Many of the 2020 Democratic presidential candidates are playing good politics in pandering to millennial angst over soaring college costs – but they sure aren’t playing good economics.
Ideas have ranged from cancelling student debt – which I suppose is the politically correct way to say “have the 2/3rds of Americans who never attended college bail out the third who did (and earn more money as a result) through their taxes.” And of course, this would do nothing to prevent future students entering college post-forgiveness from accumulating mountains of debt either.
In attempting to solve the “root cause” of student debt, Bernie Sanders has added “free” college to the list of freebies.
Every politician seeking to solve the student debt crisis seems resigned to the fact that college costs will continue to increase far above the rate of inflation into eternity. Indeed, it seems like besides death and taxes, rising college tuition is the third thing certain in life.
However, we know that isn’t the case because for the majority of America’s history, the cost to attend college remained constant (and over some time periods actually declined slightly). The uninterrupted upward trajectory of costs we’ve experienced since the 1980s is just that – a phenomenon beginning in the 1980s.
The rise in costs mainly has to do with the availability of college subsidies and loans guaranteed by the government. Or to paraphrase Shark Tank’s Mark Cuban; once anyone can borrow $50,000 a year, all of a sudden college costs $50,000 a year.
As Jay Hubbard of We Are Capitalists writes:
From 1971 to 1981, annual tuition and fees for higher education only rose $2 for a public two year facility. You read that correctly. ONLY two dollars. For a public, four year state school, in state tuition and fees had actually DECREASED $190. For the same period of time, a private four year institution, ALSO decreased by $304.This is very important to note. It concretely demonstrates that expansions in financial aid programs came BEFORE the start of the tuition crisis. The cost of higher education was NOT rising at an alarming rate at this point in history.
Indeed, in the academic year 1971-72 the cost to attend a private four-year university was $10,742 per year. The cost to attend a public four-year school (with in-state tuition) was $2,510, and the cost of a community college was $1,126. Nearly a decade later in the 1980-81 academic year, the cost to attend a private school was $10,438, $2,320 to attend a public school, and $1,128 to attend a community college. All figures are adjusted for inflation in 2015 dollars.
It wasn’t until later, in 1965, 1972, and 1978, when the financial aid that we recognize today began to take hold. In 1965, for instance, the precursors to the Pell Grant and Stafford Loans were created as part of the “Higher Education Act. At that time, a key change occurred in the way federal tuition loan programs were financed. “Instead of using government money directly, the loans would be made by bankers. But if students defaulted, the government guaranteed that IT would cover the tab [ensuring that anyone could obtain a student loan].
In 1972, Sallie Mae was created to buy student loans off banks to help them reduce risk (similar to what Fannie Mae and Freddie Mac do with mortgages). This too further incentivized banks to lend to anyone with a pulse, since all risk was taken off their balance sheets. In 1978 came the Middle Income Student Assistance Act which expanded federal student assistance programs to include middle-income students rather than just low-income students.
It was that 1978 program that became the turning point. Had it just been the poor having their tuition and loans subsidizes colleges wouldn’t be able to jack up tuition on everyone, since everyone who isn’t poor would still feel the full weight of the tuition hikes. Once federal aid applied to (almost) everyone, costs began to explode in response to those subsidies.
And if students aren’t bearing all the costs themselves, why wouldn’t colleges “capture” that financial aid?
From this point forward, most of these financial aid programs were no longer limited to a minority of low income applicants but instead became the norm for nearly the entire populace. Under this arrangement, loans would eventually be made to almost everyone regardless of the requested price of tuition, and tuition would therefore be free to rise unchecked since no financial institution was saying “no.” It should be no surprise, then, that this was the last decade our nation enjoyed relatively affordable tuition. Since that 1978 expansion, the cost of higher education increased more than 13 fold; about 1,225 percent. In the same time period, ordinary inflation (CPI) had only increased 279 percent.
According to one study from the New York Federal Reserve, for every dollar in federal subsidies given to colleges, tuition rose 65 cents in response. Other studies have found that a dollar in subsidized student loans increases tuition by 58 cents.
It’s a shame to see many turning to government to fix a crisis they created.