Fee restrictions do not help the poor. Instead of making education cheap, why can't we charge rich students high fees and use the resulting surplus to cross-subsidise the poor?

The previous article (Business Line, January 14, 2012), commented on two of the three prohibitions that the Union HRD Minister, Mr Kapil Sibal's Bill plans to impose on higher technical institutions in the country. Those two were the prohibition of admitting students without a central test and the prohibition of admitting students proposed by rich donors. The third prohibition (with which the Supreme Court concurs) refers to prohibition of charging higher fees than what is decided by a state-level committee.

Restricting fees is a form of price control. All price controls are meant to help the deserving poor who, otherwise, will not be able to avail the service. That form of socialism has been popular in many countries. In its extreme form, many countries of Europe make education absolutely free. However, we should not forget it is a form of cross-subsidy: the rich pay taxes; those taxes pay for the education of all, particularly the poor who pay little or no taxes.

Price control

Price control is a controversial issue among economists. Milton Friedman was totally opposed to it, whereas Paul Samuelson was partially in favour of it. Opposition to price control stems from the fact that it reduces incomes. When incomes go down, operational surpluses go down even more sharply; at the extreme, there may be no surplus at all to pay for much needed improvements. Thus, price control, inevitably, stunts future expansion. On the other hand, if there had been no price control, the larger surpluses could have improved both the quantity and quality of the output.

On the other hand, without price control, the poor may never be able to afford the product, particularly a service to which they might be better qualified than the rich are. It is also possible that the surplus might not be used for further expansion; it may instead be squandered in wasteful luxury or even spent abroad. Nevertheless, money is generated and spent — which should indirectly boost the economy. Thus, even wasteful expenditure could indirectly help the poor, too.

80-20 rule

Then, how do we price higher education without hampering its future or denying it to the deserving poor? I have often suggested that we adopt Pareto's 80-20 rule which states that statistically the top half spends 80 per cent whereas the bottom half spends only the remaining 20 per cent. (That is largely true in India too but, unfortunately, that is not true anywhere of savings and investment.)

In that case, let colleges charge 80 per cent of their costs from the top half of the population and only 20 per cent from the bottom half. Then, accounts will be balanced, the poor will be subsidised.

The rich will subsidise the poor directly and voluntarily by paying high fees, instead of indirectly by paying involuntarily higher taxes.

It can be argued that such a direct relationship between the rich and the poor will perform better than through the state as the intermediary. That is how Harvard University operates. It has a three-part system of admission.

First, the academic division categorises all applicants without reference to their ability to pay. Then, the finance division identifies how much each candidate is willing to pay.

With that information, the admission office makes a list of the best persons (including the very poor who may need actually not merely free education but even a scholarship) who will meet the total costs.

How can that be done? Suppose a college wants to admit 100 students and needs Rs 1 crore. First, its academic section makes a merit list on the basis of multiple criteria (and not a central test alone). Each applicant also gives a bank guarantee separately to the finance section of the highest fees he or she is willing to pay.

Then, the admission department finds out the total of the amount guaranteed by the top hundred applicants of the merit list. If the amount is inadequate, it drops the last student of the merit list and offers the vacancy to the highest paying qualified candidate.

The process continues till the desired total of Rs 1 crore is reached. Thus, the best mix of academic and financial merit is admitted. It does not let in those who are both financially and academically poor.

If the government wants to admit such students, it may guarantee them scholarships or admit them to its own institutions but it should not interfere with admissions in private colleges but expect that competition among colleges will ensure fairness.

Coaching institutions

In other words, the issues are: (a) instead of making education cheap (both in money and hence, in quality) why should we not charge rich students (provided they are as good as reserve category students are currently) high fees and use the resultant surplus to cross-subsidise the poor? (b) Why place total trust on test scores to the exclusion of assessment of personality which can be obtained only through referee reports and interviews?

The present policy has encouraged coaching institutions where the charges are several times the fees paid for the whole course in engineering. Thus, it virtually lets in only the very rich who can afford to pay such heavy charges and negates the very purpose of keeping fees low, which is to make education affordable for the poor. It is also a fact that everywhere, without exception, prohibition has led to corruption and criminalisation.

There is no point in making temples of learning corrupt or let them be led by the criminally minded.

Basically, the issue is what do we want: Is it quality education or mere increase in quantity? Harvard regularly admits many poor people with scholarships and also produces Nobel Prize winners; will the government's policy do so?


(The author is a former Director, IIT, Madras. Responses to indiresan@gmail.com and blfeedback@thehindu.co.in)

This is 321st in the Vision 2020 series. The last article appeared on January 14.

(This article was published on January 27, 2012)
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