There Is No Such Thing As A Free College Education

By Christopher Denhart

Friday, October 03, 2014

Following Wednesday’s decision to overturn tuition and fees in Lower Saxony, Germany, all universities will now be tuition free.  According to The Times, Europe, Germany will now be 100% free of charge to students, national and international, as political figures call tuition fees “socially unjust.”

Dorothee Stapelfeldt, senator for science in Hamburg, states “Tuition fees are socially unjust” and that “they particularly discourage young people who do not have a traditional academic family background from taking up studies.”

Germany, in 2006, lifted a universal ban on tuition and fees, which led to the charging of tuition in seven states. This decision fully retracted that earlier ban.

According to the Organisation of Economic Co-operation and Development (OECD) Germany has the second highest income tax burden of all OECD’s 34 countries. Of course this is not surprising considering Germany is the father of “Sozialstaat” or in English “Social State” founded in 1870 under Then Chancellor Bismarck’s reforms.

Add on more state subsidies to keep higher education free, and the 2012 tax burden figure of 49.8 percent of income is sure to increase.

TINSTAAFL

There Is No Such Thing As A Free Lunch. And there is also No Such Thing As  A Free Higher Education (TINSTAAFHE). Higher education, especially in science-heavy Germany, is incredibly costly to run and maintain. In a typical economic model for financing higher education, the consumer (student) would pay for the good that it consumes (education) and the research that researchers do would lead to innovations that have positive economic impact on society, therefore paying for themselves.

We have departed from this free market, “sustainable,” model globally, and rely heavily on federal subsidies to keep universities afloat.  CCAP has argued that these federal monies have largely led to increases in the cost of higher education, which has over time compounded, translating into higher tuition fees. It is clear in the United States, with annual tuition fees in the $40,000s or $50,000s and millionaire university presidents, that federal subsidies have led to outrageous increases in university spending, as universities, administrators, and faculty enjoy the benefits of captured student loan and grant moneys.

Sooner or later this “free” higher education will feel less and less free as increasing taxes will likely drive the most educated, highest earning, most able Germans away from Germany and into societies where they can take home a greater percentage of their pay. This will then reduce the tax cache and start to decrease the deficit more than the added tax revenues from a more professional society will add to them.

Perhaps I’m underestimating Germans, though. Nationalistic pride is historically important, and they recently won the World Cup in “Fußball.” It is noteworthy that Germany has had its highest net immigration in recent years, though migration away from Germany was up 11 percent in 2013 over 2012.

Third Party Payments

Third-party payments lead to many unintended negative consequences. Recently, the Association of American Physicians and Surgeons asserted that the third-party payment system is key to the increasing cost of health care. The same can be said about any industry that the consumer is not directly paying for the good consumed, including higher education.

The problem arises from the “Moral Hazard” associated with not paying for services. Because students are not sensitive to the costs associated with an additional year of higher education they will consume more of it. Progressive politicians may consider more higher education consumed a good thing, but I’m not talking about more students — which has other problems associated that I discuss below — but the same students taking longer to finish.

The United States has seen the rise of the five year degree. Of the 60% of students who graduate from public schools in the U.S., over half take longer than four years to graduate. Compare that with private institutions (there are natural differences in students at each type of school that pay a role) which see 80 percent of its graduates out in four years. Their sensitivity to the marginal cost of that fifth or sixth year factors into their decision to consume.

If everyone decided to take an extra year to graduate, because it was free, the burden of higher education on the public coffers would increase by 33% (if they took four as opposed to the European norm of three years to finish). Graduation rates are already a problem in Germany, which is known for its “Dauerstudenten” or “eternal students.” As The Local reports, German students fail to graduate on time, and the average graduation age (following master’s degree) is around 28 years old.

Third-party payments can decrease academic quality. Students, less sensitive to costs, are less likely to hold a university accountable for an education that they aren’t paying for. Again we can look to the United States education system as an example: Public K-12 education has been criticized for its declining standards and educational outcomes, while the private K-12 system continues to flourish. As the product of a public K-12, I can say with certainty that parents of my classmates did not care as much as the parents of friends that were paying tuitions in the 5 to 10 thousands of dollars annually.  To be sure, public education plays an important role to provide educational options to all, but the quality falls when students and parents are not as ardent about academic standards due to cost insensitivity.

Progressive Payback System

Progressive tax systems generally have nothing to do with economic progress. Tax the rich more, tax the poor less. While reducing the relative tax burden on the poor helps them, it discourages economic mobility into a higher bracket, further innovation, and others.

Students will not be paying for this higher education, the tax payer will. Attention students, you are the tax payer. Eventually you will have to pay this back in the form of increased taxes (perhaps after you graduate on your 28th birthday).

Repaying this tuition will not be equal for all parties, and perhaps it shouldn’t be. It costs more to train an engineer than it does an English (or German) teacher. Technologies are costly, equipment, more expensive instructors etc. However, say two students both graduate in economics. They take the same courses from the same instructors at the same time, but after graduation one takes a job as a statistician for the government, being compensated a fraction of what his classmate who goes on to become the CFO of a major company makes. They “purchased” the same good, i.e. the economics degree training, but that training costs the CFO multitudes more than it does the Statistician.

Underemployment of College Graduates

According to recent Federal Reserve Bank of New York, the Underemployment rate of recent college graduates is around 46%. A 2012 CCAP study shows similar findings. According to the Office of National Statistics, nearly half of graduates in the United Kingdom were working non-graduate jobs. Such figures suggest that too many are being funneled into higher education already. No tuition education will only increase the underemployment problem.

With so many unintended negative consequences, it is important to ask whether free education is the best use for public German funds.