College grants are a feedback loop for a larger government
About $ 1.6 trillion in student debt is now distributed among 45 million borrowers, making student loans the second largest consumer debt category after mortgages. The student credit crisis has its roots in government policy, and such huge educational subsidies are not about learning, but about attracting more democratic voters. The Biden administration’s American Families Plan is set to continue the cycle.
The student credit crisis has a long history, but accelerated dramatically in 2010 when lawmakers put the portfolio on the Education Department’s balance sheet to “pay” for ObamaCare. The theory was that the federal government could take advantage of low borrowing costs to make a profit. The Congressional Budget Office then forecast that the government would save about $ 68 billion between 2010 and 2020. The result: a lender with the lowest cost of capital in the world is now writing around $ 500 billion in the red.
For many Democrats, this federal debt is a success. They believe the government should pay for higher education, and unpaid loans do some of that, if not as well as President Biden’s American Family Plan. About 30% of the plan’s non-tax expenses are used for public education, which are loans with no interest and principal that are funded by taxpayers.
A larger federal student loan program also extends Washington’s control over education. This money is always conditional. Universities are forced to do what Uncle Sam wants to qualify for tax-exempt charitable status. This leads to perverse results like huge corporate savings (foundations) and rejection from customers willing to pay list price. Similar conditions are attached to loan applications, e.g. B. Forgiveness for working in certain government jobs after school.
And federal student loans are highly regressive. Richer children attend college at higher rates than poorer ones and benefit more from government loan subsidies. The Brookings Institution noted in April 2019 that Senator Elizabeth Warren’s loan proposal would mostly help the rich, with families with incomes in the top 40% receiving about two-thirds of the benefits.
After all, the universities that benefit from the generosity are now dedicated to producing new American voters who will support a larger government. The ideological turn of the universities to the left has become sharper. At my own institution, a center dedicated to Milton Friedman is now run by former Obama staff who are fueling the Biden administration’s move towards socialism.
These guidelines reward professors and administrators who can then raise the prices for their services. It is basic economics that subsidizing demand increases the price of the product. Tuition fees, which rise with the expansion of loan subsidies, are no different. It is no accident that education and healthcare, the industries where government subsidies are most widespread, have seen the highest price increases over the past 15 years – 3.7% and 3.1% per year, respectively, compared to the industry average of 1.8%.
The government’s forays into education do not improve its quality. The US K-12 public schools are lagging behind their counterparts overseas, but the Biden government is rejecting competition through coupons or charter schools. Biden’s push for a “free” community college is also likely to be detrimental, lowering graduation rates from already lousy levels – only about a third of students entering have degrees.
President Trump’s economic adviser, of whom I was a member, noted that “free” public higher education abroad often yielded worse returns than higher-priced but privately funded US education. This was mainly due to the fact that public education does not increase lifelong income enough to compensate for the loss of income while attending school. But such evidence doesn’t matter when it comes to producing loyal voters, not learning.
The Trump administration and the CEA, in collaboration with private banking experts, have been working on proposals to get the student loan program out of the Department of Education, re-impose a cap on graduate loans, encourage borrowers to repay a higher percentage of their income, and put colleges on the hook put for part of the loans that are lazy.
The student debt crisis and the American Families Plan would vastly expand the government’s role in education while teaching prospective voters to appreciate great governments and setting the stage for even bigger government in the future. Progressives prefer public funding for political campaigns, but they already exist in the form of college grants.
Mr. Philipson, an economics professor at the University of Chicago, served on and vice chairman of the White House Economic Advisory Council from 2017-20.
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