On Student Loan Cancellation

As someone who worked in the student loan industry for years (2003-2010), loan cancelation ignores the fundamental problem, which is that there are no pricing controls AND no free market controls on tuition costs. In a truly free market, exorbitant prices would reduce demand and colleges would either have to cut prices or have fewer customers. In a controlled economy, we’d simply mandate prices. What we have is a Frankenstein’s monster of both – loans and lending pass the burden onto the customer over a long period of time and thus higher education institutions have no incentive to control costs.

The reason this is a problem is the nature of student loans. Because there’s no collateral, they are inherently high risk. If we had a truly free economy, no bank would ever loan a student money because it would be exceptionally costly to get it back if the student defaulted. Imagine a bank giving you a mortgage but with no house as collateral.

So why does this system exist? Because in the 20th century, the US government decided that higher education access was sort of important. It wasn’t really important or it would have been fully subsidized, and so a private/public coalition of banks and the government created the current system. To offset the risk of students simply not bothering to pay back loans, the US government became the underwriter of the program.

What happened next was predictable. Banks issued loans happily, knowing their loan was fully guaranteed by the government. In turn, colleges cashed in on students who suddenly had money and tuition prices skyrocketed. As a simple example, using the Federal Reserve Bank’s data from 1978 onwards, tuition since 1984 has gone up 8x. Regular household items went up only 2.8x in that time. Household income has only gone up around 20%, 1.2x in that time.

I witnessed this in 2006 when the Stafford Loan cap was increased. Within a week of the announcement, a consortium of colleges all increased their tuition in lockstep for the exact amount of the Stafford Loan increase. They couldn’t even wait a month.

I would have rather seen the $300 billion this program will cost go to nationalizing state-funded schools like the University of Massachusetts and make tuition free at all state and community colleges. That would reduce demand at other schools, forcing them to rationalize their pricing and value against a free alternative – especially with how cost effective distance learning programs can be. State run schools wouldn’t necessarily need to build extra campuses and buildings, just increase the scope and scale of online education.

Without something like that, there is still no incentive for higher education to control its prices, which means we’ve just passed the buck again.

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