KEVIN DRUM worries that the high cost of college tuition is driven by the very large value of lifetime earnings gains derived from a college degree. He agrees with Kevin Carey that federal tuition subsidies and easy loans are part of what's driving up the price of a college education, but he thinks the real story is "more depressing": As long as we keep giving people whatever student loans they need to attend college, and absent any regulatory price controls, colleges will hike tuition to the very limit of what it's worth in higher wages.

[I]t's not just that universities are steadily making up for distortions caused by federal aid. The fact is that we've never been in a situation where universities were charging a market price in the first place. After all, if the lifetime wage premium for a college grad is a million dollars over 40 years, then how much is four years of college worth today? Answer: about $300,000 or so. That's $75,000 per year... For many decades, universities acted as though they had a public, charitable mission. That was especially true for state universities, but it was true for most private universities too. That's largely changed. In the public sphere, taxpayers have noticed that (a) it's mostly well-off kids who go to college these days, not children of the poor bettering themselves, and (b) this education is worth a helluva lot of money. So why should they be asked to subsidize a route to higher earnings for kids who, for the most part, already have a lot of advantages? The cost of college loans seems more and more like a simple financial transaction to them, not a crushing burden being placed on struggling youngsters. In the private sector, I'd guess that universities are simply coming to grips with the fact that they can charge a lot more than they ever imagined. They're testing the boundaries of their market price, and they haven't found it yet. Until they do, tuition costs will continue to skyrocket.

Mr Drum doesn't put this forward as a definitive figure. But the basic point seems valid, and I think there's one more consideration we need to mention: This seems like a particularly clear case where the market value of a good is much lower than its social value. One way to express this point is that the social value of each student's college degree is $1m. That's the earnings they'll add to the entire economy if they get a college degree. But without subsidies, the market value will be much lower, because most people can't afford to spend $300,000 on a college education, and will be reluctant to borrow that much even if banks are willing to loan it to them. Because the market value will be lower than the social value, the goods will be under-provided. Scrap government subsidies, and you may keep college tuitions down. But you'll be accomplishing that by ensuring that a whole lot of potential students decide not to go to college, which will ultimately mean poorer Americans and lower GDP.

Another way to think about this would be to ask what high-school tuition would cost if we didn't guarantee a free high-school education to every child, and instead funded it the way we do college education, by loaning people the money to pay for it. Assume the social value of a high-school degree is just the difference in lifetime earnings between a high-school graduate and a drop-out. According to Princeton's Cecilia Rouse, that was about $260,000 as of 2005. (In fact this greatly understates the earnings difference: it's just the difference between lifetime earnings for drop-outs and those with only a high-school degree. Since you need to finish high school in order to go on to college, we should really be factoring in some part of the eventual earnings difference for those with college degrees or higher. But I don't have those stats and it would be hard to decide what fraction of those earnings to include, so let's leave it at $260,000 and recognise that we're low-balling it.)

So how much is $260,000 in lifetime earnings worth today? I'm not sure how Mr Drum got his $300,000 figure, but I assume it's a future value calculation of what sum you'd have to invest to get $1m at some reasonable rate of return over 40 years. Which means he's estimating a real return of about 3% per year. Assuming a high-school grad or drop-out works perhaps five more years than a college grad over the course of their lifetime, what would you have to invest to end up with about $260,000 after 45 years at a return of 3% per year? If I'm doing my math right (1/ert * 260,000), it's about $67,500. So we're talking four years of high-school tuition at almost $17,000 a year. And, again, this is probably significantly low-balling the real value of that degree.

How many American parents can pay $17,000 a year per kid for their kids to go to high school? Say this math overestimates the present value of the degree, and the actual figure is only $10,000. How many parents could afford to pay that? How many can borrow that much on the private market? How many would be willing to, if they could? What percentage of American kids would graduate from high school if they or their parents had to pay the full future value of their education up front? Currently 70% of Americans graduate from high school; imagine that percentage dropped to even 50%. And here's the money question: How much poorer would America be, how much lower would our GDP be, if only 50% of Americans graduated from high school? I think this is the way we need to think about the value of government subsidies for, and/or cost controls on, and/or provision of low-cost Skype-enhanced alternatives to universal college education.