Higher Education: The Next Bubble

The nation’s outstanding student loan balance climbed to more than $1 trillion in May, which includes $460.2 billion held by the federal government. If the higher education bubble bursts, taxpayers will have to clean up the mess.

Like the recent housing bubble, this bubble has been inflated by pumping in a continuous supply of subsidies to the borrower, or, in this case, college students. Post-secondary institutions, banking on the availability of these subsidies, have expanded tuition demands accordingly. President Obama knows the country cannot continue on its present course, saying on April 1, 2012 that the federal government “can’t just keep on subsidizing skyrocketing tuition.” Yet, the federal government continues to do just that.

According to former Secretary of Education William Bennett, subsidies, grants, and student loans fuel rising tuition costs by increasing demand from the perspective of post-secondary institutions. By reducing or eliminating government subsidies, the pool of students would shrink and tuition would decrease. The major setback to this proposal is that it is generally a good idea for high school students to continue their education in college. Aside from the multitude of benefits that accrue to a well-educated society, attending college is easier than ever before.

However, only 56 percent of students finish a bachelor’s degree within six years. This lends credence to the argument that expanding the pool of potential students has been costly and ineffective.

The increased demand for a college education also drives a specific kind of competition among schools, who are trying to attract the best students to their campuses. Public colleges and universities spend less than half of their resources on instruction and academic support, instead choosing to focus on the extras that are attractive to prospective students, such as business operations, facility maintenance, and nonacademic services. These expenditures do little to educate and prepare students to enter the workforce. This helps explain why colleges and universities are spending less per student now than at any point in the last 25 years.

However, public universities are now recognizing that there are benefits to four-year degrees for those students who are academically capable of meeting those requirements. A June 3, 2012 article in The Washington Post explained that university leaders are starting to push harder for on-time graduation amid criticism over wasted tax dollars, spiraling tuition, and America’s plummeting global rank in college attainment. In fact, several of the nation’s flagship institutions, including the University of Texas at Austin, have set goals to increase on-time graduation rates in the coming years.

Congress is reluctant to reduce higher education subsidies and loans that could serve the best interests of students in the long run. In fact, some lawmakers have taken the opposite approach. On March 8, 2012, Rep. Hansen Clarke (D-Mich) proposed H.R. 4170, which would forgive student loan debt for those who have applied 10 percent of their discretionary income for 10 years to loan repayment.

Debt forgiveness widens the gap between the cost of education and the amount a student pays to obtain their education. It encourages students to attend college at a higher cost because they know that a portion of their debt will be subsidized. Colleges take advantage of the subsidies by increasing tuition in line with the amount students are willing to pay. Therefore, H.R. 4170 would increase student debt, decrease student obligations, and ask taxpayers to make up the difference.

Public universities are beginning to encourage students to graduate with less debt by offering discounted summer courses, circulating on-time graduation pledges, and working the four-year theme into recruiting events. The federal government also needs to take proactive measures to reduce student debt. If the government continues to subsidize higher education at the current rate, student debt, as well as the potential risk for taxpayers, will increase. Elected officials must build on the steps taken by public universities to cut costs and lower student debt.

– Aaron Swensen