Why Fees Aren’t Free

The decision by the Irish government to repeal the reintroduction of fees has been met with joy by students around the country. But ‘free fees’ promotes inefficiency and propogates inequality, by not imposing the true cost of education on students.

Those who criticised the reintroduction of fees claim that students couldn’t afford to pay them, and that access to education would be limited as a result. Unfortunately, inequality in educational opportunity may stem from differing financial conditions – but free fees does nothing to stop this. As long as wealthier families can gain an advantage through spending (either through private tuition or grind schools), they will do so.

In the absence of fees, rich parents just purchase the educational advantage elsewhere. A poor student won’t have to pay fees as the most prestigious universities in the country, true. But only if they manage to overcome their disadvantage and gain admission. Under the status quo, the same inequality subsists in education that free fees sought to eliminate – statistics and anecdotal experience show that access has not significantly improved for the poorest.

But there are state schemes to improve access, I hear you say. If these other programs to increase education amongst the poor are working, why do they require free fees for everyone? After all, there are certainly students who can afford to pay. Meanwhile, the state can simply subsidise fees for the poorest. There’s no need for more involvement than this – just give them vouchers, and income is no longer a limiting factor in access to education. If necessary, there could be a sliding scale. Problem solved.

The truth is that much educational spending under the status quo is highly wasteful. The Cato Institute highlights the problems inherent in trusting the state to decide on matters of education. In China, heads have been rolling as graduates are educated at great expense – only to find themselves jobless and without any way of employing their skills.

But if students are forced to pay for their education directly, they have a strong incentive not to waste educational resources. Since students who choose subjects with low employment opportunities tend to be wealthier, this is a regressive saving. If you want to study philosophy, why is it fair for everyone else to pay for it? There is limited public benefit. Fees mean fewer drop-outs and unproductive graduates, which are waste of tax-payer money.

Instead, students will direct their efforts to subjects that yield the highest return in the employment market. Because they will have to pay back their students loan later, they are more likely to complete courses too. Happily, these kinds of subjects are those that the state is currently begging and bribing young people to study. Why waste the effort when self-interest and the market does this naturally? Fees mean more efficient decision-making by prospective students.

But in the absence of state support, would students under-invest in education because many would find it so hard to get a loan for it? Liquidity constraints may be a problem, although this is not immediately obvious. In the absence of huge state spending on education, there’s a lot more money to go around. But it is true that in the presence of risk aversion and reluctance to take on debt, students may be weary of taking on a loan to pay for their education. After all, what if they don’t end up reaping the rewards in employment or end up dropping out?

In that case, it may prove profitable for universities to offer partial deferred payment to their students. This solves both problems. With the co-operation of the state in enforcement, students could be expected to pay part of their fees after graduation and entry into employment. If you don’t end up getting a job, you might pay slightly less. Since universities are competing for your custom, they will formulate payment plans to make it easier for you to pay them and thus make their programs more attractive. The market strikes again.

There is some moral hazard here, but this can be tempered by only deferring some fees and requiring students to still take on some debt. Unfortunately, the price of discouraging today’s rampant moral hazard is that some risk-averse students will be discouraged from getting an education.

Another problem with ‘free fees’ under the status quo is that top-earners have their training provided by the state. How is it fair to provide free education to (say) doctors expecting to eventually earn €200,000 off the state? If fees are introduced, the prices of these courses could be bid up to reflect their true value to the consumer. Fees mean high-earners will pay for the benefit they receive.

They might also precipitate an increase in the places available. After all, students will demand and pay most for the most valuable training, so universities would want to provide it. Wouldn’t it be wonderful if the Irish education system was churning out enough doctors to satisfy the increasing demand for health-care? This would improve the health system and reduce costs, by eliminating the monopoly power these health professionals currently enjoy. Fees mean no more closed shops, courtesy of government control.

Universities will also start making their investment decisions based on the return to the college and the students. Under the status quo, availability of funds determines the ability of universities to reinvest, and without any modicum of cost-benefit analysis. They are also competing for funding from the state, rather than voters. Fees means responsible capital investment by universities, who will be competing for students.

If students are paying fees by choice (as opposed to having their fees taxed off them by the state), they will critically only seek education in Ireland if it’s really the best option for them. Under the status quo, there is a strong bias through this obligated payment to attend university in Ireland. But if students can choose to take their money with them to another country, universities in Ireland will really have to compete for students with foreign shores. Fees foster competition and improve education standards in Ireland.

Free fees are imposing costs on students, even if they don’t know it. By promoting wasteful decision-making, it means we are spending more money on education than we need to for the lesser benefit. This money could be spent elsewhere. The benefits of free fees is also highly regressive – both in terms of the background enjoyed by many students, and the huge benefits that accrue from education in later income-earning potential. Free fees also promote bad educational standards in Ireland, by putting Irish educational institutions at an unfair advantage in competing for Irish students. They also cause under-investment in education.

Students might celebrate, but the costs of this decision will scar our nation for years. ‘Free fees’ aren’t free. Far from it.

Republished as “Why Free Fees Aren’t Free” in the University Times (25th of November, 2009).

© The Free Marketeer 2009

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