"I’m from the government and I’m here to help." Ronald Reagan
Overview
Five decades ago a college education was a serious commitment of time and money on the part of young adults. Students typically sought to enhance career opportunities through degree programs oriented towards high employment prospects (think STEM, law, medicine and teaching). Costs were relatively low, student acceptance was merit based and financial assistance was not the norm. But for students disciplined enough to navigate the hurdles and work hard, the payoff was undeniable.
A college degree prior to 1978 meant successful completion of rigorous academic studies. It also meant that a significant financial investment could now be capitalized upon in the work force. It did NOT mean that a college degree was the only, or even desired, pathway to American success (as skilled craftsmen and entrepreneurs can attest).
Ronald Reagan’s “most terrifying words in the English language” quote shown above, directly exemplifies the current state of mushrooming college costs and declining value. The federal government (and other entities) has instituted policies that encourage raging inflationary tuition and expansion of questionable degree programs.
Bottom Line Cost 40 Years Apart (1978 v 2018)
College students entering a typical public college in 1978 would face a per year cost of $2,150 ($8,250 inflation adjusted 2024). By 2018 this cost had risen to $21,370 ($26,724 inflation adjusted 2024). After adjusting for monetary inflation, a college education now costs THREE times more than 40 years ago.
In the same 40 year interval, the percentage of college graduates jumped from 16% to 35% of the adult population. Why was the number of college graduates doubling as costs were tripling?
Financial Assistance Policy Drives Tuition Inflation
The origin of higher education inflation dates to the 1978 Middle Income Student Assistance Act (S.2539). The bill allocated no less than $286 million per year ($1.4 BILLION inflation adjusted 2024) in student loan funds. Student loans prior to S.2539 were either narrowly focused (National Defense Education Act of 1958) or strictly means tested (Higher Education Act of 1965).
Pre-S.2539 loans were leveraged against borrower assets similar to any other commercial loan (in this case parents were pledging assets to leverage the student repayment). S.2539 changed the lending and acceptance dynamic. The federal government now provided schools with massive loan and grant subsidies to bring down out of pocket tuition costs. The colleges, however, were not incentivized to restrain costs.
The expansion of government loans and grants to lower and middle class students opened the flood gates of college acceptances. Why not accept questionable applicants if Uncle Sam (the US taxpayer) would guarantee all or part of the ultimate loan repayment? The lax loan/acceptance environment drove up applications (see the doubling of adult degrees referenced above) while diluting the overall student body quality and degree offerings (Art History, Black Studies, Musical Theory, etc.).
Colleges and universities began using the expanded cash flow from federal needs based loans/grants to increase base tuition levels. Administrators would take the sum of these loans and apply that amount to the “new” tuition level.
Simplified example:
In 2024 Shady University has a student population of 20,000 and advertises a yearly tuition of $10,000 for in-state students. The current yearly gross revenue is 20,000 multiplied by $10,000 for a total of $200 Million.
If the 2024 gross revenue number includes $40 Million in federal needs based loans/grants then Shady University may apply up to $40 Million to the 2025 advertised tuition. The annual tuition just jumped from $10,000 to $12,000 with no justification other than “we can.”
Affordable Care Act Effects
Prior to 2010 even federally guaranteed loans could be obtained through commercial banks. Private sector involvement in the student loan business provided a degree of competition and accountability in a government dominated market. In 2010 the Obama administration eliminated the federal guaranteed loan program, froze out private lenders and forced all student loans to flow through the Department of Education.
The Affordable Care Act (ACA) of 2010 was passed with the promise that interest payments
from the Obama administration’s earlier loan takeover would be applied to reducing ACA premiums. It never happened and the reason is…Tuition Inflation. Loan defaults to the federal government erased the promised ACA savings. The net effect of college tuition practices and student access to gargantuan loan dollars is eerily similar to past and present consumer credit card excesses.
Buying Votes through Unconstitutional Decrees
Further realization of Ronald Reagan’s warning has been the effort of the executive branch to woo young college voters to vote for its political party through promises of loan forgiveness. The concept of federal forgiveness of student loans issued by that same government is not only a poke in the eye of non-college attendees but also a blatant violation of separation of powers. This is a classic case of the federal government attempting to rebrand monumental policy errors to its own favor.
A System in Crisis
Easy credit, guaranteed government repayment and deferred student responsibility have
combined to create a system that encourages colleges to:
- Offer low employment degree programs (If traditional degree programs are too hard here are some easy ones!)
- Attract poor performing or uninterested students (The feds are underwriting the risk so grab all we can and expand the income base!)
- Push low risk financial assistance towards ever increasing base tuition costs (Let’s use the increasing student population as an excuse to increase “costs” since the feds will cover any losses…)
The classic college education defined by rigorous study of in-demand disciplines, undertaken with serious financial commitment, has been turned topsy-turvy. Higher education has become a financial grift and its victims are the American taxpayers.
Capitalism Can Fix College Costs Quickly
Consider a very real current day scenario:
Jane Doe is an average high school graduate wishing to major in Art History at an Ivy League university. Her parents do not have sufficient income so her solution is to take a federal student loan for $260,000 to cover her four year degree. What are the chances that Jane will earn sufficient income as an art historian over a ten year period to repay the loan and support herself? Who covers the loss?…the US taxpayer!
This scenario is being replayed thousands of times over across the USA. Students and taxpayers are frustrated and the government feigns sympathy while adding more fuel to the inflationary fire. How is this situation fixed? Capitalism!
Capitalism, in practice, asks simple questions:
- Will the consumer buy the product (Will the awarded degree fill an in-demand workforce position)?
- If excess inventory remains unsold who is financially responsible (If awarded degree recipients are not employable who is responsible for the misallocation of funds)?
Currently loan repayment risk is borne by US taxpayers and college students. Colleges and universities are the 800 pound gorilla in the room and have been given a pass. If colleges are forced to assume the costs associated with unemployable graduates through loan forgiveness, then watch and observe the subsequent contraction of questionable degree offerings.
The federal government could put the brakes on college tuition virtually overnight by exiting the college loan business and returning to a classic capitalist loan structure:
- The product provider (college or bank) examines the applicant background and degree employment prospects.
- The provider and applicant agree on repayment terms.
- In the event of default, the provider may attach wage garnishment or write off the balance as uncollectable. In either case the US taxpayer is not impacted.
- Provider and applicant must both recognize the risk of extending credit and responsibility for its repayment.
Convention of States Can Help Curb Tuition Costs
Convention of States has proposed that Fiscal Restraint be one of the central convention
planks for amendment action. The exorbitant cost and demonstrable inflationary policies regarding higher education make removal of these programs from the federal budget a major Article V Convention of States topic.
If you agree that a college education is both opportunity and responsibility without need of Uncle Sam’s heavy hand, then please sign the COS petition and help the return to fiscal responsibility.
