Exacerbating the Bubble: Student Loan Forgiveness and the Subsidizing of Higher Education

The following is the first of a two-part examination of the causes and effects of the student loan crisis, government subsidies to finance higher education, and free-market solutions to address the issue before it is too late…

One topic of discussion that seems to be on the minds of many recent college graduates has been the possibility of student loan forgiveness, an issue that seems to be gaining traction through several different avenues. Online petitions are currently being circulated, President Obama has been weighing in on the issue during visits to college campuses and in speeches throughout his first term, and legislation known as the Student Loan Forgiveness Act was introduced in the 112th Congress by former Congressman Hansen Clarke (D-MI). The piece of legislation that was crafted by former Rep. Clarke included lofty promises that debt forgiveness accrued by college attendees would, among other things, “increase purchase power, strengthen economic recovery, and restore fairness in financing higher education in the United States…”

On the surface, it seems that bold pieces of legislation such as H.R. 4170 mentioned above could possibly help speed up the economic recovery. Proponents of the Student Loan Forgiveness Act of 2012 argue that by forgiving debt that accumulated over time while attending a post-secondary educational institution, millions of Americans would benefit immediately by reducing their financial burdens, thereby enabling them to contribute to the economy through investments, home ownership, and entrepreneurship. Additionally, supporters say consumer spending would drastically increase, because the individuals who benefit from the legislation would be able to afford greater discretionary spending as a result of loan forgiveness.

Undoubtedly, proposals such as H.R. 4170 are superficially attractive, especially when they include audacious assurance such as increased consumer spending and economic recovery. However, these empty promises are as deceptive as they are appealing, and will inevitably lead to less financial accountability by doing an incontrovertible disservice to younger generations, creating an aura of reliance on the federal government in the form of a munificent bailout. Despite the perceptibly enthralling nature inherent in proposals such as student loan forgiveness, a handful of statistics and opposing viewpoints reveal the true risk of such legislative measures:

• According to the U.S. Census Bureau, as of 2009, 28 percent of adults in the United States had received at least a bachelor’s degree. Logically, those who receive at least a bachelor’s degree tend to have higher incomes than those who do not achieve similar levels of educational attainment. The same report from the U.S. Census Bureau shows that median earnings for a worker with a bachelor’s degree is roughly 77 percent higher than median earnings for a worker with a high school diploma. Because recipients of bachelor’s degrees on average have higher incomes than those who were not fortunate enough to attend college, would it be fair to give a small percentage of the population a virtual bailout while the vast majority of citizens are having trouble making ends meet?

• Americans who receive at least a bachelor’s degree were able to weather the financial collapse that began in 2008 with more ease than individuals with little to no college experience. From January 2008 to December 2010, individuals with advanced degrees were far less likely to be unemployed during this 3-year period. In August 2010, the unemployment rate for people with less than a high school diploma was 13.3 percent. Conversely, the unemployment rate for those with advanced degrees was 4.1 percent. With higher incomes and lower unemployment rates, college graduates should be able to afford reasonable repayment plans, even if it means tightening their belt for a few years after graduation.

• Now that student loan debt has surpassed credit card debt in the United States, it is mind-boggling that student loan forgiveness is even an option that is being considered. Student loan debt is not an imaginary number with an invented price tag. The money is indeed real, and it is owed to both the government and private lenders. Forgiving student debt would send severe shock waves throughout the entire financial system, leaving taxpayers on the hook for billions of dollars. Asking responsible taxpayers to pick up the tab for college graduates who felt compelled to take out $40,000 in student loans to obtain an unmarketable degree is an insulting endeavor.

It is relatively easy to recognize the problems associated with post-secondary funding, but what factors laid the groundwork for these calamitous circumstances to develop? Like the 2008 collapse of the housing market, the government played a crucial role in creating the student loan bubble in the first place. By providing massive subsidies and setting artificially low interest rates, allowing for easier accessibility to these loans, tuition rates have skyrocketed as a result. As long as the government continues to subsidize student loans on a massive scale, colleges and universities will use the opportunity to keep costs high, knowing the institutions will inevitably receive payments. Low interest mortgage rates coupled with relaxed lending standards forced upon the banking industry by legislation such as the Community Reinvestment Act eventually caused the housing market to crash a few years ago. We shouldn’t remain idle and allow higher education to suffer the same fate.

Yet another cause of the student loan bubble concerns the fervent belief by many on the left that raising spending levels to provide greater access to college education will directly produce an expansion in economic growth. However, a state-by-state analysis published in 2004 by Dr. Richard Vedder of Ohio University examined the correlation of higher education spending and economic expansion. Evidence compiled by Dr. Vedder over a 25-year period indicated that there is indeed a negative relationship between state spending on higher education and economic growth. Between 1980 and 2000, the 10 states with the most rapid economic growth slightly increased spending on higher education, from 1.31 to 1.44 percent of personal income. During the same period, the 10 states with the slowest economic growth drastically increased spending on such budgetary items, from 1.80 percent to 2.21 percent of personal income. Conclusions such as those drawn by Dr. Vedder indicate that increased spending levels on post-secondary education not only raises the cost of attending college, but also leads to sluggish economic development.

None of the statistics cited above should lead to the incorrect determination that receiving a four-year degree is no longer worth the time and effort. In fact, it is a foregone conclusion that, over time, higher educational attainment increases personal income and earning potential. The purpose of this article is to reveal the absurdity of student loan forgiveness, while acknowledging the inherent flaws in the current system of highly subsidized education, which strains state budgets, raises tuition costs, and weakens the value of a college degree. For example, according to the Education Department, from 2006-07 to 2009-10, the percentage of first-time, full-time undergraduate students receiving any financial aid jumped from 75 percent to 85 percent, while tuition also increased drastically over this same time period.

As any introductory economics course would teach its students, when demand increases, so does price. With demand for college education at an all-time high, the government should begin to adopt policies that will control the cost of attendance, making college more affordable and accessible for those who dream of wearing their school’s cap and gown while proudly receiving their diploma. Fortunately, the government can craft certain approaches that adopt free-market principles to address the growing concerns of post-secondary education funding, without alienating students or jeopardizing the economy.

Stay tuned for part two of this examination, which will focus on applying free-market principles to control the costs of higher education while maintaining both the quality and access to post-secondary institutions.

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