Higher Education Subsidization: Part 1—Subsidy Justifications and Rationales

Editor’s Note: This series is adapted from the new paper Higher Education Subsidization: Why and How Should We Subsidize Higher Education? Part 1 explores the justifications and rationales that have been used to subsidize higher education.

Higher education has long been subsidized by the government in America, but the reasons used to justify subsidization have changed considerably over time. This part of the series simply seeks to document the main justifications for college subsidies in a positive—as the world is—rather than a normative—how the world should be—sense. The rest of this series will critique college subsidies but will do so while taking these justifications at face value. I do so not because these justifications are beyond dispute, but rather to demonstrate how badly designed and implemented much of the subsidization of higher education is. It is shocking how much subsidization can be critiqued as “you’re doing it wrong” without even raising the “you shouldn’t be doing that at all” type arguments.

But before we can get into all that, this part will simply present the main justifications for subsidies, which include:


  • Promoting favored religions
  • Reducing the size of the labor force
  • Strengthening national defense
  • Paternalism
  • Redistribution
  • Generating positive externalities
  • Boosting economic growth


Promoting Favored Religions 

While it seems antiquated today, it is difficult to understate the importance of religion in establishing and funding early colleges. Indeed, for more than a century before and after the U.S. won independence, religion was the main purpose of college. For example, Harvard’s original mission statement was:

Let every student be plainly instructed and earnestly pressed to consider well the end of his life and studies is to know God and Jesus Christ, which is eternal life, and therefore to lay Christ in the bottom, as the only foundation of all sound knowledge and learning.

Many of the 13 colonies had a dominant religion that was closely tied to the colonial government, so many established and subsidized colleges to ensure that the colony’s religion had a sufficient pool of religious leaders. As Miguel Urquiola documents, this “desire might have been particularly intense in Massachusetts and Connecticut, where Puritans—strict Calvinists with a scriptural rather than sacramental approach to religion—emphasized an educated clergy and a literate flock.” After these colonies established Harvard and Yale, other religions pushed to establish their own colleges—e.g., Presbyterians were instrumental in establishing Princeton, Anglicans in establishing Columbia, and the Dutch Reformed in establishing Rutgers. This close tie between religion, state government, and college was in place for centuries. Bruce A. Kimball and Sarah M. Iler find that as late as the 1880s, the majority of college presidents had previously been clergymen.


Reducing the Size of the Labor Force

Another historically important but now obsolete justification for college subsidies is reducing the size of the labor force. During the Great Depression, many thought that there were not enough jobs for all those seeking employment, and work-study were created to keep people sequestered in colleges without adding them to the welfare programs. As World War II ended, there was fear that millions of returning soldiers, sailors, and airmen would rekindle the massive unemployment problems of the Great Depression, which spurred the creation of the first GI Bill, keeping many veterans out of the workforce. Given the modern economy’s ability to absorb labor, this justification is rarely used today.


Strengthening National Defense

During World War II and again after the Soviets launched Sputnik, fear of technologically advanced opponents spurred investments in education in the name of strengthening national defense. While this justification has faded since the end of the Cold War, rising tensions with China could potentially revive this strain of thought. Indeed, this may have already started with the 2002 Chips Act, designed to ensure access to computer chips in case China invades Taiwan, the leading producer of advanced chips.



Another justification for subsidizing colleges is paternalism. The basic idea is that if potential students are routinely making the wrong decision by failing to enroll in college or choosing the wrong major, then subsidies could encourage them to make the right decision by artificially manipulating prices. Today, the leading academic approach along paternalistic lines focuses on the uncertain payoffs of attending college combined with risk aversion. A risk averse potential student may avoid college due to the uncertain payoff but can be nudged into attending with sufficiently generous subsidies.



Starting in the 1960s and continuing through today, a major justification for subsidizing colleges is redistribution. The redistribution usually targets some combination of students from low-income families with a goal of promoting equality of opportunity, students from middle-class families with a goal of making college more affordable, and talented students who excel at academics, music, or athletics with a goal of rewarding and encouraging merit and hard work.


Generating Positive Externalities

Externalities refer to the effect on third parties from a transaction. Externalities can be negative—e.g., pollution—or positive—e.g., getting a flu shot reduces the chances you get and spread the flu to others. Most economists argue that markets will not yield optimal outcomes when there are externalities because private decisions do not account for the externalities’ effect on third parties. Since many believe that education produces positive externalities, the market will produce too little education. Subsidies can remedy this problem by altering education’s private costs and benefits to match the social costs and benefits more closely.


Boosting Economic Growth

Another common justification for college subsidies is that such subsidies would boost economic growth. This is one of the most common justifications for subsidies. Politicians and college leaders are so enamored with framing subsidies for higher education as an investment in the economy that, as Alison Wolf writes, “we have almost forgotten that education ever had any purpose other than to promote growth.”

In Part 2 of this series we’ll explore the main subsidy design considerations.

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2 thoughts on “Higher Education Subsidization: Part 1—Subsidy Justifications and Rationales

  1. All subsidies should be eliminated if the university has an endowment over some specified amount. Let them spend their own money.

  2. “… in Massachusetts and Connecticut, where Puritans—strict Calvinists with a scriptural rather than sacramental approach to religion—emphasized an educated clergy and a literate flock.”

    There was more to it than that — they believed that everyone needed to be able to read the Bible for himself or herself and that’s why you have the start of universal (taxpayer-supported) public education with the the “Old Deluder Satan Law” (passed in Massachusetts in 1642 and then in Connecticut in 1647, with various subsequent amendments).

    So if you want to talk subsidy of education, this is where it started and where the majority of it still is — about half of every municipal budget goes to K-12, along with a whole lot of State and Federal money. And one also needs to remember the role of the municipal minister prior to about 1830 — both he and his wife were municipal employees, paid out of the property tax, and subject to being rehired or fired at the annual town meeting. The more contentious issue on the town meeting agenda was usually the minister’s firewood allotment — how many cords of wood the men of the community would provide him to heat both his house (the parsonage) and the church for the following year.

    Just because it was a theocracy doesn’t mean it wasn’t a government — and even though things were simpler, there still was a need for bureaucrats to do bureaucratic things such as assess and collect property taxes, oversee the poor, work on roads, etc. Back then every town had at least one representative in the General Court (legislature) and there were judges and Governors and whatnot.

    So you may just have been educating ministers, but if your ministers were also your civil servants, you are subsidizing the education of your civil servants.

    I also like to remind people of the introduction of public higher education in the 19th Century — first the Normal Schools which became the state colleges and then the Land Grant Colleges which became state universities. The Normal Schools were to train teachers, which the growing nation desperately needed, and the Land Grants were to teach “Scientific Agriculture and Mechanical Arts” (A&M) in a desperate attempt to keep young people tilling the rocky soils of places like Vermont instead of moving out to the Ohio Valley.

    And yes, the GI Bill was intended to put the returning GIs into college in hopes of preventing the “bonus armies” of unemployed WWI vets and the problems they created.

    But in terms of subsidies, it was Sputnik in 1957, the National Defense Education Act of 1958, and then LBJ’s Higher Ed Act of 1965 that really started the subsidization. It very much is a case of before and after

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