Federally subsidized student grants and loans have caused inflation in education costs, everything from tuition to textbook prices. (From the point of view of universities, "federal funding is the soda; students are the straw.")
Lessen this effect by making the grants and loans not earmarked for educational expenses after a student has qualified for them. They are unrestricted.
Because of this, the student may then shop around for the best educational deal and perhaps keep the remainder of the funds as profit. This causes educational institutions to compete in the market to keep costs down. A student might choose to not even go to college, keeping the entirety as financial profit (though missing out on formal education).
The amount of student subsidy should be proportional to the student's potential ability. Rather than try to measure this directly, use many schools' admissions process (assumed to be exclusive) as a proxy, for they, too, are trying to measure students by ability and select high ability students. There remain many tricky details.
Reiterating for emphasis: the amount of funding a student is offered is proportional to the most exclusive school a student gets into, but the student can accept that funding without having to choose to go to that school.
(Completely missing the "network" effect in which what a student benefits from a school -- achieving his or her potential ability -- often depends on other students.)
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