Tuition, Subsidies, and Hazlitt’s Lesson
by Taylor Pace
As of 2015 the National Student Debt reached $1.3 trillion with the average student loan debt at about $29,000. Many former college students are discovering it is difficult to pay back such a large amount of debt. This is especially true of students that graduate with fruitless degrees like sociology and human development and family studies for example. These majors are only good for a prerequisite to a master’s degree. Most graduates find themselves working jobs that are completely unrelated to their studies. For the graduates with worthy degrees such as engineering and nursing, large amounts of student loan debt will still be a burden. For some universities the student loan default rates are as a high as 30-40%. Why is the price of tuition so expensive?
The College Industrial Complex
In 1965 the Higher Education Act (HEA) was created. It mandated federal funding directed towards higher education. This was the beginning of the Federal Pell Grant Program and the William D. Ford Federal Direct Loan Program, which prior to 2010 was known as the Federal Family Education Loan (FFEL) Program. These government programs provide subsidized loans to be used by students to pay for tuition. The result has been a tremendous increase in the flow of money into higher education. Government funding in 1960 was $11 billion and spiked to $48 billion by 1975. Between 1960 and 1980 state funding for higher education increased 390%, but the cost of tuition did not remain unchanged. In 1964 the average cost of tuition (adjusted for inflation) at a public university was $248 and by 2007 increased to $8,055. At private universities tuition increased by an average of $1,088 to $19,991
How are colleges spending all the revenue they receive from tuition? The number of full-time professors has actually decreased while the number of cheaper part-time professors has increased. Meanwhile the number of university administrators has more than doubled in the past 25 years. Between 1987 and 2012 the number of new administrators increased to 517,636 or an average of 87 per working day. These are non-academic employees that add little to no value to the education of students and are appointed as a result of political favoritism. The largest portion of tuition money is now surging into athletics. The amount of athletics spending per athlete at universities grew by about 50 percent between 2005 and 2010. Colleges spend three times as much on athletics as they do on academics. Schools in the Southeastern Conference (SEC) spend twelve times as much on athletics compared to academics. Of course none of this is possible without the federal government subsidizing student loans
Spiking Tuition Coincides with Government Subsidies
Colleges are willing to raise the price of tuition so long as student loans are guaranteed. In a free-market private loans are funded by a bank, credit union, or the school itself. These lenders have to weigh the risk of a loan being paid back. Graduates may or may not be able to pay back their loan or pay them back on time. This varies for each student based on the amount of money lent and the type of job they work after college. Private financial institutions will not lend a huge amount of money if the chance of the loan being paid back is unlikely. If students were limited to the market value of loans and were not able to pay for their tuition, then attendance would dramatically drop and schools would have to lower the price of tuition or risk going out of business. These were the circumstances before the government got involved and in most cases students could work all summer and make enough money to pay for a year of tuition and never have to take out a loan.
Under the system we have now loans are funded by politically connected financial institutions via the federal government, which has no risk of bankruptcy when too many people default on their student loans. All of these loans are backed by taxpayers and inflation. Schools gladly raise the price of tuition so long as the amount of lending also increases. The result is skyrocketing student debt and the creation of a bubble similar to the one that caused the housing market collapse of 2006-2007.
Capitalism Gets Blamed
Capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned. It’s a system that fosters free markets or the separation of economy and state. Under these circumstances no relationship exists between colleges and government. However, this is the ideology that tends to take the blame for the problem of unaffordable tuition. It’s argued that capitalism is predicated on selfish greed and responsible for exploiting students, despite the fact that before the government intervened into higher education most students did not have to take loans because it was affordable. What’s more exploitative than predatory lending made possible by the government’s forced redistribution of capital or wealth from one group of people to another?
Still, socialism and the idea of “free” education as a solution to student debt has gained popularity. Senator Bernie Sanders (VT) proposed a plan to do just this. President Obama mentioned in his last State of the Union address that he wants free community college and to reduce student loan borrowers’ payment obligations to 10% of their income. Supporters of Sanders and Obama claim this idea is good because wealthy Scandinavian and European countries already do this. They believe that socialism works and assumes there is no negative economic effect on society. Never mind that this does nothing to solve the underlying problem of overpriced tuition and will only place this burden on others.
Let’s say the aforementioned socialist policies were implemented and all of higher education were priceless to students. The cost would be shifted to the rest of society in the form of taxes or inflation. This may be a benefit to those in school, but only at the expense of society as a whole. Libertarian philosopher, economist and journalist – Henry Hazlitt (1894-1993) correctly identifies this problem in his book Economics in One Lesson. His lesson is based on two main economic fallacies: that of looking at only the immediate consequences of an act or proposal and that of looking at the consequences only for a particular group to the neglect of other groups.
If student tuition were completely subsidized, then graduates would have more money to spend on other things, like clothes, food, vacations, cars, and houses for example. More money would circulate to other industries and cause a boom in the economy. This is the immediate consequence and focuses on students only. The long-term consequences are much different. In this scenario capital has been redistributed not only to students, but to all the cronies involved in higher education. In other words, capital that was produced in other industries has been taken and given to a group that has produced nothing for society. All the people working in manufacturing, farming, construction, and many other productive industries would have to subsidize $1.3 trillion (and get nothing for it) to people who have produced nothing more than an exaggerated cost of tuition. If college could become a free-market industry again, then the $1.3 trillion could be kept by those who bear the cost. This money could be spent on clothes, food, vacations, cars, houses, etc. This difference would be that graduates would be largely debt free and also have more opportunity to accumulate wealth. All the people with crony jobs in the college system would have to find productive and valuable work in other areas of the economy. On a net society would be more wealthy and more productive.
All the Scandinavian and European countries that have socialized education could be wealthier if they understood these economic concepts. The United States could be better off as well if everyone here realized that government intervention has only made the problem worse.