Based on a story in the Ann Arbor News, December 11, 1996

TAX BREAKS MAY RAISE TUITION

This story discusses a proposed subsidy toward college tuition at colleges and universities. This tax break would take two forms:

• A $1500 to $3800 exemption for tuition based on the family's tax bracket
• A $1500 credit for a student maintaining a B average during the first two years of college.

"President Clinton's proposed tax breaks to help the middle class pay college tuition may result in little savings to families but a windfall to schools.

The story maintains that "Critics fear that universities will simply use this as an excuse to raise tuition - an assertion hotly disputed by University of Michigan provost J. Bernard Machen.

Wayne E. Becraft, director of the American Association of College Registrars and Admissions Officers is quotes as saying: "Tuitions are going up fast already, but I expect them to go up even faster (if the proposals are enacted)... But colleges won't just increase tuition for the heck of it. Schools will have to adjust staff and facilities to meet the volumes that are expected from an influx of new students." According to the story Provost Machen at the University of Michigan said that "except for inflation, tuition at the University of Michigan is about as high as it can possibly be," and therefore the proposed tuition subsidies would only benefit the students and not the university itself.

The story suggests that tuition is most likely to rise at community colleges, where Clinton's tax credit is $300 larger than the average tuition. As a result, the two-year schools are expected to raise tuition to match the full amount of the tax credit.

A White House spokesman, Barry Toiv, is reported as saying, "But we hope that colleges will be responsible and not make this a problem or an incentive to raise tuition."

Robert McGee, a taxation and public policy professor at Seton Hall University, said the tax breaks would lessen the pressures on these schools to keep costs down. The story reports that according to Mr. McGee, "In the past, when the government has helped with higher education expenses, colleges have raised tuition. >From 1944 to 1947 the college population doubled and tuition increased sharply when the government paid tuition for nearly 2 million officers in the GI bill."

"That not only benefited the students, but more the schools," said Judy Bellafaire, a historian with the U.S. Army. "Schools began to say, `Hey, if the government is going to pay for this, we're going to up tuition to the maximum'. Colleges knew they had a good thing going."

Some Exercises for You

• Draw supply and demand curves for college education and find the predicted effect on college enrollment and on tuition.
• Show that Wayne E. Becroft's remark that "colleges won't just increase tuition for the heck of it. Schools will have to adjust staff and facilities to meet the volumes that are expected from an influx of new students." would be consistent with an upward-sloping supply curve, but not with a horizontal supply curve.
• If you can make any sense out of Provost Machen's remark in the same paragraph, please let us know.
• Explain why the community colleges are almost certain to raise their tuition to be at least as high as the subsidy.
• Do you think that Barry Toiv's remark that "we hope that colleges will be responsible and not make this a problem or an incentive to raise tuition" is adequate reassurance that colleges won't raise their tuition by the full amount of the subsidy? Can you think of a more convincing argument for why they might not raise their tuition very much? (What would have to be true of the supply curve for this effect to be small?)
• Can you use supply and demand curves to explain the effects of the GI bill as reported by Robert McGee?
• Do you think universities are going to say as, as Judy Bellafaire, suggests , `Hey, if the government is going to pay for this, we're going to up tuition to the maximum'. And what do you suppose Judy Bellafaire means by "the maximum"?
• Do you think that if students get a tuition subsidy of $1500 only if they maintain an average of B or better, there will be a decrease in the number of economics students (where grading is relatively strict) and an increase in the number of psychology and sociology students (where grading is easier)?
• Please be aware that while economics can make sense of many things in the newspapers that seem mysterious to the uninitiated, a lot of stuff that people say in the newspapers (and elsewhere) probably doesn't make any sense at all.

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