Should university tuition fees be subsidized?

Some ECONOMIC arguments against university tuition subsidy (I mean a general tuition subsidy, not targeted scholarships):

1. The private benefits of tertiary education is higher than its social benefit. University graduates will be the 'elite' groups of the society, and they will make a big private return of their education. Anne Booth (2000) argued that the increasing Gini coefficient in Indonesia in the early '80s was a result of more-than-proportionate government subsidies to tertiary educations. University graduates were the ones benefited most from economic boom in the early '90s. Unskilled labor, on the other hand, benefited less from the boom.

2. Rich kids can afford their education -- they (including me!) are even willing to pay for university admission test tutorials (bimbingan tes). They are the ones who will be more likely to get admission to favorite schools, and not the poor kids in a poor district somewhere in a remote place of the country. So what's the justification of subsidizing them?

However, there is a valid ECONOMIC arguments why it should be subsidized (not the populistic type arguments that are usually based on moral justice, inequality, government's responsibility etc): higher education has an increasing return. Hence, the benefit for the whole population will be high only if a significant portion of the population have higher education -- there will be a positive externality from interactions among educated people.

But increasing returns to education imply that people will tend to underinvest. If only a small fraction of the population have high education, there will be small incentives to invest in higher education. Hence the government intervention is needed to create incentives for people to go to universities, for instance by subsidizing tution fees. (Sometimes, intervention may not be needed. Consider the IT boom in India, pioneered by the Bangalore Inst. of Technology. The attraction to work in Silicon Valley is enough incentives for them).

How to reconcile these two arguments? The government provides tuition subsidies for universities in areas where the social benefits of tertiary education will be higher than the private benefits. In practice:

1. The subdidy should be provided to smaller universities in 'disadvantaged' areas, to create education in such places. Not for top, elite universities like UI, ITB, UGM and the likes.

2. Create the 'community college' systems. Or, the existing small private universities can be given status as community college, hence eligible for subsidized tuition fees. In this instance, students of UWI (Universitas Wiraswasta Indonesia, Jagakarsa, South Jakarta) are more eligible for subdidized fees rather than UI students.

Note: my arguments are only concerning tuition subsidy. I don't make any claims about government subsidies on university research. That would be another story.