President Joe Biden recently announced a student loan forgiveness program. Although it offers some people a little relief from student loan debt, this taxpayer-funded $300 billion program does nothing to address the underlying problem. In fact, it will make it worse.
The underlying problem is the high cost of college education.
And why are tuition fees so expensive?
The cost is directly related to the widespread availability of student loans.
Canceling student debt a little does not change the underlying dynamic. Even though some people will see their debt balance decrease, new students are borrowing money even as you read this article.
And of course, the federal government signaling that its willingness to cancel the debt will do nothing to deter further borrowing. This will only encourage more student debt. As Peter Schiff pointed out in a recent interview, loan forgiveness increases moral hazard. Moral hazard means a lack of incentive to hedge against risk because people are protected from the consequences.
Remember, the only reason we have all these student loans is because the government gave them or guaranteed them. The only reason college is so expensive is because the government provides so much money in the form of loans. But now that they are starting to forgo loans, students will be borrowing more money than ever before. Because colleges are going to say to students, ‘Hey, who cares how much you borrow for college? Either way, you won’t have to pay anything back. So we’ll double your tuition, and don’t worry. Maybe we’ll put in a free car.
Schiff hints at the root of the problem. The government is trying to solve a problem that it created in the first place.
Somewhere along the line, the powers that be decided Everybody need to go to college. So the government created the federal student loan program to make college “accessible to everyone.” But like most government programs, it did not deliver on its promises. The result was no more people going to college. He simply raised tuition fees for those who go to school. Indeed, colleges and universities have been able to base their prices on the fact that students can easily borrow money.
It’s not just theorizing. An article published by the National Bureau of Economic Research (NEBR) in 2015 found that a significant percentage of the increase in tuition fees can be explained by the increase in the amount of financial aid available.
Economists Gray Gordon and Aaron Hedlund wrote their paper for the NBER after creating a sophisticated model of the college market. When they analyzed the numbers, they found that the shock of ever-increasing demand for financial aid accounted for almost all of the tuition increase:
Specifically, with demand shocks alone, equilibrium tuition increases by 102%, which is almost entirely the baseline 106%. In contrast, with all factors present except demand shocks, net tuition increases by only 16%. These results are strongly consistent with Bennett’s hypothesis, which states that colleges respond to the expansion of financial aid by raising tuition fees.
Alex Tabarrok, an economist at George Mason University, pointed out that Gordon and Hedlund revealed the inevitable result of the government’s financial aid policy.
Remarkably, so much of the grant translates into higher tuition that enrollment doesn’t increase! What’s happening is that students are going into more debt, which a lot of them can’t pay.
An article published by the Federal Reserve Bank of New York came to the same basic conclusion.
We find that the institutions most exposed to changes in the subsidized federal loan program increased their tuition disproportionately around these policy changes, with a large tuition pass-through effect of about 65%.
In a nutshell, the federal government has increased the cost of a college degree while destroying its value. Peter Schiff summed up the problem several years ago in an interview with Tom Woods.
The government wanted to make college more affordable. They made it more expensive. And at the same time, they destroyed the value of the degree. It costs more to get a diploma, and the diploma is worth less, because everyone now has one.
Fast forward to today and the problem has only gotten worse. Student loan debt in the United States stood at $1.59 trillion at the end of the second quarter. About 43 million Americans have student loan debt. Less than a third of them owe less than $10,000.
Biden’s scheme does not even reduce the level of student debt. More importantly, it not only doesn’t solve the underlying problem, but it exacerbates it.
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