Universities Are Complicit in Ballooning Student Debt

By Daniel Tenreiro

Thursday, August 12, 2021

 

In the aftermath of the 2008 financial crisis, Elizabeth Warren issued an ultimatum to opponents of her proposed Consumer Financial Protection Bureau. If the CFPB was not crafted to her liking, Warren would opt for “no agency at all and plenty of blood and teeth left on the floor.” The statement made clear that punishing greedy bankers was as important to progressives as ameliorating the causes of the crisis. Demagoguery and dishonesty notwithstanding, the rhetoric of the 99 percent versus the 1 percent worked, catalyzing the Occupy Wall Street movement and making a more radical economic agenda feasible.

 

Now Warren claims we face another looming debt crisis — this time from the $1.7 trillion of outstanding student-loan debt. Curiously, though, the Manichean worldview that shapes so much of progressive politics is absent from the push to eliminate student debt. In the platform for her ill-fated 2020 presidential run, Warren pinned the blame on “an economy that forces [students] . . . to take on more debt to cling to their place in America’s middle class.”

 

The proposal has won over Senate majority leader Chuck Schumer, who is urging Biden to cancel student debt unilaterally to “build a more just economy and address racial inequity.” Neither Warren nor Schumer has told us who is responsible for this injustice.

 

That’s because the villains of this story — on one side, university administrators; on the other, well-intentioned lawmakers — do not fit into the Left’s moral schematic. But a failure to lay blame leads to misguided policy and continued wrongdoing. Conservatives should learn from the Left’s post-2008 politics: Line up the culprits and make them answer for their misdeeds.

 

Lawmakers can start by pointing out that tuition is not set from on high: Colleges set prices every year, and every year opt to increase fees. Just as mortgage underwriters and Wall Street traders availed themselves of federal-credit subsidies to pad their pockets in the lead-up to 2008, university administrations of all stripes — private, public, for-profit — feed on debt-financed tuition hikes. They use these dollars to pay themselves and their colleagues, to build glossy new facilities or to fund diversity initiatives, but hardly ever to improve the education they are ostensibly providing.

 

A 2015 study from the Federal Reserve Bank of New York found that for every dollar of additional subsidized lending, 60 cents went to tuition hikes. It’s something akin to a tax on borrowers, who effectively receive 40 percent of what they borrow but must pay back in full, with interest. Economists Grey Gordon and Aaron Hedlund find that the expansion of student debt accounted for nearly 80 percent of increased tuition costs between 1987 and 2010, whereas a higher college-wage premium accounted for less than 20 percent.

 

The outsize surplus captured by universities was identified in 1987 by Secretary of Education Bill Bennett, who pointed out that “increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase.” The Bennett Hypothesis, as it is now known, is not so much an economic law as an indictment: one that pins the blame for runaway costs and debt burdens on university administrations. Academics disagree as to the validity of Bennett’s argument, but the underlying logic is clear. Colleges are capacity-constrained, increasing enrollment intermittently and gradually, thanks in part to regulation that bars new entrants. Because of constraints on the number of seats at colleges, administrators are able to raise tuition nearly in lockstep with increased demand. The problem is that higher prices do not yield better outcomes.

 

In fact, tuition hikes tend to go toward bloated administrative staff rather than improved instruction. As Benjamin Gins­berg points out in The Fall of the Faculty, the rate of hiring of nonteaching staff has outpaced that of professors by nearly five times. Indeed, the growth of low-level staffers has even outpaced student enrollment, leading the U.S. to spend more on nonteaching staff than any other country in the OECD. Spending on “student services” goes toward diversity and Title IX offices, sustainability initiatives, bike-share programs, organic-farming co-ops, and anything else a deputy assistant dean of student life might think up.

 

As Jason Brennan and Phillip Magness point out in their 2019 book Cracks in the Ivory Tower, universities follow the logic of bureaucracy, characterized by “internal budgetary competition over scarce re­sources between two or more of its components.” This can take the form of a department head lobbying for general-education requirements that force students to take his courses or a chief diversity officer requesting an ever-larger staff to fight discrimination. The first rule of bureaucracy is “Never say no to money,” so the ability to raise tuition becomes synonymous with the need to raise tuition.

 

Taken together, each venial sin — the needless administrative hire, the umpteenth “student life” program — is part of a distributed conspiracy against students and taxpayers. A great many American universities now serve a mob-like function, offering students protection from the vicissitudes of low-skilled labor in return for extortionate tuition fees. As with the Sicilian mob, which filled a vacuum left by the fallen Bourbon crown in the late 1800s, the higher-ed mafia is not necessarily bad for the parties involved: College graduates make roughly two-thirds more than those without degrees, and the average monthly payment for borrowers is roughly $200. The median graduate of a bachelor’s program earns roughly $5,400 a month, more than enough to service interest costs.

 

Like a Palermo shop-owner paying the local capo for private protection, the average student would not be mistaken to see college as a costly but necessary investment. Most borrowers land on their feet, and contrary to Senator Warren’s portrayal, higher-ed costs are progressive, with students from high-income households shouldering most of the burden.

 

But irrespective of the harms to individual borrowers, rising tuition imposes a deadweight loss on the U.S. economy, transferring wealth from potentially productive uses (say, basic research or infrastructure investment) to university apparatchiks. Progressives are wrong to claim that Americans are sinking under student-loan debt, but that does not mean rising tuition fees are not a problem.

 

The magical thinking of student-loan forgiveness would only exacerbate the issue, demonstrating to universities in no uncertain terms that tuition hikes will continue to be rewarded with federal largesse. Universities have been fed subsidy after subsidy, only to increase costs and leave students with more debt. Erasing debt hands colleges a clean slate on which to calculate next year’s budget.

 

Conservatives tend to laugh off student-debt cancellation, pointing out that it would most benefit doctors, lawyers, and other recipients of professional graduate degrees. Fair enough, but the inadequacy of Warren’s proposal does not nullify the underlying problem of rising higher-ed costs, and by remaining forever on the defensive, conservatives cede political capital to lawmakers who claim to be doing something. Congressional Republi­cans should learn from the failure of the “repeal and replace” health-care agenda and offer an alternative.

 

The obvious alternative is a market-driven student-loan regime, one that acknowledges the variance in student outcomes. Rather than charging a uniform interest rate, the government should set rates based on the wage premium a student is likely to receive, or else leave student loans to the private sector altogether.

 

No doubt a more sensible loan policy would push students to think twice before committing to a costly degree, and a reduction in credit would bring down costs. But the language of incentives and market-clearing interest rates is unlikely to sell Americans on a meaningful overhaul of the federal-loan system.

 

Progressives have rallied around the student-debt issue by painting it as part and parcel of their agenda to redistribute wealth. The emotional resonance of Warren’s rhetoric has won over a critical mass of voters, as well as the relatively moderate majority leader. This rhetoric has cloaked a move to entrench the economic power of universities as a push for economic justice.

 

Conservatives should take back the high ground: The moral abomination of higher education is a result of government subsidies and bureaucratic capture. By depicting the complicity of unassuming university presidents in the higher-ed racket, conservatives would not only set a more sensible agenda but also underscore the harms of rent-seeking more broadly.

 

Too often, a stodgy economic lexicon drowns out the moral force behind market mechanisms. The buildup in student debt is a familiar story of rent-seeking underwritten by a generous government. It could be a winning issue for Republicans, if only they would talk about it.