So How Does Free College Work?


Sparkplug bear1One proposal by Presidential Candidate Bernie Sanders is to make college “free for all.”  (He also thinks healthcare and daycare should also be free for all.)  This has made him very popular among college students and young adults who are facing their student loans.  After all, what’s better than “free?”

Still, how exactly would that work, free college?  Somebody would need to maintain the buildings and the grounds of the college.  Someone would need to mine the fuels and then run the plants to generate the electricity for the college, mine and distribute the heating gas, and maintain all of the internet equipment and miles of cables and wireless towers that provide the internet bandwidth for the college.  Beyond that, someone would need to produce the food the professors and staff ate, make their clothes, build their houses, build their cars, extract and refine the gasoline they use, and provide the hotel rooms and food they enjoyed while on vacation.  This means that someone somewhere would need to be creating the goods that would be traded to pay for all of these things.  If the students and their parents weren’t working and paying for college, someone would need to do so.  Where would this come from?

Take it from the wealthy.  We could just levy a high tax on people who make a lot of money and have them pay for these things, right?  How about a 70% income tax on those making more than a million dollars per year?  Well, first of all, even if you confiscated all of the money earned over $1 M, you wouldn’t get enough to pay for everyone’s college, certainly not at the level of quality seen today.  This means that you would need to tax people at lower and lower income levels.  This means people making $100,000, or even $50,000 per year would need to pay.

Also, people who make a lot of money are very mobile.  Many travel all over the world and may own homes in several different countries.  If you raise taxes on them enough, they may just decide to leave.  They may also decide to stay but put in less time at the office, or start fewer new projects.  They may decide that making $500,000 per year is just fine, because they only get 30 cents on the dollar if they make more anyway.  Why not catch up on some hobbies instead?  As the wealthiest leave or just make less, the burden on lower-income people would grow and grow.  Also, when the wealthy start fewer projects, it means fewer jobs.

Who would pay for all of this?  Middle class Americans, and for the rest of their lives.  Currently parents save and pay for part of their children’s college, then the children put a portion of their income towards paying off their student loans after college.  Everyone pays for their own college and for part of that of their children.    Students have the ability to pay less by doing things like going to a state school, working hard and getting scholarships, or taking classes at a community college before moving up to a more expensive university.

If we had “free college,” those who were working would be paying for all of the people who were in college at a given time.  They would not be able to save money through their choices because the people getting the “free” college education would decide how much things would cost by how and where they decided to go to college.  It all cost the same to them, so why not go where they wanted and take eight years to finish?  (Why not put off getting a job when college is “free,” including, one would assume, room and board?)  If there were a lot of people born after you started working, you’d pay a lot more for college over your lifetime than you would have if you had just paid for yourself.  Realize also that if this passed in the next few years, people in college now would pay for their college but then be paying taxes for all of the people after them getting “free college” since those in college now would not benefit.

You would see quality decline and restrictions placed in an effort to cut costs.  At first you might be able to go where you want and take as long as you wanted.  But as costs increased because so many people were spending longer in college and going to more expensive places, you would see things cut and restrictions placed.  You might be forced to go to a community college first, even if you wanted to go straight to a university.  You might see restrictions on the majors you could take since those graduating with French History degrees might contribute a lot less after they graduate than those with engineering degrees, and someone would need to be producing enough to pay for all of this free stuff.

You would no doubt see a rationing system and large amounts of bureaucracy form as rules were passed to prevent fraud and abuse.  In this kind of environment, corruption would appear as people paid off officials and used influence to get ahead in line and get around the system.  Ironically, the very people Bernie Sanders rails against would be the ones getting access to a quality educations because they would have the influence to get the best slots while those in the middle class would be shut out.

You could choose better options, but only if you could afford to pay twice.  Almost everyone would agree that private prep schools provide a better education than the average public school.  In inner city neighborhoods, schools may even be dangerous and have rates of proficiency in reading and math in the single digits.  Yet still many students attend public schools instead of private.  Why would they do this if there was a better choice?  The reason is that everyone has already paid for the public schools through their tax dollars.  While the private school may not cost any more than the public one (many times the cost per student is less), in order to send your children to the private school you need to find the money to pay again for something you’ve already paid for through taxes.  Many families can’t afford to do this, so they are forced to take whatever the public school option is.

With “free college,” it would be the same way.  You and your family would be paying for the public college regardless.  You might be able to go to a nicer private college, but only if your family was wealthy enough to pay again.  Because your taxes would be higher than they are today, because you were paying for all of this “free college,” most people in the middle class would be forced into public colleges.

Those paying would see an increase in the cost of college.  Because taxes would be high if you were working, many people would delay working, or not worry about getting a job that made much money after they finished college since most of it would be taken in taxes anyway.  Someone might decide to play guitar on the streets for (tax-free) donations while also getting money from welfare programs rather than work in a job where they were producing a lot and therefore being paid a lot and paying a lot in taxes.  Because fewer people would be paying, the cost to those who were paying would go up quickly.

Think about going out to eat with a group of friends at a casual dining restaurant.  If everyone paid their own way, the average check might be $12 and everyone would be able to pay it easily.  If a few people stopped paying and everyone else needed to cover them, the cost might go up to $20 each.  This increase in price might make it more difficult for for some people to pay, so they would stop paying or need to be subsidized by others, increasing the burden still further on those still paying the full bill.  As the price of paying the dinner increased because fewer and fewer people were paying, more and more people would stop paying, either because they couldn’t pay or because they decided it was better to make less and let others pay, so the price of dinner would keep increasing for those still paying the full bill.  Prices of things are much lower if everyone shares the burden.

The same thing would happen with “free college,” where people would find ways to not work and pay their share, or perhaps stay in college their whole lives and never pay.  This would make the cost of college for those paying increase to the point where the taxes paid for college would be much higher than it would be if people just paid their own way.  They would be paying for themselves and several others.  Note that this is the reason the list prices for medical services are so high.  If is also why the full prices for college is so high – most people aren’t paying the full cost, so those who do need to pay the costs of several other people.

So before you jump on the bandwagon and vote for “free college,” think about the results.  Someone needs to pay for everything.  If everyone does their part and pays for themselves, costs will be far lower, there will be more choice, and quality will be better.  Let the government pay for it and you’ll see higher costs, less choice, lower quality, and lots of corruption.  There is always a cost for “free.”

Got and investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Comments appreciated! What are your thoughts? Questions?

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s