Student fees and subsidies

There is a clamour all the time to reduce subsidies in higher education. Higher fees are perfectly okay as long as loan finance is available- this is the new mantra of those sold on market economics. The IIMs have been raising fees over the past several years and the coming year will see a big jump in fees in some of the IIMs, including IIMA.

When former HRD minister MM Joshi sought to peg fees at Rs 30,000 there was a huge uproar. What was overlooked subsequently was that the IIMs quitely accepted under Arjun Singh the principle of a big subsidy in fees for those coming from families with income upto Rs 200,000.

Those who advocate the proposition that fees should be market-related or that fees must recover costs of education overlook one crucial fact: nowhere in the world, certainly not in quality institutions, is this proposition rigidly adhered to. On the contrary, as a story in the Economist points out, top universities in the US are stepping up subsidies.

Formidable financial-assistance policies have eliminated fees or slashed them deeply for needy students. And last month Harvard announced a new plan designed to relieve the sticker-shock for undergraduates from middle and even upper-income families too.

Since then, other rich American universities have unveiled similar initiatives. Yale, Harvard's bitterest rival, revealed its plans on January 14th. Students whose families make less than $60,000 a year will pay nothing at all. Families earning up to $200,000 a year will have to pay an average of 10% of their incomes. The university will expand its financial-assistance budget by 43%, to over $80 mn.

Harvard will have a similar arrangement for families making up to $180,000. That makes the price of going to Harvard or Yale comparable to attending a state-run university for middle- and upper-income students. The universities will also not require any student to take out loans to pay for their tuition, a policy introduced by Princeton in 2001 and by the University of Pennsylvania just after Harvard's announcement.

Why would Harvard and Yale want to provide subsidies to "middle and even upper income families"? After all, anybody who studies at these places should be able to earn to repay student loans?- the point that is made ad nauseam with respect to IIMs. I can think of several reasons.

One, to attract the broadest possible range of talent. High fees, it is implicitly conceded, constitute an entry barrier for some talented students at least. Two, even in the US, where young people are on their own from an early age, it is families that bear some part of the burden of fees. This would be even truer in India where the graduating student has responsibility for his or her larger family even after taking up a job.

Three, quality institutions do not operate on the principle that they must recover costs (plus profit) through student fees. Just as newspapers recover costs through ads, not the sticker price, so also educational institutions get their funding from other sources- either government (as in much of Europe) or through endowments (as in much of the US). The idea of a subsidy is thus built into higher education, the only issue is the source of subsidy. It follows that if the leading IIMs are loath to accept government assitstance, they must find ways to generate endowments. Higher fee is not the answer.

Four, when we talk of a subsidy, we should know exactly what the costs are. To simply say that costs are rising and therefore fees need to rise is not enough- the costing of a particular programme must be done rigorously with proper allocations of overheads and this must be certfied by an appropriate authority.

One final thought. I recall my days at IIT Bombay at a time when the fees were laughably low. The one thing that astonished me was the number of people who had come from small towns- these constituted the raw, intellectual firepower of the school and many went on to make waves in the US. They came in because the fee was eminently affordable (student loans were hard to come by at the time). I have little doubt that high fees would have acted as a deterrent to many of these families even if loan finance had been available.

That experience gives me the utter conviction that escalating fees in higher education are the route to exclusion and elitism and the snuffing out of great talent.