Although subsidizing college degrees no doubt has produced more of them, this effect has not been as dramatic as is commonly assumed. "The large majority of the rise in higher education participation in America occurred before there was a major federal financial involvement," economist Richard Vedder noted in a December speech at the Heritage Foundation.
To the extent that rising subsidies since the 1970s have encouraged people to enter college who otherwise would not have, that is not necessarily a good thing. Citing low completion rates, Vedder argues that "we probably have over-invested in higher education," attracting marginal students who never graduate.
Which makes sense, since anyone who can finish college and reap the typically large returns from doing so should be able to finance tuition through market-rate loans, private aid or some combination of the two.
The nonfederal market, which already accounts for a rising share of student loans, could be augmented by human capital contracts, under which students agree to pay a percentage of their future earnings in exchange for tuition money.
First suggested by the economist Milton Friedman half a century ago, such contracts reduce risks for lenders, especially when combined and sold as shares in an investment fund. They help borrowers with no collateral tap the added income they expect to earn with a college degree.
Given these alternatives, government aid is necessary only when the investment in college tuition is not economically viable. It makes sense only when it doesn't.