Determining Preferred Levels of Tuition and Need-Based Aid Subsidies for Colleges

This chapter analyzes the public provision of higher education subsidies. When voters have a positive utility from the share of college-educated among the young, they may decide to vote for subsidies for students which increase the number of college students. These subsidies are paid for by income taxes that reduce the amount of consumer goods voters can purchase. There are a group of credit-constrained young who must pay high interest rates on student loans. This paper shows that even though voters do not explicitly care about the welfare of poor students, it is preferable for policymakers in the government to choose positive amounts of need-based subsidies which only benefit the credit-constrained young.