Driving up the cost of college
With the Biden administration’s announcement this week that it would continue the moratorium on student loan payments through the beginning of next year and will forgive up to $20,000 in student loan debt per student, student loan forgiveness is at the top of the current political agenda. Meanwhile, there’s little talk about bringing the cost of college under control, or why the cost of college became so outrageous in the first place.
While proponents of student loan forgiveness argue American taxpayers need to pick up the student debt tab to level the racial and socio-economic playing field, the reality is debt forgiveness disproportionately benefits the well-off and educated, as the wealthiest 40% of Americans hold 58% of student debt, and 56% of debt is held by those with prestige and income-boosting post-bachelors’ degrees. Instead of forcing the 87% of American adults who don’t have student loans to pay for the college experience of educated elites, American leaders must reform the universal federal student loan program that has driven the cost of college to grow eight times faster than wages.
Until 1965, the cost of college at private and public institutions remained fairly in line with inflation — these were the good old days, when a minimum wage summer job could cover all of one’s annual tuition, and then some. So what happened in 1965? President Lyndon B. Johnson passed the Higher Education Act, which created guaranteed student loans by subsidizing capital for banks that would provide loans to low and middle income students.
This simultaneously expanded college access, especially for less privileged students seeking to attend private institutions, while keeping loan burdens manageable because private banks still controlled who could receive student loans and for how much. From 1964-77, the tuition at private universities grew 11.5% more than inflation as rising demand oustripped supply, while that at public institutions, it grew 1.6% less than inflation as the government massively expanded public college systems to accommodate an exploding college-age population fueled by the Baby Boom.
Carter created unlimited, guaranteed college demand
This bank-dominated system remained in place until 1978, when an economy in shambles and the pressures of the Baby Boom’s succeeding Baby Bust on empty college classrooms prompted President Jimmy Carter to pass the Middle Income Student Assistance Act, which eliminated income requirements for student loans. At a time when colleges otherwise would have had to cut tuition or cohort sizes to stay full, this new bill ensured that anybody could be a full time student.
With this bill creating unlimited, guaranteed college demand, college tuition hikes were off to the races; from 1978-92, tuition at private universities grew 50.7% more than inflation, while that at public universities, it grew 25.4% more than inflation. Pretty dismal, right? Well, things got worse.
In 1992, the Higher Education Reauthorization Act introduced direct, guaranteed loans from the Department of Education itself, and, in response to higher tuition, removed borrowing limits, which removed any last incentive for schools to keep costs down. From 1993-2006 (the endpoint of the common data set used in this analysis), tuition at private schools grew 39% more than inflation, whereas that at public schools rose 47% more than inflation. These massive increases were a result of large cuts in state funding for public universities (who increased tuition to offset these losses) and growing room and board fees (which were used to impose higher costs on students without having to increase headline tuition as much).
Debt forgiveness encourages rising tuitions
Without any changes to the federal student loan program, all debt forgiveness does is encourage a never-ending cycle of higher tuition, crushing debt, more bailouts, and more graduates lacking the positive equity to buy a house or even a wedding ring. A return to something more like the 1965 Higher Education Act but without federal loan guarantees — a mix of privately issued loans, low-interest capital, and strict requirements ensuring the loans would only serve lower and middle income students — would be a significant and realistic improvement. Banks would be more careful in issuing loans, taking care to make sure students aren’t overwhelmed with debt they’d never afford to repay.
...
There is much more.
The current system looks like a bad deal for the borrower and the lender because the colleges keep charging more because of the loans. The incentives are out of whack.
See, also:
Comments
Post a Comment