Privatizing Higher Education


November 10, 1991|By JAMES A. DORN

The state's fiscal crisis has thrown a monkey wrench into plans for restructuring Maryland's system of higher education. There have been deep budget cuts, and the retrenchment is expected to continue. The University of Maryland System is in a state of shock.

Every crisis presents an opportunity to challenge the status quo and embark on a new path. In the case of higher education, one can challenge the system of state ownership and control and ask if we cannot do better. Instead of restructuring the system of higher education from the center, consider the idea of privatization.

While privatization and educational choice may appear radical in an environment dominated by government schools, those notions are gaining ground as the budget crisis deepens. Maryland's Secretary of Higher Education, Shaila Aery, has recommended that the possibility of privatizing at least parts of the UM system be given further study, and UM College Park President William Kirwan has stated, "It's essential that we look at the concept of privatization."

Privatization would end central planning of higher education and eliminate state subsidies. Ownership and control would be in the hands of trustees who would be directly responsible for the health of their private institutions. Experience has shown that managers of private colleges or universities have a stronger incentive to cut costs, improve efficiency, and innovate than do managers of state-owned schools. The ratio of staff to faculty at Johns Hopkins University, for example, is significantly lower than at UM College Park.

Ending state subsidies for higher education would reveal the true cost of college and lead to more efficient educational choices.

Higher education is primarily a private rather than a public good: benefits accrue almost entirely to those who receive the education, and tuition can be charged to cover the costs of education. College should be viewed as an investment in one's future. The lifetime income of a college graduate is nearly three times that of a non-college graduate and this premium is likely to increase in the future. Why should taxpayers -- many of whom have lower lifetime incomes than college graduates -- be forced to subsidize those who want and receive higher education? Why should students or their parents not pay the full cost of college education if they receive most of the benefits?

Higher education is not free. We pay for it one way or another. Currently, we pay mostly through taxes and a smaller part through tuition. At Towson State University, one of the more efficient state schools, the full cost per student in fiscal year 1991 was $6,887, but tuition and fees covered only $2,486 of that cost; taxpayers picked up a bill of $4,401 per full-time student. That subsidy, paid by taxpayers, was equivalent to giving every full-time student a scholarship equal to nearly two-thirds of the cost of education, regardless of merit.

Full privatization would require transferring state colleges to private boards of trustees and substituting private financing for state subsidies. The transition to a private financing system could be expedited by adopting a deferred tuition plan along the lines recently suggested by Peter F. Drucker, a professor at the Claremont Graduate School in California.

The private financing plan would work as follows. On acceptance to Towson University, for example, students would decide how much of their educational costs they wanted to defer. They would then sign a promissory note and agree to take term insurance to cover the outstanding liability. The university, in turn, would market the claims to future income through a financial intermediary, such as T. Rowe Price.

Since college significantly increases an individual's lifetime income, the education securities (IOUs) would be valuable and attract private investors who would hold legal claims to a small fixed portion of students' future incomes. Educational investment funds, similar to money market funds, would develop, and the managers of those funds would have an incentive to monitor students' performance and collect on their IOUs. The government's only role would be the judicial one of enforcing legally binding contracts. If such a private financing plan were implemented, there would be no danger of widespread student defaults.

Ending state control and financing of higher education would increase efficiency, encourage innovation, and increase choice. Schools that produced successful graduates would find it easier to attract investors. Greater emphasis would be placed on marketable skills. Universities would find new ways to raise revenues and lower costs by offering new courses, developing new programs, and using new information technology. The market, not the state, would determine the direction of higher education.

Education is too important to be left to the state. The present fiscal crisis offers a unique opportunity to explore the privatization alternative.

Those who have most to gain from the current system will be strongly against any alternative that weakens their prerogatives. But citizens who ultimately have control should be made aware of the alternatives. The one that will improve the quality of education, provide it at lower cost and be more equitably financed is privatization.

James A. Dorn is professor of economics at Towson State University and editor of the "Cato Journal."

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