05.23.14 9:45 AM ET
The Way to Tackle College Debt Is to Take on Tuition Inflation
Graduation season is here, and in the midst of the pomp and circumstance, students will walk away from their institutions with their degrees and, on average, five figures worth of debt.
As college tuition rises faster than inflation, the class of 2014 will have an average of $33,000 in student loans to pay back. Of course, not all debt is bad debt, and an investment in education is overwhelmingly a good decision in the long term, but as young people find themselves tens of thousands of dollars in the red just as they embark on their “freshman year of life,” they’re finding it harder to save, build wealth, and buy a home.
While many people would say “Well, not everyone needs to go to college,” the vast majority of middle-class families still hold a college degree as the ultimate goal for their own children. In particular, African-American and Hispanic adults view a college education as essential to joining the middle class. Parents nowadays are increasingly concerned that their children won’t have the same opportunities they had and will be less financially secure. For politicians who say they are concerned about the middle class, affordable higher education should be a top priority.
Yet “affordable,” to most policymakers on the left, usually just means “more heavily subsidized.” The 2010 bill that enabled the passage of the health-care reform law also dramatically shook up the student lending market by essentially eliminating private banks as lenders. But since that time there hasn’t been a change in the increasing trend lines on student debt.
Policy proposals such as increased loan forgiveness and reductions in interest rates put taxpayers in the position of picking up more of the tab, which may be of great help to borrowers who are feeling crushed by debt but which don’t actually fix the real long-term problem at hand. Senate Democrats, led by Elizabeth Warren, are proposing to lower interest rates for new undergraduates and pay for it with taxes on millionaires, which will lower the interest burden on new borrowers but doesn’t touch the tuition inflation that makes large loan balances necessary in the first place. “We’re on a treadmill where we raise funding to aid programs to make college more affordable in the near term, only to watch tuition increases wash away those investments over time,” says Andrew Kelly, resident scholar of education policy at the American Enterprise Institute. “Helping struggling borrowers after the fact is a debt management strategy, not a higher-ed policy.”
The logic here is simple: In a normal market, providers of a good or service compete on cost and quality. But when it comes to college, not only is quality somewhat hard for a potential student to assess, but the sticker price is unlikely to be the cost that student will pay, at least not at the moment. There’s little incentive for a school to work to lower tuition because there will be a steady stream of willing customers ready to borrow thousands to cover the difference, even if they aren’t sure how they’ll manage to pay back the loans after graduation. Increasing federal subsidies of tuition is the easy thing to do politically but doesn’t address the underlying problem of rising tuition; it just puts a Band-Aid on it.
If policymakers were serious about tackling the issue, what are the levers at their disposal? Kelly has a few ideas for how to change the incentives that drive up tuition costs. First, in the short term, Kelly recommends placing borrowing limits on the loan programs most likely to contribute to tuition inflation: federal PLUS loans that offer parents or graduate students the chance to borrow up to the cost of attendance, no matter how insanely expensive an institution might be. Unlike some other loan programs, there are no lifetime limits on what can be borrowed, and no consideration is made to whether borrowers will be able to pay off that amount of debt in the future. This open tap of easy credit reduces incentives for institutions to compete on price, since their customers can just borrow the difference, no matter how much it is.
In the longer term, Kelly suggests that innovation in how to deliver quality, affordable higher education is an essential goal, and one tailor-made to the sorts of things conservatives in particular love to talk about: increased competition, options, and efficiency. “It’s about cracking open a closed market,” he says, noting the difficulty of things like accreditation and federal regulation that keep alternative providers of postsecondary education and job training, like low-cost online institutions, on the sidelines. As “non-traditional students” become the rule, not the exception, there’s ever more room for expanding beyond the traditional definition of higher education.
The politics of higher education are tough. Students who have worked hard and made the wise decision to invest in their futures deserve support from policymakers, and as a nation it is a worthwhile goal to build a skilled, educated public. The trouble is that the very same policies that try to patch the problem of college costs in the short term may be feeding the same problem in the long term because they distort incentives that might otherwise pressure institutions to provide lower-cost, quality education options. If politicians don’t just want to talk about the middle class but actually do something about it, higher education policy is a good place to start.