Student Loans Help Fuel Higher College Costs

While President Biden claims that forgiving student loans helps reduce college costs, it is the loan program itself that is responsible for much of the explosive growth of higher education spending.

In my last article about the college problem, I talked about the cultural factors that have led to the falling value of a college degree. I did this because I wanted to show that we can't just blame bad public policy for the decline of higher education. But bad policy at both the federal and state levels has been a major cause of many of the problems in the university system.

The first of these policy failures is being talked about again because of President Joe Biden's plan to wipe out up to $20,000 of student loan debt for each borrower. Even though there was a short, unsuccessful attempt to include student loan forgiveness in the huge covid stimulus package, the response to the pandemic has overshadowed the student debt crisis for most of the last three years.

First of all, Biden's plan to forgive people is clear to be little more than a "Hail Mary" to keep Democrats from killing each other in the midterm elections, not a serious attempt to solve a problem. In a recent article for Mises Wire, Daniel Hubbard made a strong case that Biden's plan only treats the symptoms of the student loan crisis, not the cause.

The problem is, of course, the student loan program run by the Department of Education (DOE). In the 1990s, the Department of Education started giving out loans directly. With the Health Care and Education Reconciliation Act of 2010, the government took over the student loan business. As of 2019, 92 percent of all student loan debt was owned by the government. Biden's plan to forgive student loans does nothing to stop the flow of federal loans.

In fact, it would be hard to find a Democrat who would even agree that the government has a role in giving out student loans. The loans are managed and paid back by companies that are almost private. This gives borrowers the false impression that the loans themselves are private, which is how it was before Bill Clinton was president. And the Democratic Party members who talk the most about getting rid of student loans outright lie about the federal government's role, saying that the debt crisis is caused by the "predatory for-profit college industry."

I have said in the past that libertarians have no reason to be against student loan forgiveness as long as the federal government is the lender. The catch is that if student loans are forgiven without the student loan industry being privatized, then higher education will be run by the government. This is what Biden's plan is all about. If the goal was to really solve the crisis, the Biden administration could forgive all federal loans and end the student loan program. This would leave the DOE with about the same amount of money as before. But this chance won't last if students think they can borrow money without thinking and wait for loan forgiveness programs whenever the Democrats are in trouble.
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No matter where you stand on the issue of student loan forgiveness, it is important to first understand how the DOE's lending program works and what it means. The DOE doesn't follow the same rules as other creditors, which is typical of the federal government. There are two main ways in which student loans are different from private loans in other fields:
  1. Student loans cannot be denied based on risk of default.
  2. Borrowers cannot declare bankruptcy on student loan debt.
The first point leads to more reckless borrowing for majors that don't matter. If a student wants to get a degree in gender studies, a private lender might think twice before giving them tens of thousands of dollars in loans. With federal loans, we have to rely on 18-year-olds to make good cost-benefit decisions, which are often based on well-meaning but bad advice from parents who went to college before student loans were taken over by the government. This is not exactly a good way to borrow money.

The crisis is also made worse by the second point. The main problem with forgiving student loans is that it's not fair to people who have already paid off their loans. This may be true ("fairness" is a hard way to judge any policy), but this is the exact same argument that was made against bankruptcy laws in the 1800s. As more and more graduates stop paying their student loans, which can sometimes be as much as a mortgage (thanks to point 1), we might want to think about whether it's fair to treat government creditors differently than private lenders.

All of this makes the cost of a college degree go up, both directly and indirectly. This is on top of the decreasing value I talked about in the first article. Not only do guaranteed loans make it easy to get money, which drives up tuition costs, but students also have to pay the interest on their loans. Instead of filing for bankruptcy, the federal government offers hardship deferrals and lower payments. However, this can mean that borrowers will have to pay off their debts for the rest of their lives.

State policies, like subsidies to state universities, also contribute to higher tuition costs. Subsidies to universities have the same problem as any other government funding program: you have to use it or lose it. Government bureaucracies and organizations that get money from the government have a strange incentive to spend every penny they get because if they have any extra money, they will get less money in the future. Private businesses get around this problem by giving managers rewards for staying within budget, but universities don't give rewards to presidents or department heads who are good with money.

The result is not better education, but a lot of wasted time and money. When I was an undergraduate student at Marshall University, every history classroom had a table with a crank that could raise or lower its height (essentially a standing desk for the professors). I never saw a professor use this feature, but one of my professors told me that it cost $3,000 and that the department bought it along with other expensive tools that were never used, like touchscreen smartboards, so that they wouldn't have to cut their budget in the future. This was going on at a university in West Virginia that was losing a lot of students because the state was losing people.

The use-it-or-lose-it budgeting policies illustrate why subsidies always seem to run counter to their purported purpose. Instead of making college more affordable, they just drive up the cost of going. When you add this to the fact that student loans are now run by the government, you can start to see why you can't pay for college with a part-time job like you could in the 1970s. It also means that the cost of a degree goes up a lot for students who can pay for school on their own, usually because their parents help them out.

This is why forgiveness of student loans, even if it is fair, can't solve the problem of the rising cost of college. The only way to make college more affordable is for the federal government to get out of the student loan business and for state governments to stop giving money to wasteful state universities.
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