The ugly truth about your student loans

By Russ Davis

I hear it every major election: College is too expensive. We need to make college more affordable for those who might not otherwise be able to go. Controlling interest rates on student loans and widening their availability was a recurring theme in President Obama’s 2012 reelection campaign. On the other end of the spectrum, Senator Marco Rubio, a Tea Party darling, said in July 2013: “I understand the important role federal loan programs play in helping students fund their higher education aspirations.” Both parties agree: College costs too much, and more state funds are the answer.

But like so much else, what the federal government tries to fix, it makes worse.

This sounds like such a controversial idea that it surprised me to discover that it’s not even that recent. In February 1987, then-Secretary of Education William J. Bennett wrote in the New York Times that “increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that federal loan subsidies would help cushion the increase.” I wish policymakers had heeded his warning back then, because the situation has gotten worse. Financial analyst Tim McMahon gathered the numbers and found that the average cost of college tuition and fees has risen more than four times faster than the general inflation rate since 1985.

This is certainly true at the local level. The tuition for an undergraduate resident at the University of Washington is currently $11,305 a year – more than quadruple what it was back in 1995.

What can policymakers do about this? Part of the problem is that many people don’t realize the role federal student aid has in artificially raising the cost of college. Because the federal government has the ability to tax and borrow extensively, they’re able to lend more money to college students than private lenders could. This means that more students have been able to go to college, using temporarily “free” money. Theoretically, this is a good thing, but it also gave colleges the perfect carte blanche to raise their prices. Sometimes, it’s not even to cover academics. Fox Business Channel’s Gerri Willis reported that, thanks to student aid funds flowing in from the Department of Education, the University of Missouri now has a gym that “boasts an indoor river and waterfall, surrounded by palm trees.” Our rivals at Washington State University boast the largest Jacuzzi on the West Coast. I doubt these “innovations” could have happened without the easy money of student loans.

So here’s my proposal: Abolish – or, at the very least, significantly reduce – federal student aid.

Not only has federal student aid proven to raise college costs, but abolishing or reducing federal student loan availability is backed by one of the major cornerstones of economics: supply and demand. Aaron Smith of the libertarian Ludwig von Mises Institute writes, “the abolition of FFA would drastically decrease demand for higher education at current tuition levels… This would place immense pressure on most colleges to respond with substantial tuition cuts.”

I can already hear people complain that “substantial tuition cuts” would amount to a lowering in quality, but that assumes that colleges won’t re-prioritize. Maybe now universities will make wiser investments in education, rather than palm trees for their gyms. Curricula will become more efficient – as Aaron Smith points out, “It is rarely questioned why a student studying engineering and another studying business are to attend college for precisely the same number of years.” Streamlining curricula would lower costs; we can see this in countries like the UK, where students only take classes relevant to their major – and pay lower costs.

When politicians and concerned voters talk about the rising tuition, I doubt many of them will see the value in gutting federal student aid. But at the very least, it should be a discussion worth having when considering how to lower the cost of college.