Posted by Joseph Y. Calhoun, III

Lost in the hoopla of passing health care reform is the matter of the takeover of the student loan industry in the reconciliation bill. As best I can tell, the student loan bill got folded into healthcare for two reasons. First of all, the Democrats needed the savings provided by the student loan bill to get the health care legislation to come in under $1 trillion. For some reason Democrats deemed it important to keep the tab under that round figure even though $950 billion is still a whole bunch of cabbage. The second reason is that there weren’t 60 votes for the bill as a stand alone in the Senate; putting it in the health care reconciliation allows it to pass with 51 votes.

So what does the legislation do? Essentially it eliminates private lenders for student loans. All student loans will come directly from the government and be serviced by private companies. Eliminating the subsidies to private lenders will save $61 billion a year of which $36 billion will be used to increase Pell grant funding. Frankly, I don’t have much of a problem with the government making these loans directly since we were already guaranteeing them anyway. Any losses had to be covered by taxpayers so paying a subsidy to lenders to keep the rates low was just transferring money from taxpayers to lenders with no gain for taxpayers. Well, assuming the government can do it as efficiently as the private sector. If you have complaints about service in getting your student loan processed, well you’ll know who to blame anyway.

What concerns me more than the direct government student loans and grants is that the subsidy for higher education is being expanded again. We have seen this story before and it leads to higher tuition costs. Expanding demand for higher education through subsidies while doing nothing to expand the supply of higher education is a recipe for higher costs. That’s why education costs have been rising at rates much faster than overall inflation for many years - just as healthcare costs have. In both cases, the government subsidizes demand but does nothing to encourage the expansion of supply.

There is a plethora of academic research (how’s that for irony?) showing that subsidies for higher education lead to higher tuition costs. That isn’t really a very controversial conclusion for most economists. The problem is that expanding the supply of higher education is a difficult, expensive and lengthy process. If you just try to force more people through a system that is already overburdened you get a lower quality product at a higher price. And that doesn’t help anyone particularly the students who end up paying too much for their education and are deep in debt when they finish.

There are no simple answers as to how the supply of higher education can be expanded quickly. Technology is part of the answer - there are surely many ways to improve the productivity of our colleges. How do we get universities to expand capacity or increase productivity and not just use the increased Pell grants as an excuse to raise tuition? That’s a question we ought to answer before we just allow universities to capture the increased Pell grants with tuition hikes.

Some references:

• Making College More Expensive
• College Costs Keep Rising
• Lumina Foundation
• Student Lending and College Affordability - Alternative Approaches
• This isn’t a new problem; here’s an article from 1988

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