The Looming Federal Student Loan Bubble

As college students across America return to school this month, there is a lot of controversy over how their bills, and those of former students, are being paid.  According to the Federal Reserve Bank of New York, student loan debt hit an all-time high of $1.16 trillion in 2014.  That marks a $77 billion increase from the previous year. 

Upon graduating with a bachelor’s degree, the average student will owe more than $35,000 in debt, more than double the amount they owed in the early 1990s.  Over the past decade, there has been a 69 percent increase in students borrowing from federal loan programs.  The federal government now provides about 71 percent of all student aid, and more than 43 million Americans owe money on student loans. 

The ease with which students can obtain a college loan mirrors the ease with which Americans were able to obtain loans to purchase homes in the early 2000s.  An ironclad conviction from the federal government that every possible American should be able to purchase a home led to dramatically low qualifications for borrowing and created a bubble which began to burst in 2007. 

A similar kind of federal belief that every child should attend college has also allowed a bubble to grow in the higher education system.  Increased student access to credit enables colleges and universities to continue to hike prices.  Tuition costs have increased by 153 percent over the last three decades for private universities and 231 percent for public universities.  That’s faster than prices for both food and healthcare.  Lindsey Burke of The Heritage Foundation perfectly describes this cycle: “The Department of Education increases subsidies for college, inflating students’ purchasing power, in turn allowing universities to raise tuition, which ultimately increases the demand for more government subsidies.” 

Besides placing students in a perilous financial situation, colleges and universities grow bloated and inefficient with no oversight on how they spend the influx of taxpayer subsidies.  The average salary for college and university presidents has risen from $375,000 to $428,250 in the past five years, along with other perks.  According to the College and University Professional Association for Human Resources, “half of university presidents enjoyed free housing and more than 70% received some type of car allowance.”  And these luxurious benefits have very little correlation to the quality of the institution they lead.  Colleges and universities have also spent millions on lavish capital projects like pools and even water parks inside newly-built recreation centers. 

With millions of young voters saddled with debt and billions of federal dollars on the line, the issue of student loan debt has garnered the attention of the White House and those vying for it in 2016.  Prior to his 2015 State of the Union address, President Obama announced a plan that would make the first two years of community college “free” for students who earned better than a “C” average.  Of course, someone always has to pay for “free.”  Under Obama’s plan, the federal government would shoulder 75 percent of the cost and individual states would be saddled with the rest.  A White House estimate put the taxpayer cost of the program at $60 billion annually. 

The 2016 presidential candidates have also jumped into the fray.  On August 10, 2015, Hillary Clinton announced a plan that would pump $350 billion into the already bloated federal system over the next ten years.  The Clinton plan would go a step further than Obama’s and hand out federal tax dollars to states in exchange for “no loan” tuition at four-year universities, plus make two-year community colleges free.  The money would come from the same source as every one of Mrs. Clinton’s new spending programs:  Higher taxes on the supposedly richest Americans.

Other Democrats like Sen. Bernie Sanders (I-Vt.) are pushing for “free” college education for all students at all public universities.  Sanders estimates this grandiose scheme would cost $70 billion per year.  

On the Republican side, former Florida Gov. Jeb Bush expressed support for Tennessee’s state-based community college program named “Tennessee Promise.”  Bush also said that colleges and universities needed to have “skin in the game,” and, “If kids can’t graduate with a four-year degree in four years, there ought to be some payback to their families or to them, or there’s got to be some support for the loans they’ve taken out.” 

The Obama White House said this same program was the inspiration for their plan and borrows many of its core tenets, like offering free community college for two years.  President Obama even made a trip to Tennessee during his announcement tour and borrowed part of the program’s name, dubbing his plan “America’s College Promise.” 

All of these plans fail to address the root cause of the higher education bubble:  the dramatic surge in federal funding and involvement from the Department of Education.  Unless the federal government turns off the unending spigot of taxpayer subsidies, the higher education bubble will continue to grow.  When it pops, the nation’s taxpayers and youngest professionals will bear the fiscal burden.