In August 2022, President Biden announced a program to relieve student loan recipients of their obligation to repay $20,000 of their loans.
Unsurprisingly, the move was very popular with those recipients. Some argue it swayed the 2022 off-year elections. However, it was controversial because of its unfairness. First, the action was grossly unfair to those who had already paid off their student loans. Second, the program would tax millions of workers to pay the debts of a relatively more prosperous segment of the population. Third—and most significant—forgiving debts is not among the president’s powers.
The plan could be derailed in one of three ways. The president (or a future president) could rescind it. Congress could overrule the president. Finally, the Supreme Court could declare it unconstitutional. Recently, the Supreme Court heard oral arguments in Biden v. Nebraska, which may decide the plan’s constitutionality. A House of Representatives subcommittee has also held hearings on the subject.
Thus, it is an excellent time to consider the goals and effects of the entire student loan program.
Paving the Way
The grandfather of the current student loan is often referred to as the G.I. Bill of Rights, passed shortly before the end of World War II. The government subsidized the educational and living expenses of veterans who wanted to go to college for three years. This action delayed the re-entry of thousands of returning soldiers into the labor market. Congress hoped this detour would prevent an economic downturn like that which broke out after World War I.
The G.I. Bill had massive effects. College education was suddenly available to many Americans. In the late forties, roughly half of the college students were veterans. This training, in turn, expanded access to the learned professions (law, medicine, etc.).
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A dozen years later, the Soviets sent the first artificial satellite into outer space. Suddenly, many were concerned about America’s education system, especially in science and technology. This concern triggered the National Defense Education Act, which granted scholarships and loans to American students who showed promise in mathematics, science, engineering or foreign languages.
The Higher Education Act of 1965
Today’s student loan program came in 1965 as a part of President Lyndon Johnson’s “Great Society.” As he signed the bill, he spelled out his hopes.
“[The Higher Education Act] will open a new door for the young people of America. For them, and for this entire land of ours, it is the most important door that will ever open, the door to education. And this legislation is the key which unlocks it. To thousands of young men and women, this act means the path of knowledge is open to all that have the determination to walk it.”
The idea was simple. College educations were the road to greater financial prosperity. However, most young people needed help to pay for that education. No bank would loan so many dollars to a student without collateral. So, the federal government guaranteed the bank that the loan would be repaid.
The country expected that the actual cost would be minimal. After all, the students would repay the loans from their higher post-college incomes.
Unintended Consequences
Until the early eighties, the program worked as it was designed. For thousands—including this author—the relatively small student loans filled the gap between the costs of education and the student’s resources.
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However, as time passed, Congress made the loan programs increasingly generous. Universities could raise tuition and fees because the students could easily borrow the money to pay them. Incoming freshmen were treated to “free” lunches surrounded by tables of bankers eager to make the “guaranteed” loans. College “financial aid advisors” facilitated the process of borrowing. Students who do not know how to fill out a check signed contracts for multiple thousands of dollars. For a new high school graduate, the effect was mesmerizing.
To attract more students and compete with other schools, the schools began to provide ever more lavish amenities. They built increasingly expensive dormitories, recreational facilities, and fitness centers. Better libraries and highly qualified faculty members had limited appeal. Free pizza at midnight and luxurious amenities drew them in.
Incurring Unpayable Debts
The long-term results of this feeding frenzy are catastrophic. Many college graduates are over $100,000 in debt. For those in law, medical and other graduate programs, the debts will continue to climb. Those with degrees in relatively low-paying fields, like education or social work, must repay these massive debts and living expenses with incomes that will not pay for it all.
The worst off are those who borrowed money but never finished college—and there are many of them. Their debts may not be as high. However, most are not making college-level incomes.
All tolled, the total outstanding debt in 2021 was $1.7 trillion. Covid-related payment moratoriums have increased that total.
At this point, it may sound like this article is making a case for Mr. Biden’s plan, which is not the case at all. There is no question that the students should honor their debts. The taxpayers, who received no benefit from these massive expenditures, should not be held accountable for another’s obligations.
Excusing the Malefactors
However, that leaves the greatest beneficiaries, the colleges themselves, off scot-free.
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Colleges pulled in astronomical amounts from this process—far above the general inflation rate. From 1980 to 2021, the cost of living went up by 219%, according to the Consumer Price Index. However, the prevailing inflation rate was nothing compared with the increase in college tuition. From 1980 to 2020, the average cost of tuition went up by almost 1200%, according to the National Center for Educational Statistics.
In 2017, the Federal Reserve Bank of New York reported that college tuition increased by $0.60 for every dollar lent out in subsidized federal student loans.
Unnecessary Increases
There was no need for these massive increases. The land and any previously existing building on campus were already paid for. The exact number of students fit into the same rooms.
So, where did all the money go? Some of it went into the luxury accommodations described above. Much of it went into increased numbers of administrators. The rest went into the endowments.
The once-prestigious Yale University is a fine example. According to the Yale News, the august institution employed 3,500 “administrators and managers” in 2003, a number that increased by 45% by 2018. That increase had no relation to any increases in the student body. There were only 600 more students in 2018 than in 2003—an increase of 11%. The endowment increased even more rapidly. Between 2001 and 2021, Yale’s endowment grew fourfold from $10.7 billion to $42.3 billion in tax-free dollars.
A Possible and Just Solution
Writing for The American Mind, Inez Feltscher Stepman lays the responsibility for the deteriorating situation squarely on the universities.
“Universities can charge whatever they want for their product, and the students are stuck with insurmountable and disproportionate debt on the back end. Throw in millions of dollars in aggressive marketing to every graduating high schooler, largely 17 or 18 years of age, and the conduct of these institutions looks closer to what we would call predatory behavior in any other context.”
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The suggested solution is an intriguing one. Tax the universities to pay for the damage that they have caused. The simplest way to do this would be to end their tax-exempt status. Another possibility would be to charge the university a set percentage of the loans its current and former students still owe.
As with most new ideas, working out the various legalities would require much work. Still, it takes little imagination to determine the reactions of the socialist “wokesters” to being taxed.
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