Warren’s Student Debt Cancellation, Free College would be a Disaster

Earlier this week, Massachusetts Senator Elizabeth Warren released a radical plan to combat the more than $1.5 trillion in outstanding student loan debt, and address the ever mounting cost of attending a 4-year university. Warren had taken the mild assistance approach of Democrats from the second half of the 20th century and amplified it into a trillion dollar bailout for student’s fiscal irresponsibility.

Warren proposed cancelling all student loan debt up to $50,000 for any person making under $100,000 a year. This plan would help 95% of the 42 million Americans who currently still owe money. 75% of former students are expected to be fully debt free because of Warren’s plan. She also proposed adding free (taxpayer funded) public universities to the list of promises. How could this end poorly?

With the implementation of Pell Grants in 1972, the federal government began the long and inflationary journey of subsidizing higher education without consideration of long term effects. University tuition has gone up by 213% over the last 30 years, far outpacing the regular price basket. How did we get here?

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Tuition increases vs wage growth

When someone, like the government, subsidizes the price of a good, providers see that the money available to be spent by the consumer on that good has increased by the amount of the subsidy. People would have already spent X dollars on the good, now they can spend X+Y, with Y being the subsidy amount. Colleges are no different. In fact, they’re smarter. They see that their price hikes trigger the government into further subsidization, so they charge X+Y+Z, a little extra in order to coax the government into literally handing over an extra wad of cash.

When we have dozens of new grants, scholarships, and federally guaranteed loans (sounds a bit like the MBS’s of the financial crisis), we end up with over $14,000 per student per year in financial aid, most of which must be paid back at some time or another. That’s $14,000 more, on average, that students are able to spend on college, meaning universities can now charge an extra $15,000 (a little extra to encourage more federal spending).

The cost of this would be astronomical. While a lot of this debt is owed to the government, much of it is held by private institutions. They must be paid off by the government all while the government takes a massive hit in lost long term revenue returns from the loans. Money that was put out there for students will not be recouped. Somehow, it must be made back. That’s where taxes come in.

Because people with incomes over $100,000 are exempt from this program, college graduates who were responsible, got practical degrees in STEM or business, and became successful in life will be directly paying for people who spent their four years partying and working on a gender studies degree. We have more job openings today than we have unemployed. Opportunities are out there for anyone; clearly the system is not the reason why some people failed to get ahead.

We as a culture have put far too much ‘fun’ value on college. It used to be a place for learning and skill acquisition. Now, it’s an environment for parties and socializing, and sometimes you head to class. With someone else paying the check, people will be encouraged to spend less time preparing for the job market and more time having fun. There is no consequence for falling behind, which creates the same moral hazards we see in other overly safety netted systems. Without the penalties of failure, people will not put in the same effort during classes.

Students willingly signed their loan statements, they should have understood the fact that they will need to pay this money back, and done a little due diligence into the degree they’re choosing and the salary of said career path. The average public university tuition is about $9,500 per year while the average yearly cost of community college is $3,500. If people did 2-years at a community college to figure out what they wanted to do, or decide if college is for them to begin with, their total tuition would only be $26,000 for 4-years. Adding the cost of textbooks and we’re looking at $30,000. Save boatloads of money by living at home and commuting. A good chunk of that can also be paid for by taking up a part time job during weekends or the summer. Paying for tuition with minimal loans is still possibly.

When we make tuition free, everybody goes. When everybody goes, standards are lowered, both for students and the institution. A college degree will be worth far less in the job market and provide you with far fewer useful skill sets. College will become a continuation of high school when in reality, even now, it is far from necessary for most low to mid level jobs. Most courses are fairly useless and can be substituted with Google anyway. Politicians are pushing college as a litmus test for self-value. This new demand shock is driving more and more students to fight for a limited number of seats and again driving up prices while devaluing the diploma.

But all these extra subsidizes, spending, and taxes are going to drive up tuition for those who don’t qualify for free college or it will spike the cost of private universities where the standards will likely remain high.

So Senator Warren, if you want to lower tuition, stop subsidizing it, and stop making it out to be more than it is. When most skills are taught far better on the job then in the classroom, college becomes little more than a numeric measurement of the ability to learn. Literally handing free money to colleges will not encourage them to lower their prices, market pressure will. We have yet to see a single politician offer this time tested solution.

Categories: Opinion

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