The Student Debt Racket

By Derek Foster, Mises Institute

The student debt crisis isn’t a natural market phenomenon; it’s the predictable result of decades of government interference. Since 1980, average tuition and fees have increased by 1,200 percent, while consumer price inflation has risen only 236 percent over the same period. This massive increase has left students and families struggling to keep up, often forcing them to take on substantial debt just to attend college. Today, over 42.7 million Americans owe a combined $1.69 trillion in federal student loan debt. A combination of federal policies, including subsidized loans, government grants, bloated university budgets, and a complete lack of accountability, has fueled the relentless rise in tuition costs. As a result, higher education—once seen as a path to opportunity—has become a debt trap for millions.

Why 1980?

In 1978, Congress passed the Middle Income Student Assistance Act, making federally-subsidized loans available to nearly all students, not just those with low incomes. It took two years to fully roll out loans to the newly-eligible student population. Once 1980 began, tuition rates started their steady climb. Making student loans available to more people seems like a benign policy on its face, but it sent tuition prices soaring for decades.

Universities serve one of the poorest age/education demographics in the United States: young adults without a college degree. Since their target market was short on cash, universities had to be sensitive to tuition prices; otherwise, students couldn’t afford to attend. Before 1980, students had to work during college to pay as they went or work after high school to save as much as possible before enrolling. Once subsidized loans became available, students could borrow the full cost of college with the expectation of higher post-graduation earnings and easy debt repayment. Never mind the taxpayer picking up part of the interest expense. College administrators quickly realized that since students didn’t have to pay up front in cash anymore, price sensitivity was no longer a limiting factor. Universities could raise prices and pursue pet projects like social change, costly sports programs, bloated staffing, and luxurious amenities.

A study by the New York Federal Reserve found that for every dollar the maximum loan limit increased, average tuition rose by 60 cents. This astonishing pass-through rate makes raising subsidized loan caps completely ludicrous. Originally, only the poorest students needed subsidized loans. But as more loans originated, tuition spiraled out of control, requiring more students to borrow until we reached today’s crisis of unaffordable tuition.

Follow the Money

The vicious cycle is obvious. So why not stop raising the loan maximums? Because higher education is a $200+ billion industry. Even in the public university system, an entrenched bureaucracy is getting wealthy off high tuition. The corrupt cycle looks like this: university administrators and faculty unions donate to left-wing super PACs. In return, they ask for increased student loan limits and more federal grants under the banner of increasing “affordability” for students. Universities then raise tuition and funnel the new money into raises, administrative expansion, and campus construction projects. Then, faculty members continue indoctrinating students to vote for far-left candidates, and the racket continues.

A Forbes article stated the following:

Between 1976 and 2018, full-time administrators and other professionals employed by those institutions increased by 164% and 452%, respectively. Meanwhile, the number of full-time faculty employed at colleges and universities in the U.S. increased by only 92%, marginally outpacing student enrollment which grew by 78%.

University administrators are not using the increased tuition revenue to create smaller class sizes or improve student’s education. They are inflating the bureaucracy to create a colossal social justice organization.

Graduation now depends on ideological coursework; every student in the California State University system’s 23 campuses must take a class in ethnic studies or social justice. The point is twofold: indoctrinate students in radical leftist ideology and create education jobs for graduates with useless degrees like San Francisco State’s Social Justice Education program. It’s a pyramid scheme designed to enrich the academic elite and cement progressive dogma in the young professional class.

Universities are so effective at converting students into activists that the education system can’t even afford to employ them all. We have begun to see the private sector’s culture shift to placate the radical employees coming out of colleges. So many young adults have fallen under the spell of left-wing cultural ideology that an entirely new industry has appeared out of thin air. “Diversity, Equity, and Inclusion” training and consulting is now a $15 billion industry. Firms now feel obligated to create mandatory training programs under pressure from young employees. These consulting fees are nothing but tributes to activists in exchange for a “Get-Out-Of-Jail-Free” card in case an employee says something in public contrary to leftist social doctrine. While universities have succeeded at getting rich by indoctrinating students and poisoning our culture, they’ve also buried an entire generation in debt.

The Collectivists’ Role

The same collectivists who built this broken system now insist on fixing it—by expanding it. As Bernie Sanders described in a recent interview with Joe Rogan, the solution to a $500,000 medical degree is more subsidies. He sees public colleges gouging students with government-backed aid and calls for even more intervention. He lacks the self-awareness to see that his ideology created this crisis. His support for ever-growing bureaucracy and government control led to a $1.69 trillion student debt bomb, with 42.7 million borrowers. Now he’s adamant that this enormous financial burden be shifted onto taxpayers. US higher education is a prime example of how collectivists take control of a system, corrupt it, and then raid taxpayer coffers to cover the damage. All the while, they accuse small-government advocates of being heartless and blame them for the very crisis the collectivists created.

The Forgotten Taxpayer

Lost in this conversation is the taxpayer, who’s also getting shafted. State governments continue to fund bloated universities because even federally-subsidized tuition isn’t enough to pay for the massive bureaucracy. Meanwhile, taxpayers are forced to cover the interest on ballooning student debt. Americans who couldn’t afford college and chose to work, are now paying taxes to subsidize the degrees of their higher-earning peers. This collectivist pyramid scheme is a naked power grab designed only to expand the education system, enrich insiders, and reward those who continue to partake in the scheme.

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