In America, it's more so when you use third parties to pay for higher education.

In November 2005, the Kalamazoo, Michigan, Public Schools made a dramatic announcement. It said that henceforth every successful graduate of a Kalamazoo public high school (there are three) who had been in the district since kindergarten would receive 100 percent payment of tuition fees at any Michigan public community college or university as long as the student was making satisfactory progress (taking 12 hours of classes with an overall average of at least a "C"). Students who had begun school in Kalamazoo for between four and 12 years would receive smaller reimbursement, but not less than 65 percent. The project was funded by massive private gifts --probably at least $200 million in endowment money.

My friends at the Mackinac Center in Michigan tell me that Governor Jennifer Granholm in her forthcoming "State of the State" address plans to propose expanding the Kalamazoo Promise idea to more areas, financed it appears by a combination of public and private monies. ...

The unintended consequences of this well intended effort are many, and mostly very bad. Here are three of my concerns:

1) When third parties (private donors, governments) pay the bills, the student pays little or no attention to tuition fees (the demand for higher education is nearly perfectly inelastic, us economists would say), and this enormously increases the incentives for colleges to increase tuition fees.

2) The lack of strict performance limits and penalties for poor academic performance creates incentives for mediocre students to go to college for an extended period of time -- 5 or 6 years. ...

Does that sound paradoxical to you? Increase tuition and you get better credit-taking decisions by students and more scrutiny of tuition increases? Thus, when you hear proposals to increase college affordability, you should ask "isn't this how we got into the health insurance mess?"

Labels: economics, education