Still Subsidizing Inefficiency

by Daniel L. Bennett

As my colleague Andrew Gillen has stated publicly in the past, eliminating guaranteed subsidies paid to student lending companies is in itself, progress. To be more precise, Gillen noted that:

FFEL should be taken out back and killed with a shovel

In general, subsidies add to costs and promote inefficiency. Education Secretary Arne Duncan seems to have realized that in promoting the SAFRA bill that killed off the FFEL program (CCAP's opposition to that nationalizing of the entire student loan market aside). However, Mr. Duncan's misunderstanding of markets is apparent in the remarks he made to the Huffington Post heralding the new bill:

This is a $60 billion investment to make higher ed more accessible and more affordable

Folks who don't contain costs are going to lose market share, competitive advantage

What the bill does, rather than reward efficiency and promote competition, is exactly the opposite. It further subsidizes inefficiency and deters competition by making more third party money available for colleges to gobble up, while implementing neither sticks nor carrots to influence cost cutting and efficiency. Sure, the slight increase in Pell Grants may help some students afford to attend to a community college, or perhaps a public 4-year if willing to borrow money from big brother.

But how in any way is this promoting competition? If anything, it is deterring it, as well as consumer choice, by directing more students into a relatively fixed number of publicly subsidized institutions that don't have the capacity to expand and already have the artificial competitive advantage of receiving direct institutional subsidies from their states. As much of CCAP's analysis and research has indicated, these subsidies have in no way, shape or form promoted efficiency or cost cutting, as the institutions have used these resources for things other than education, often adding to costs as opposed to reducing, or even limiting them. Why would anyone think that further feeding the insatiable appetites of these inefficient institutions would lead to cost cutting and competition, when we have a history of experience revealing the opposite effect?

As we've said in the past, it would be much more efficient to subsidize students directly and give them a choice in where to attend, rather than limiting their choice to a limited number of public schools. This would be a much better way to promote fair competition, access and affordability, if we as a society choose to subsidize college education at all. But then again, I'm not sure that competition and efficiency are among the Administration's real agenda items, as the bill will also pump more than $2.55 billion into

bolstering the resources of community colleges, historically black colleges and universities and minority-serving institutions

I'm assuming that none of this funding is being made available to the career colleges, which provide educational opportunities to a large share of minority students, often with better outcomes. This is the antithesis of competition, with the Administration obviously favoring one segment of institutions over another.