Political Editors / July 7, 2021

In Brief: The College Subsidy Feedback Loop

Professors raise their prices to capture cheap loans, while producing new Democrat voters.

University of Chicago economics professor Tomas J. Philipson served on Donald Trump’s White House Council of Economic Advisers. And he has a warning: Subsidizing college is not just inflating academic coffers; it’s creating more left-wing graduates.

Some $1.6 trillion in student debt is now spread across 45 million borrowers, making student loans the second-largest consumer debt category, behind only mortgages. The student-loan crisis is rooted in government policy, and such enormous educational subsidies are not about learning but about churning out more Democratic voters. The Biden administration’s American Families Plan is designed to perpetuate the cycle.

The student-loan crisis has a long history but accelerated dramatically in 2010, when lawmakers moved the portfolio onto the Education Department’s balance sheet to “pay” for ObamaCare. The theory was that the federal government could exploit low borrowing costs to make a profit. The Congressional Budget Office predicted at the time that the government would save about $68 billion between 2010 and 2020. But Education Department bureaucrats, not experts in lending, didn’t bother with prudent practices, such as underwriting, that are routine in private credit markets. The result: A lender with the lowest cost of capital on the planet is now about $500 billion in the red.

For many Democrats, this federal debt is a success. They believe the government should pay for higher education, and unpaid loans partly accomplish that, although not as well as President Biden’s American Family Plan. About 30% of the plan’s nontax expenditures are devoted to public education, which amounts to loans without interest and principal, funded by taxpayers.

As Philipson points out, “That money always comes with strings attached.” Universities have more rules to follow, and the money distorts who goes to college. In fact, subsidies end up benefiting wealthier kids, who attend college at higher rates. But the biggest problem is subsidized indoctrination.

The universities that benefit from the largess are now dedicated to producing new American voters who support larger government. Colleges’ ideological turn leftward has become sharper. At my own institution, a center dedicated to Milton Friedman is now run by former Obama staffers who cheer on the Biden administration’s moves toward socialism.

The indoctrination is lucrative, too.

These policies reward professors and administrators who can then raise the price of their services. It’s basic economics that subsidizing demand increases the price of the product. Tuition rising as loan subsidies expand is no different. It isn’t a coincidence that education and health care, the industries in which government subsidies are most pervasive, took the highest price increases over the past 15 years — 3.7% and 3.1% a year, compared with the 1.8% average across industries.

Philipson sums it up by writing:

The student-debt crises and the American Families Plan would be a huge expansion of the role of government in education, while teaching future voters to value big government, setting the stage for even bigger government in the future. Progressives favor public financing of political campaigns, but it already exists in the form of college subsidies.

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