The Real Reason Behind the Student Loan Crisis: The Out-of-Control Cost of College

by | Sep 19, 2023 | Fixing Education

Government hasn’t made college cheaper; it’s made it more expensive, and we’re all paying for it. Here’s how to fix it.

Radical leftists, inspired by Bernie Sanders, have made student loan debt forgiveness their white whale. Informed by their Marxist professors and egged on by protest organizations, the loudest voices proclaim unaffordable student loan repayments to represent nothing less than the failure of the capitalist system. If one examines how we got here, however, it becomes clear that capitalism had nothing to do with it.

Student loan forgiveness became such an important political issue for the left that Joe Biden made ceaseless promises about it. Even when his original scheme of partial forgiveness got roundly shot down at the Supreme Court, he doubled down and said he was going to find a way to do it anyway.

“Progressives” often tell the story of unrealistic student loans, culminating in a lifetime of debt keeping young people from achieving more than previous generations did. Indeed, student loan debt has created an ever-increasing burden for young college graduates in America, which has only gotten worse since the early 1990s. In their emotional appeals, leftists never fail to exclude the root cause: the cost of college has gone completely haywire. They offer no solutions to bend the cost curve, like they falsely proffered when advocating for government-provided universal healthcare and Obamacare. No, with student loans, there is no recognition at all of the galactic spending, facilitated and subsidized by federal government intervention into a no-longer-free market.

Did You Know… We Nationalized Student Loans?

Speaking of Obamacare, few Americans knew it at the time of its passage, and even fewer remember today, but the Affordable Care Act essentially nationalized the student loan industry. President Obama promised America that his signature healthcare act was “paid for” and would create “significant budget savings” for Americans. It was a lie then, and it’s a lie now. These “pay for” schemes were nothing more than new taxes, redistributions, and subsidies.

One of these “pay for” schemes nationalized an entire industry. Soon after Obamacare passed in March 2010, Congress passed another bill—the Health Care and Education Reconciliation Act. Prior to that, the vast majority of student loans were issued by semi-private Sallie Mae, which received federal guarantees (like Fannie Mae and Freddie Mac with housing loans). The Education Reconciliation Act was sold to the American people with two shiny benefits: Students could pick their repayment amount based on income on a loan offered directly by the federal government with very consumer friendly terms; and the “savings” would help pay for Obamacare. President Obama himself promised this would contribute $58 billion over ten years towards Obamacare costs.

Guess what didn’t happen? Any cost savings that could have gone to pay for Obamacare.

Meanwhile, those repayment plans ended up creating a nightmare scenario for borrowers. Paying minimal installments based on an income calculation meant monthly payments often didn’t even cover the interest charges, never mind paying down the principle. Many borrowers found themselves seeing their balances grow every month instead of shrinking.

So while Obamacare was busy screwing up the relationship borrowers had with their loan obligations, America once again ignored the real elephant in the room: the skyrocketing cost of college. Ironically, many of those skyrocketing costs have their origins in the student loan racket.

The Wall Street Journal recently ran an article in which they used the term “arms race” multiple times to describe the out-of-control spending by America’s universities. There’s an arms race for glamorous new buildings, another arms race for administrators (especially the diversity/equity/inclusion kind), an arms race in faculty salaries, and yet another arms race for athletic facilities.

The Journal tracked spending at the 50 “flagship” universities—the oldest public school in each state. Over the 20-year period from 2002–2022, median spending increased at a rate almost double that of the increase in enrollment. As states have routinely cut contributions to public universities in the legislative budgeting process, universities have used the excuse that they must increase tuition to backfill the funding loss.

States and boards of trustees have provided poor oversight, however, in the university budgeting process. The Journal study found that, over 20 years, for every $1 lost in state funding they made up $2.40 by jacking up tuition and student fees. From the Journal:

Through it all, schools operated in a culture that valued unrelenting growth and prioritized raising revenue over cutting costs. Administrators established ambitious strategic plans and tried to lure wealthy students with luxurious amenities. Influential college rankings rewarded those that spent more.

Many university officials struggled to understand their own budgets and simply increased spending every year. Trustees demanded little accountability and often rubber-stamped what came before them. And schools inconsistently disclose what they spend, making it nearly impossible for the public to review how their tuition and tax dollars are being used.

‘These places are just devouring money,’ said Holden Thorp, who was chancellor at the University of North Carolina at Chapel Hill from 2008 to 2013 and is now editor in chief of Science. Offering everything to everyone all at once is unsustainable, he said. ‘Universities need to focus on what their true priorities are and what they were created to do,’ he said.

Creative Accounting Leaves Colleges Unaccountable

How can colleges and universities afford to spend so much with no consequences? Much of their budget comes from major gifts by wealthy donors or grants from various programs. The rise in coaching salaries is paid largely by boosters and TV money. (A dirty little secret about wealthy donors paying for their name on a building: It often only pays for construction or a building upgrade, whereas the university foots the bill for the maintenance and upkeep. Up, up, up go the costs.)

These revenue sources don’t cover the full budget. Much of it comes from increases in tuition and fees. But how can students afford to take out loans like this?

By now you know. Massive government subsidies, grants, and consumer-friendly loan terms that increase the pool of money available to colleges. Consumers’ access to easy credit has left these schools awash in riches they never could have conceived prior to the early 1990s, when the Clinton administration made it a priority to get as many high school students as possible to college. (They had the same aim with homeownership, under the revamped Community Reinvestment Act. Look how well that turned out.)

As many have pointed out, when you remove the consumer from the direct price consequences and the decision points all along the process, market forces get shifted to a third-party payer. All too often, that’s the federal government. Just like in healthcare, insurance, and mortgages, the more the government promises to cover expenses, the more distorted the consequences for fiscally unsound behavior.

Nobody anywhere in the process of forking over all this wealth has any incentive to cut costs, or to make hard choices between alternatives of differing expense. Budget-makers at universities have the opposite incentive, in fact— to justify next year’s budget increase, they must spend all of this year’s money. Results don’t matter in the process, only the ability to show that the money got spent, and they need more of it next year because of inflation.

What’s the Solution?

So how do we solve this mess?

It seems few trustees, legislators, chancellors, administrators, or those in charge of public student loans have the desire to stop exploiting kids who just want a college education. (Those Olympic-sized swimming pools and new law colleges won’t pay for themselves.)

But if anybody stands up and wants to derail the gravy train, there are a few concrete steps to take:

  1. Cut spending. This may sound like Tea Party radicalism, but maybe Ohio State doesn’t need hundreds of DEI officers making six-figure salaries. Maybe, just maybe, that does nothing to produce well-rounded graduates.
  2. Re-privatize student loans. As mentioned previously, applying the Obamacare and Community Reinvestment Act models of government intervention hasn’t enhanced the student experience.
  3. Provide real choice for students. Allow them to choose lower cost options when they enroll. Create new programs that rely less on extraneous considerations and more on core academic goals.
  4. Speaking of core academic goals, reorient them. A whole university approach must be undertaken to determine the true mission of academia.
  5. If that can’t be done, like at the New College of Florida, and the bureaucratic bloat is just too impenetrable, start over. That’s been done at places like Hillsdale College and Ralston College. Start with a clear vision and mission at the heart of everything you do, and don’t allow the lure of other people’s money to deter you from it.

One thing is certain. Forgiving student loans that taxpayers will repay will only perpetuate and grow the current, deeply broken system we’ve allowed to metastasize in America’s colleges and universities.