What State Legislatures Should Do Now: II

By Richard Vedder

My presentation before the American Legislative Exchange Council (ALEC) Higher Education Committee last weekend went well, and I mentioned some things I was going to tell them in the last blog. But that list of things for legislatures to do was not exhaustive. Additional ideas:

1. Incentizing tuition restraint. I tend to be lukewarm towards tuition caps, a form of price controls. However, when many colleges restrict supply through selective admissions, the shortages that arise from price controls already exist before the caps are in place, and also government already is messing up markets for higher ed in other ways, meaning tuition caps are not as clearly bad as they might otherwise be. One approach that is not a pure tuition cap approach is to tie state assistance to the amount of tuition increase. For example, give a school a 5 percent increase in subsidy payments if it keeps tuition increases to two percent or less, and 3 percent increase for tuition increases between 2 and 4 percent, a 1 percent increase for tuition hikes of 4 to 6 percent, and no subsidy increase for hikes of greater than 6 percent. This gives schools some flexibility, but encourages them to moderate increases. Governor Ted Strickland and the legislature in Ohio are proposing a scaled down version of this approach. More generally, give a 6 percent subsidy increase for schools enacting a tuition freeze, and a 1 percent reduction in subsidy for every one percent of tuition hike above that, and then a one percent reduction in subsidy for hikes greater than 6 percent in tuition (or some variant on that formula).

2. Tie subsidy payments instead to total spending per student (excluding commercial operations and federal government research grants). If total spending rises more than X percent, there is no subsidy increase, but subsidies rise by 1 percent a year for each 1 percent spending per student is held below the threshold amount.

3. Better yet, freeze all subsidy payments to schools, but use incremental funds that would have gone for subsidies for student vouchers (as discussed in the last blog). Allow vouchers to be used only at schools whose sticker price increases less than X percent a year (perhaps 4 percent).