Some $1.6 trillion in student debt is now spread across 45 million borrowers, making student loans the second-largest consumer debt category, behind only mortgages. The student-loan crisis is rooted in government policy, and such enormous educational subsidies are not about learning but about churning out more Democratic voters. The Biden administration’s American Families Plan is designed to perpetuate the cycle.
The student-loan crisis has a long history but accelerated dramatically in 2010, when lawmakers moved the portfolio onto the Education Department’s balance sheet to “pay” for ObamaCare. The theory was that the federal government could exploit low borrowing costs to make a profit. The Congressional Budget Office predicted at the time that the government would save about $68 billion between 2010 and 2020. But Education Department bureaucrats, not experts in lending, didn’t bother with prudent practices, such as underwriting, that are routine in private credit markets. The result: A lender with the lowest cost of capital on the planet is now about $500 billion in the red.
For many Democrats, this federal debt is a success. They believe the government should pay for higher education, and unpaid loans partly accomplish that, although not as well as President Biden’s American Family Plan. About 30% of the plan’s nontax expenditures are devoted to public education, which amounts to loans without interest and principal, funded by taxpayers.
A larger federal student-loan program also expands Washington’s control over education. That money always comes with strings attached. Universities are forced to do what Uncle Sam wants to qualify for tax-exempt nonprofit status. This leads to perverse outcomes such as enormous corporate savings (endowments) and rejection of customers willing to pay list price. There are similar strings attached to loan proposals, such as forgiveness if you work in certain government jobs after school.
And federal student loans are highly regressive. Richer children attend college at higher rates than poorer ones and benefit more from federal loan subsidies. The Brookings Institution found in April 2019 that
Sen. Elizabeth Warren’s
loan-forgiveness proposal would mainly help the rich, with families with income in the top 40% receiving about two-thirds of the benefits.
Finally, the universities that benefit from the largess are now dedicated to producing new American voters who support larger government. Colleges’ ideological turn leftward has become sharper. At my own institution, a center dedicated to
is now run by former Obama staffers who cheer on the Biden administration’s moves toward socialism.
These policies reward professors and administrators who can then raise the price of their services. It’s basic economics that subsidizing demand increases the price of the product. Tuition rising as loan subsidies expand is no different. It isn’t a coincidence that education and health care, the industries in which government subsidies are most pervasive, took the highest price increases over the past 15 years—3.7% and 3.1% a year, compared with the 1.8% average across industries.
Government forays into education don’t improve its quality. U.S. public K-12 schools trail their counterparts abroad, but the Biden administration is opposed to competition from vouchers or charter schools. Mr. Biden’s push for “free” community college will also likely be damaging, reducing graduation rates from an already abysmal level—only about one-third of entering students graduate.
President Trump’s Council of Economic Advisers, on which I served, found that “free” public higher education abroad often delivered worse rates of return than more expensive but privately financed U.S. education. That was mainly because public education doesn’t boost lifetime earnings enough to make up for the earnings lost while attending school. But such evidence doesn’t matter if the point is to produce loyal voters, not learning.
The Trump administration and CEA, working with private banking experts, crafted proposals to get the student-loan program out of the Education Department, reimpose a limit on graduate loans, ask borrowers to repay a higher share of their income and put colleges on the hook for a portion of loans that go bad.
The student-debt crises and the American Families Plan would be a huge expansion of the role of government in education, while teaching future voters to value big government, setting the stage for even bigger government in the future. Progressives favor public financing of political campaigns, but it already exists in the form of college subsidies.
Mr. Philipson, an economics professor at the University of Chicago, served on the White House Council of Economic Advisers as a member and acting chairman, 2017-20.
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