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Degree-level education can offer a route out of poverty, for graduates as well as their children. To reduce both cross-sectional and intergenerational inequality, improving public schools and subsidising college tuition fees are both viable policy options. But the optimal approach remains open to debate. This column suggests that a combination of the two reforms can be effective. In fact, the two programmes are complimentary: combining better school funding with tuition fee subsidies provides the most significant welfare gains. This dual policy approach is also self-financing, allowing policymakers to reap the economic benefits of higher human capital over the long run.
Education is key to beating the poverty trap. As policymakers around the world continue to debate the best ways to improve livelihoods and reduce inequality, access to education remains central to the discussion. A college degree in particular is associated with improved wages for a graduate, as well as better opportunities for their children down the line. Economic opportunities are often forged in the classroom.
In the United States, 16% of children grow up in poverty. Educational attainment gaps between children of different socioeconomic backgrounds appear early in life and persist into adulthood. Those with parents/guardians who went to university tend to enjoy higher incomes later in life (Chetty et al., 2014). In fact, these ‘pre-labour market entry gaps’ have been identified by researchers as the key determinant of economic outcomes for the next generation (Keane and Wolpin, 1997; Carneiro and Heckman, 2002; Huggett et al., 2011). Differences in wellbeing are often determined at birth.
This has sparked debate about whether public education policies can lessen these disparities and lift children out of poverty. For example, the Biden administration has proposed free community college that would make higher education less costly. Not only would this support the current cohort of college applicants, but it could also help close the socioeconomic gap between future generations of Americans.
The opportunity to acquire quality education is pivotal for people to break free from the poverty trap. But what is the best approach for achieving this? Should governments make college free, or should they focus on improving the quality of public (i.e., state-run) schools? A recent study by Dirk Krueger, Irina Popova and myself delves into this question, offering new insights into the long-term impact of two education reforms.
Free college or better schools?
In our new paper we examine the potential outcomes of two major education policy reforms: making college tuition-free and increasing funding for public schools. Both policies are designed to make education more accessible, but they tackle the problem from different angles. The ‘free college’ approach focuses on removing the financial barriers to higher education, while the ‘better schools’ initiative aims to improve the foundational education children receive, shaping their entire academic trajectory.
Children from low-income families tend to perform worse in school, and their chances of attending and completing college are much lower than their wealthier counterparts. This not only affects their future earning potential but also perpetuates intergenerational poverty. Removing the financial barriers to college entry, as well as boosting the quality of state-delivered high school education, could be effective policies to address this issue.
Understanding policy impact
To understand the impacts of the two reforms, we use a complex general equilibrium model. This framework takes into account the various stages of education (or ‘human capital development’) from childhood through to college, as well as the role of both parental and government investments in education. Our model also considers the family structure (i.e., single vs married parents) and is informed by household level data to assess the distributional and welfare consequences of each policy.
The model includes ‘intergenerational linkages’. This means we can assess the extent to which the two policies affect outcomes for future generations. Rather than simply measuring changes in inequality within the current cohort (known as ‘cross-sectional inequality’), our framework also considers the longer-run effects on school attainment and wages for the next generation (what we call ‘intergenerational earnings and education mobility’ in the paper). Given we are interested in how best to break the poverty cycle, this multi-dimensional approach is critical. We want to know how to close the gap between different socioeconomic groups, as well as between generations.
What works best?
Both reforms generate significant long-term welfare gains. But the better schools reform stands out for its broader and more equitable impact across society. While free college increases the number of university graduates, the better schools approach strengthens the overall level of human capital, reducing dropout rates and benefiting students across the socioeconomic spectrum (not just those who go to college). A rising tide lifts all boats.
But these two policies are not mutually exclusive – they can be complementary. Combining better school funding with tuition fee subsidies provides the most significant welfare gains and reduces poverty more effectively. The reasoning behind this is that making college free is only beneficial if students are adequately prepared to succeed in college, which is where better schools come in.
The long-term view
One of the most interesting findings is that both reforms are self-financing in the long run. While each programme requires initial government debt to finance, our model suggests that the subsequent increase in human capital boosts productivity and the tax base, leading to higher government revenues. In fact, the better schools reform is even more cost-effective, as it generates larger increases in human capital and tax revenue over time compared with the free college policy. In any case, a smarter, better-paid workforce is an economic win-win.
Another key takeaway is the timing of the benefits. The welfare gains from both reforms take time to materialise, as it takes years for improved education to translate into better job prospects and higher wages. But our model suggests that once the full impact is realised, the benefits are substantial, especially for children from disadvantaged backgrounds. Tackling poverty through education policy reform is a game of patience.
A balanced approach
Our study suggests that the optimal policy is a combination of both reforms, with around two-thirds of a given budget allocated to university tuition subsidies and one-third to better school funding. This approach balances the need to make higher education accessible while ensuring that students are adequately prepared to succeed in college.
As policymakers continue to grapple with the challenges of inequality and poverty, this research provides a compelling case for a holistic approach to education reform as a way to improve livelihoods. By investing in both the quality of public schooling and the affordability of university, we can create a more equitable society where every child has the opportunity to succeed, regardless of their background.
Author: Alexander Ludwig