lead to lower levels of academic performance, even though they might encourage students to attend college. We can have more college-educated students, but at the cost of their achieving less. As enrollment rates go up, graduation rates go down.

One advantage of blogs is that readers sometimes share interesting things. Our ally and friend George Leef of the saintly Pope Center in North Carolina is one such person, and he told us about an absolutely superb paper done in 2004 by Avsegul Sahin of the Federal Research Bank of New York entitled "The Incentive Effects of Higher Education Subsidies on Student Effort." To quote from the abstract: "The findings are that subsidizing tuition increases enrollment rates; however, it also considerably reduces student effort. This follows from the fact that a high-subsidy, low-tuition policy causes an increase in the ratio of less able and less highly-motivated college graduates. Additionally...all students, even the more highly-motivated ones, respond to lower tuition levels by decreasing their effort levels."

Our own work is consistent with this finding. It fits into narratives of such persons as Jackson Toby and Harry Stilles, both of whom feel that too many persons enter four year colleges. At the margin, governmental subsidization of tuition in the name of "access" may have a very high price associated with it,and the costs of such a policy, broadly defined, may very well exceed the benefits. Harry believes that perhaps we should convert some four year colleges to two year institutions, and I think that is an idea worth exploring.

Remember, Sunday at 8:00 p.m. EDT is the Fox News Special on the costs of higher education. It should be interesting and provocative -- much more so than the first hour of the competing Emmy Awards, learning who made the best costumes for some dreadful situation comedy that pollutes our airwaves.