When I taught "Economics for the Citizen" this past fall at George Mason, I included a unit on education. In the latest issue of the Becker-Posner blog, Richard Posner brings up a point that I wrestled with in class.
But the "externalities" argument for subsidizing college education depends not only on how many kids would not attend college without the federal subsidy, but also on the cost of the subsidy to the taxpayer. I have no strong sense that the net external benefits are positive. If they are positive, it is very unlikely that they are large, considering the indirectness of this method of subsidizing education.
There is tremendous emotional support for public subsidies to enable young people to go to college. However, on closer examination, most of the benefits accrue to the individual rather than to other members of society. If your income increases, then that is a private benefit. If you enjoy the nice gym and the great basketball games at college, then that is a private benefit. Only some nebulous "better citizenship" benefits are public.
For Discussion. Are there estimates of the benefits of college that attempt to distinguish private benefits from public benefits?