Deliver Students From Debt by Investing in State Schools

Not only has the share of kids enrolling in public colleges and universities dropped to 73%, from 78% in 1990, those who enroll have to fork out more for the privilege to make up for the decline in state and local funding. Tuition now covers 42% of revenue at public colleges and universities, according to the State Higher Education Officers Association, up from 29% at the turn of the century.

Those kids, by the way, are the lucky ones. The unlucky ones who didn’t make the cut got trapped in the maw of for-profit schools selling the mirage of success. Two million students enrolled in for-profit colleges in the fall of 2010, the peak year for the industry, almost 10 times as many as did 20 years before. On average, they paid some $14,000 more per year than students at public institutions. Many ended up with a worthless degree or no degree at all. (Following years of scandals, annual enrollment in for-profit colleges has fallen back to about one million.)

To be fair, the federal government has tried to cover some of the shortfalls in state and local funding. The problem is that it chose to provide the money in a fairly boneheaded way: handing out grants and loans so students could pay for more schooling without doing anything to ensure that the supply of quality of education would grow to meet rising demand.

This federal strategy didn’t just spawn a predatory for-profit educational industry that set tuition at the very limit of what student loans could bear. Pretty much the entire educational ecosystem set out to capture as much of the federal money as it could by pumping up tuition and fees.

One study by economists at Brigham Young University, the Federal Reserve Bank of New York and Harvard found that for every dollar increase in the ceiling that students were eligible to borrow from the subsidized federal loan program, sticker-price increases captured 60 cents. The students didn’t get any more education. They were just left holding a heavier bag.

Maybe one shouldn’t fault Biden’s good intentions, as he tries to lift some of this burden. But his offer to cancel the debt of several million students doesn’t correct the policy mistakes. It’s no more than a Band-Aid over a wound inflicted on society by bad public policy.

Indeed, calling it that may be too generous. If college administrators come to believe that periodic loan forgiveness has become a regular policy tool, they will inevitably work it into their tuition schedules: Students can bear more debt, and afford higher tuition, if the government is going to step in down the road to pick up the tab.

So what can be done? Instead of juicing demand for whatever education the industry will provide, Washington should work on the supply side. A good place to start might be to bolster the financial wherewithal of the state colleges and university systems that have done the best job so far of providing affordable higher education to Americans of limited means.

Appropriations to pay for public higher education have declined to $9,327 per fulltime equivalent student, according to the higher education officers association. That’s about 10% less than at the turn of the century.

It might not be politically palatable for the Biden administration to just grab the $500 billion-plus in planned debt relief and hand it over to the states to invest in their colleges. But the feds could nudge state governments to stop the decline in educational funding.

Consider Medicaid, which absorbs about 20% of state budgets. The growth of Medicaid has been crowding out state educational budgets for years. It enjoys what state college administrators might consider an unfair advantage: For every dollar the state devotes to the program, the federal government adds up to $5.

David Deming of Harvard suggests that public education would benefit from similar support. A $1-for-$1 matching grant would not only provide substantial financial backing to state colleges and universities. It would also reduce the financial incentive for states to take money out of schools and plow it into hospitals. And the aid could come with strings to ensure quality and accountability, maybe even to the point of standardizing some features of higher education.

This approach might be politically challenging at a moment in which a big chunk of the political class is heatedly accusing the higher education system of brainwashing children into questioning their privilege and adopting liberal causes. And yet the political downside can’t be any worse than what comes from handing tens of thousands of dollars to young graduates making $125,000 a year in blue urban America.

Bloomberg News provided this article. For more articles like this please visit bloomberg.com.

Read more articles by Eduardo Porter