Why Increasing University Subsidies Does Not Help The Poor

Recently here in California Governor Arnold Schwarzenegger was taken to task for reducing government subsidies to California Universities. The argument went that government subsidies help reduce University costs, which in turn helps reduce tuition, and since the poor would have a hard time paying higher University tuition, government subsidies are a boom for the poor.

While I can understand the motivation behind this argument, frankly, the argument was never very persuasive to me. For one, the majority of people that attend these Universities, especially the elite ones like the UC system, Stanford, and USC, are not poor people, but the upper and middle class. Yet since the subsidies come from tax revenue, tax revenue that can be used to help all citizens, very poor, poor, and middle class, subsidizing Universities is a method that takes from everybody but primarily helps the upper class and middle class. In the end, becoming a very inefficient way to decrease income inequality.

Second, there is no guarantee that subsidizing Universities will result in cheaper tuition for the poor. For example, Harvard, probably the highest subsidized University in the country, either by government subsidies or by direct gifts from former students, has one of the worse records of cheaper tuition for the poor. Hispanic Business writes:

Until recently, Harvard University has been perhaps the most glaring example of an elite college’s failure to welcome low-income students. With an endowment of $25.9 billion — far larger than that of any other university in the U.S. or abroad — Harvard clearly has the resources to educate the poor.

Yet only about 10% of its undergraduates are eligible to receive federal Pell Grants, which are usually awarded to students from families earning less than $40,000 a year. At Amherst, 15% of the students get Pells, and President Anthony Marx is aiming to boost that to 25% of future classes.

But now, Harvard’s controversial president, Lawrence Summers, is on a campaign to give low-income students far greater representation at America’s most prestigious university. “If Harvard is only for the children of those who have been successful, we will lose the social mobility that has always been America’s strength,” argues the former U.S. Treasury Secretary. “I’d like Harvard to look as much like America as possible.”

How far has this program gone? Hispanic Business continues:

GUARDED OPTIMISM. Harvard’s program has only been in place for one full admissions cycle — for the class that entered Harvard in September, 2005 — but Summers and Fitzsimmons are encouraged. Last fall’s entering class had 299 students from families earning less than $60,000 a year vs. 246 the year before — an increase of 22%.

Imagine that, with a school as rich as Harvard, with a school with as many resources as Harvard, and more importantly, with a school that gets so much free money from government subsidies and private donors, Harvard could only find 299 students – and that an increase of 22% from the following year – from families earning less than $60,000/year. In addition, since the hard left at Harvard has run out Larry Summers, the founder of the program, the problem might get worse not better.

Subsidizing Universities to help the poor is analogous to having the government subsidies upper end department stores like Nordstroms and Bloomingdales in an effort to make products cheaper for the poor. A method that not only doesn’t accomplish its goal very efficiently, but when it does help make products cheaper, it does so primarily for the benefit of the rich and middle class, not the poor.

Shawna Rasul, a student at the UCLA School of Law, learned this lesson the hard way, in a letter to the editor of the Daily Bruin she wrote:

I got an e-mail from the chancellor Thursday morning that gleefully described how UCLA has managed to raise $3 billion – more money than any other institution of higher education ever!

That’s truly impressive, and from now on, I will hear “$3 billion” every time I walk into the lobby of my UCLA apartment building that looks like an abandoned home-improvement project.

Every time I look at the holes in the drywall and the 1970s renaissance carpeting, I’ll think about the $3 billion.

When I cautiously take the elevator up to my floor and notice that the permit expired 14 months ago, I will wonder about those $3 billion. When I pay my $24,000 in student fees (which recently went up another $1,500), the $3 billion will be on my mind. While I’m pounding the pavement looking for a full-time job because the mid-year tuition increase has left me without the ability to pay my rent and bills this semester, I will reflect on the $3 billion.

But excuse me if I don’t pop open a bottle of champagne and throw a party – I can’t afford it.

This is why you won’t find me on the picket lines asking for more funding for Universities, and instead find me squarely on the side of those who reduce University funding and instead find efficient means to help the poor pay for college tuition.

Update: Harvard economist Jeffrey Alan Miron writes on the same thing and seems to agree with my conclusion as well, his post here.

Update: Richard Vedder of the Center For College Affordability And Productivity has more.

11 Responses to “Why Increasing University Subsidies Does Not Help The Poor”

  1. jennifer says:

    this is an interesting argument.

    i think that it’s interesting that you fault harvard for only funding X number of working class students. the more pertinent issue might be to examine how many working class kids are actually admitted into harvard. and then to look at how many of them are funded.

    my hunch is that, because of the poor state of public schools in working class neighborhoods, many kids are not even admitted, let alone being granted financial aid.

    i don’t feel too strongly about university subsidies (though it’s important to recognize that a lot of working class kids at UC schools, etc. *do* find these subsidies crucial). personally, i would rather see government subsidies go to improving the state of public schools in working class neighborhoods. that way there would be more kids who would be prepared to attend harvard. and then we can worry about funding them.

  2. Hey Jenn,

    Thanks for stopping by!!! Allow me to respond.

    Your response actually strengthens my argument, my point here is that the overwhelming number of students who would benefit from lower tuition costs are the middle and especially upper class students, whether low income students don’t get to these universities because of admittance or not is beside the point, what is important is that it is true that a majority of them don’t get there.

    Second, as my UCLA example showed, even where there is a large amount of money given to a University many times that does not result in a lower tuition fee. So even in cases where a University has many low income students – and as a student at a UC school, I can tell you that the amount of low income students is certainly not large – giving large amount of money to that University, either through government subsidies or private money, is certainly no guarantee that tuition will drop, all in all, becoming a system that primarily benefits the rich, at the poor person’s expense.

    Which is why I proposed that instead of having the government give money to Universities, instead give it in the form of a voucher directly to low income families, thereby forcing Universities to compete to attract these low income students in order to get more income, more on that here.

    You bring up a very important point with your emphasis on preparation instead of mere acceptance when you said,

    personally, i would rather see government subsidies go to improving the state of public schools in working class neighborhoods. that way there would be more kids who would be prepared to attend harvard. and then we can worry about funding them.

    I completely agree!!! However, the problem arises in the fact that more money for public education is not correlated with better educational results.

    I could go on and on talking about that but in short, this is what you get with more money for education; a picture is worth a thousand words…click here.

    However, there are proven methods to increase test results, and that is through education vouchers, which is why I support them so strongly. 🙂

    Thanks for dropping by and congrats – one more time – on your new career.

  3. jennifer says:

    hp,

    i’ll start by saying that this is not an issue where our positions seem to diverge greatly. but i still feel the need to say the following:

    first, i think it problematic to ignore the working class students who are already at universities. though they may be them minority, they really do struggle with tuition. you’ve been talking about subsidies for tuition reduction, but it seems like students are protesting to keep tuition at the same level.

    when i was at ucsb a couple of years ago, the governor was trying to implement tuition increases. while the students could have benefited from decreased tuition, there was the governor trying to increase it every year for the next five years. the issue of tuition increases became big rallying point for chicano/a students, most of whom were from working class backgrounds.

    let’s please not ignore the struggles of the working class chicano/a students who are already in the UC system and how they might benefit from reduced tuition.

    second, university subsidies are not only used to lower tuition. while this can be a benefit of subsidies, they can also be used to offer greater financial aid packages to working class students.

    finally, while everyone’s taxes might contribute to university subsidies, let’s not forget that everyone is taxed at different rates. people with lower incomes are taxed less than the middle and upper classes. so this is not quite the unjust picture that you have painted in terms of educational subsidies actually hurting the poor.

  4. Hey Jenn,

    Thanks again for responding. First let me say that all taxes hurt the economy, whether you tax the rich or you tax the poor, they all have some negative affect on the economy (just look at what was happening here in California when the tax burden got too high, businesses, entrepreneurs, were all leaving California in high numbers). So even if the rich are taxed at higher rates, that tax rate still has some negative affect on the overall economy, of which the poor person is a very real part of.

    However, there are circumstances where the benefits of taxation outweigh its negatives, resulting in an overall boom to the economy. For example, if those tax revenues are used to pay for roads, for police officers, and military. They all have such an overwhelming positive affect on the economy that it justifies the taxation (to a point, there is such a thing as too much good roads, too much police, etc).

    On the other hand, when you use that tax money to give to an institution of which the poor are a very very small part of, than you have in effect increased income inequality. You ask about the middle class students at these Universities, well I ask you about the overwhelmingly larger number of middle class -and poor – families that will be disproportionately hurt by a larger taxation on the economy. What about them?

    And all of this without even questioning your flawed premise that greater University subsidy means a lower tuition or greater help for middle class and poor students. Remember, in many instances – for example UCLA above – a larger subsidy did not translate into a lower level of tuition. Or in the Harvard example, greater subsidies only translated to a small fraction of the student body benefiting. So in those circumstances, even the middle class at these Universities got screwed, all in all, compounding the problem of inequality.

    With that said, if I were governor, the way I would structure the system is in one hand increase tuition for all students, thereby decreasing the tax burden of all state citizens and in the other hand use a fraction of that money to help low income families, whether they be middle or lower class. This has the added benefit of directly subsidizing the poor instead of through the -often very inefficient – middle man of Universities. So under my plan the poor and middle class students at these Universities would most likely wind up with even more assistance than is currently done under the current method.

    If subsidies are your goal, direct subsidies are almost always the more efficient method. So if you want to subsidies poor students who can’t afford education, directly subsidies them, not some institution that primarily caters to the rich and already well educated.

  5. cindylu says:

    You really need to stop using UCLA’s 10-year fundraising campaign as an example. It’s not relevant and doesn’t help your point. If you would have looked into the issue a little more, you would have known that the 3 billion UCLA raised over 10 years does not come from the state of California and therefore is not a state subsidy. It is the same thing private universities have been doing for years, going to parents, alumni, philanthropists and corporations for donations. Some of this money will go to support students (see the Ensuring Academic Excellence Initiative).

    Also, I don’t know about you, but the Cal Grant I got from the California Student Aid Commission covered my fees/tuition for all four years of my undergraduate education. I know the Cal Grant might not cover so much these days, but I basically did have that voucher you wrote about above.

  6. Hey Cindylu,

    Did you read this exchange from the beginning? I specifically mentioned it when I said, in comment #2,

    Second, as my UCLA example showed, even where there is a large amount of money given to a University many times that does not result in a lower tuition fee. So even in cases where a University has many low income students – and as a student at a UC school, I can tell you that the amount of low income students is certainly not large – giving large amount of money to that University, either through government subsidies or private money, is certainly no guarantee that tuition will drop, all in all, becoming a system that primarily benefits the rich, at the poor person’s expense.

    I added the emphasis specifically on the part that pertains to UCLA. In addition, a tax-free status is a form of subsidy; under normal circumstances if I give you money the government taxes that money, yet if I give a University money than that money is not taxed and can be written off. So in that case, the government is still subsidizing that institution by exempting it from normal taxation, an indirect way of giving that institution more (tax revenue) money.

    With that said, that is still not germane to my overall point. My overall point with the UCLA example is that tuition costs and assistance for poor students are at best loosely tied to the amount of money the University receives. Even the richest Universities like Harvard still only help a handful of students yet receive tax money, either directly or indirectly, from the much larger body of taxpayers.

    Let me ask you a very direct question since you say you are a beneficiary of the cal grant program: what do you consider more helpful for the poor, having the government subsidies Universities and than crossing your fingers in the hope that they may pass some of that money on to poor and middle class students or having the government directly fund more cal grant programs that are specifically tailored to the poor and middle class?

    Remember, this isn’t an issue of whether or not the University gets funded. In both scenarios the Universities are going to get funded, the only difference is that in my scenario it is truly a ‘help the poor and middle class students first’ program, where in the current scenario it is a ‘help an institution that primarily caters to the rich and already well educated first’ program.

    In my case, I would like to see that money directed to more cal grants that directly benefit the poor and middle class instead of having it directed to Universities. So unless that happens, I am always going to see the picket lines for more funding for Universities as just a way for the rich to get richer and the poor to get poorer, but in the process using the handful of poor minority students that went to that University as their poster children.

  7. Ana says:

    I came across this “hispanic pundit” site when trying to find information on how middle class minorities can fund elite college educations. I grew up in the working poor economic stratus. I put myself through college, married and moved up to working class. Sent my husband back to school and find that I am in the middle, to low end of upper income. Now some 8 years after he started a “real job” rather than being a student, we find ourselves in no man’s land with regards to funding daughter’s college. Too high an income to qualify for need based but not near enough income to be able to pay more than half of tuition costs outright. We have another child whose future must also be considered. My oldest is wanting to enter research and contribute to solutions in human disease. The level of researchers does matter for how she would like to contribute to the world. It is an ironic place I find myself. 20/20 hindsight tells me that if we had not tried to better our situation by returning my spouse to school we would have the same kid and full rides to the elites. With EFC determined by schools and through FAFSA forms, there are little to no funds made available to people in the middle. So I am at a loss to understand how the middle class benefits from subsidizing of colleges when the money is not redistributed to them.

  8. It is primarily the Universities that benefit from University subsidies, everybody else is secondary at best.

  9. […] Long time readers of my blog know that I strongly disagree with those who argue that Universities need more government funding – especially elite Universities like UCLA. I’ve blogged on this in depth before, see here. […]

  10. […] why it has gotten so high, see here. Just one more reason why I continue to believe that increasing university subsidies does not help the poor. See more here. Share and Enjoy: These icons link to social bookmarking sites where readers can […]

  11. help fix credit…

    Long- time followers of this blog – you rule – the people make the blog!…

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