You may recall that we recently put out a paper looking at “net prices” in Canadian higher education, which concluded that, in many cases, these prices were substantially lower than is commonly believed, and that too many of our subsidies in higher education were effectively hidden from those who benefit from them.  The reaction for the most part was amusingly incoherent – mostly variations on “they must be lying, because I’ve never heard of these hidden subsidies”.

But there was one line of criticism that is very much worth discussing.  Several people said “look, expressing subsidies as a function of tuition is all well and good, but the cost of education doesn’t just consist of tuition and fees, it’s living expenses, too – so why didn’t you also include that?”

Fair question.  We did it for two reasons. The first is practical: fees are set and living costs are not.  Some students move to another city to study (either by choice or out of necessity) – that raises their costs by several thousand dollars.  Some students don’t move cities, but rather choose to move out of their parents house anyway – again significantly raising costs.  Students can and do choose various levels of accommodations, with different financial consequences.  Many students also either own or rent cars.  I could go on, but you get the idea: student living costs vary enormously either by choice or circumstance, and more to the point, these costs will be to some degree dependent on the resources government makes available, which brings an endogeneity problem.  It’s a methodological nightmare: hence, we decided to leave it alone.

But there’s another reason to leave living costs out: quite simply, they aren’t a cost of education.  Whether or not a young person goes to school, they need to live.  Those costs (or some of them, anyway) would be incurred regardless.

Pointing this out usually drives people mental.  “But they have to live!” people say, “and they can’t earn the money to do that while they’re studying!”  Well, indeed.  This is why the real cost of attendance is not what students spend, but rather what they fail to earn – their opportunity cost.  We confuse this point all the time, because through our student aid program we try to compensate direct costs rather than reward missed earnings.  But the fact of the matter is the actual “cost” is lost wages.

Could we have included lost wages in our “net cost” calculations?  Possibly – though of course we’d have to make a fair number of assumptions about employment rates, hours worked, and hourly wages, all of which would have been open to challenge.  So on the whole, it seemed safer to leave them out.

What about the policy aspect though?  Why do we compensate living costs rather than lost wages?  Two reasons, really.   First is that it’s a hell of a lot of easier to explain to students and the public.  And second, there are reasonable policy rationales for – at the very least – covering the cost of moving away from home, either for reasons of access (for students from rural areas who need to move to attend education) or program choice (for all students).

Basically, it’s one of those cases where what makes sense for policy analysis and what makes sense for actual policy aren’t one and the same.