Most people believe having a college degree contributes to an individual’s career, increases potential earnings and even makes the overall economy more productive. Not surprisingly, the rapidly rising cost of higher education is a perennial hot-button issue.

In recent months, the concerns have generated state and federal legislative proposals including a so-called “Michigan2020” plan that would fully subsidize college for all high school graduates, a bipartisan federal bill to arbitrarily cap college loan interest rates and a proposed bailout of existing college debt.

These and similar proposals generally assume that injecting more taxpayer dollars into the system will lower the cost for individual students. A case study shows why this may not be the case.

A recent article from the Pittsburgh Tribune-Review called Grove City College in Pennsylvania (my alma mater) “an exception to the rules of higher education.” The school is ranked 87 out of 87 of the Keystone State's institutions of higher education in its tuition, room and board. Yet Grove City College, like Hillsdale College in Michigan, accepts no direct or indirect government funding, and its students get no federal grants or loans.*

Given a constant stream of state university rhetoric threatening higher tuition if even a dollar of taxpayer funding is cut, one might expect that Grove City tuition costs would be stratospheric. In fact, annual tuition is $13,598 — not cheap, but less than half the national average of private schools. Hillsdale's tuition for 2011-2012 is $20,760.

According to Grove City College president Richard Jewell, there is no "secret formula” to the college’s success.

"We live within our budget. ... We run as much as possible on a cash basis. Room and board and tuition pay for 94 to 95 percent of our operating costs," Jewell said.

Apparently students aren’t being shortchanged in quality, either. Grove City freshmen have average SAT score nearly 240 points higher than the national average, demonstrating its appeal to a group of students who have many alternative opportunities, and the school is consistently ranked as one of the top colleges and universities in the nation.

According to school administrators, it’s no coincidence that costs are low and quality high despite the lack of government subsidies. Freedom from myriad government rules and regulations helps keep administration costs down, and the absence of government money keeps faculty compensation demands within reason (there is no academic “tenure” for Grove City professors, for example). The school lives within its means because there’s no taxpayer-funded safety net if it does not.

In higher education as in all human endeavors, incentives matter. Government grants and subsidized loans don’t just cause more students to enroll, they also cause colleges and universities to raise prices and provide less for more. One example of the latter is an increased number of degrees granted in marginal subjects. Tuition spikes, skyrocketing administration costs and tenured professors who teach fewer classes each year are all examples of universities following the incentives that politicians have created.

If we want lower costs and greater value in higher education, make the schools respond to consumers instead of politicians.

*The lack of federal funding is due to a 1984 Supreme Court case, Grove City v. Bell. Because it refused to submit to certain federal regulations and mandates, the court ruled the feds could cut off all funding.