The Plan For Universities to Raise Tuition to Infinity

Via the WSJ, President Obama is proposing debt forgiveness for student borrowers

The White House proposes that the government forgive billions of dollars in student debt over the next decade, a plan that cheers student advocates, but critics say it would expand a program that already encourages students to borrow too much and stick taxpayers with the bill.

The proposal, included in President Barack Obama's budget for next year, would increase the number of borrowers eligible for a program known casually as income-based repayment, which aims to help low-income workers stay current on federal student debt.

Borrowers in the program make monthly payments equivalent to 10% of their income after taxes and basic living expenses, regardless of how much they owe. After 20 years of on-time payments—10 years for those who work in public or nonprofit jobs—the balance is forgiven.

Already, it's pretty clear that many students pay little attention to size of the debt they run up.  Easy loans for students have essentially made them less price sensitive, however irrational this may seem (did you make good short - long term trade-offs at the age of 18?)  As a result, tuition has soared, much like home prices did as a result of easy mortgage credit a decade ago.  The irony is that easier student debt is not increasing access to college for the average kid (since tuition is essentially staying abreast of increases in debt availability), but is shifting student's future dollars to university endowments and bloated administrations.  Take any industry that has in the past been accused of preying on the financially unsophisticated by driving them into debt for profit, and universities are fifty times worse.

So of course, the Progressives in the White House and Congress (unsurprisingly Elizabeth Warren has a debt subsidy plan as well) are set to further enable this predatory behavior by universities.  By effectively capping most students' future financial obligations from student debt, this plan would remove the last vestiges of price sensitivity from the college tuition market.  Colleges can now raise tuition to infinity, knowing that the bulk of it will get paid by the taxpayer some time in the future.  Just as the college price bubble looks ready to burst, this is the one thing that could re-inflate it.

Postscript:  By the way, let's look at the numbers.  Let's suppose Mary went to a top college and ran up $225,000 in debt.  She went to work for the government, averaging $50,000 a year (much of her compensation in government is in various benefits that don't count in this calculation).  She has to live in DC, so that's expensive, and pay taxes.  Let's say that she has numbers to prove she only has $20,000 left after essential living expenses.  10% of that for 10 years is $20,000 (or about $13,500 present value at 8%).  So Mary pays less than $20,000 for her education, and the taxpayer pays $205,000.  The university makes a handsome profit - in fact they might have given her financial aid or a lower tuition, but why bother?  Mary doesn't care what her tuition is any more, because she is capped at around $20,000.  The taxpayer is paying the rest and is not involved in the least in choosing the university or setting prices, so why not charge the taxpayer as much as they can?

Postscript #2:  It is hard to figure out exactly what Elizabeth Warren is proposing, as most of her proposal is worded so as to take a potshot at banks rather than actually lay out a student loan plan.  But it appears that she wants to reduce student loan interest rates for one year.  If so, how is this different from teaser rates on credit cards, where folks -- like Elizabeth Warren -- accuse credit card companies of tricking borrowers into debt with low initial, temporary rates.  I  find it  a simply astounding sign of the bizarre times we live in that a leading anti-bank progressive is working on legislative strategies to get 18-year-olds further into debt.

  • http://devilish-details.blogspot.com/ mesaeconoguy

    Because student debt currently is not dischargeable in standard bankruptcy, for a reason - broke students.

    There is a reason for this.

    Students used to be a reasonably sound risk in loan payback, and relatively few took loans to go to school.

    Now, most students are subsidized by the same institution causing the college edumacation hyperinflation: government.

    Stupid kids.

  • mesocyclone

    Do these people think about this at all? I'm beginning to think the most parsimonious explanation is that they don't care if they wreck the country, as long as they win the next congressional election, and they'll do anything to get low information and low maturity (student) voters on their side.

  • http://profiles.google.com/7continents7 Benjamin Cole

    Oddly enough, Obama may be right on this, but for the wrong reasons. Of course, he is for forgiving debt to get votes. And not reforming a system out of control. I am shocked---shocked---that he is acting in a calculating manner.

    But wiping out debt may be very good for the economy. In fact, the Fed's QE program is a great idea, and should actively target federal debt. Monetizing the debt in this era will both deleverage the nation (and taxpayers) and boost the economy. We see inflation is still dead. If any business guy could wipe out debt without consequence, they would do it. Too bad we do not have business guys running DC.

    Unfortunately, the private-secor has gone crazy with debt too, in the last 20 years. The more heavily leveraged an economy, the less it can survive downturns. Yet, regulating the amount of debt outstanding would be government intrusion.

    One fix may be to eliminate tax deductions for debt payments (corporate or personal) and to encourage equity formation.

    BTW, the home mortgage interest tax deduction does more to boost house prices and encourage debt than any other federal program.

    Shssshhhh. Let's blame urban socialists instead......

  • http://devilish-details.blogspot.com/ mesaeconoguy

    Wrong, Obama is causing this.

    Check the time series loan size and debt numbers.

    But that's only half - check the government/academic complex subsidies, institutional expansion of the problem.

    Housing, Socialist Insecurity, college, healthcare, lawnmowers, plumbing, etc.

    What's not to like?

  • August

    The more sensible approach is to declare this whole gig fraud, forgive the loans, and seize all the assets of Big Academia. I might even get silly and award damages to college students who wasted time in college when they could have been doing something else. Yes, I know they were goofing off and having fun, but they probably would have been more productive, even by accident, if they had not been conned into thinking college was a good idea.
    Obama (and the Republicans for that matter) will never do this because the fraud provides a lot of jobs as well as cover for statist action.

    As libertarians, we wouldn't normally have a chance to do populist (and hopefully popular things), but when you look at stuff like MERS, student loans, the bank bailouts, etc... Act like a court, or maybe on of these days the local courthouse realizes it has jurisdiction (and local politicians realize their voters are the ones who could receive restitution), and then let people get on with their lives rather than having all this fictional crap weighing down the economy.

  • MNHawk

    Wiping out debt OWED TO A UNIVERSITY would indeed be very good for the economy. Noting would work more getting responsibility back into higher education. Too bad that's not what's being proposed.

  • http://www.facebook.com/matthew.slyfield Matthew Slyfield

    "The more sensible approach is to declare this whole gig fraud, forgive the loans, and seize all the assets of Big Academia."

    The problem with this is that the fraud has largely been committed by the government itself and not the universities.

  • irandom

    Shouldn't the Elizabeth Warren post be on the page where you are talking about the intellectually disabled? Apparently, she didn't notice that is what we already do, giving students subsidized loans like the banks.

  • nehemiah

    This really, really bad policy. Did I say it was really bad? Just when colleges are starting to feel the pinch and are actually extending tuition discounts! With more young men and women attending 2-year community colleges and then transferring or just redirecting to trade schools, enrollment is trending down.

  • dc

    the universities were quick to catch on to the game, though. hence the explosion of admins, facilities...and tuition.

  • dc

    and why has the private sector gone crazy with debt - you're noting it without looking more deeply - this is done entirely because of incentive by the government.

  • August

    Hey, I thought I was at least getting an education. I've got a history degree, but a lot of what I was taught was crap. Then there is the implication that these degrees are going to help you in the job market. The government does have it's hand in this, and I would love to put this bankrupt country into receivership and put whatever assets it has left back into tax payer hands, but Big Academia knows it has been selling a lie for a quite a while now. And every time the government announces more 'assistance' they are right there, raising the price on those worthless degrees.

  • skhpcola

    I'd apply for this, if it became law, but I'd never vote for a D-ooshbag. Hell, any American would be foolish not to avail himself of every single "free" thing that is available. The marginal damage to the economy and future is negligible and the fact that millions of other freeloaders are sucking at the teats of government is pretty much a green light. To be clear, it should not become possible to stick it to the taxpayers in this manner. But I'd still take advantage of it...integrity, honor, and values are for suckers. Ozero and his cabal of filthy progtards has taught me that.

  • marque2

    I am sure I mentioned this before but in 1934 my Grandfather went to med school and paid for it with odd summer jobs, and on campus jobs during the school year. Student loans didn't exist back then.

    Now a med student gets 300K in debt and then people complain when they try to earn a few bucks for investing 10 years of life, and 300K in money to learn how to save their lives.

  • marque2

    It isn't exactly a good idea to monetize debt. Politicians get addicted to that as well. In just a decade we will be like Zimbabwe.

    Inflation is really stealing from the people, because you have already directly taxed them to the breaking point.

  • marque2

    The discount is funny as well. I just read an article about how colleges are giving more discounts and the rate of increase for last year was only 3% - that sounds great until you find out that the rate of inflation last year was 1.75% - Yup tuition rates, even with all those discounts are still going up at 250% the rate of inflation.

    They still haven't got it.

  • marque2

    Yes we need to get more and more students in 150K of debt to learn grossly distorted History and Sociology so they can get high paying paying jobs as Um, well um - I guess they really didn't get high paying jobs even when they taught real history

  • dc

    if you are getting a degree in history, you'd better be realistic that pretty much the only job out there for it is high school or middle school history teacher.

    I tried telling my son not to go if he had no idea what he wanted to do but unfortunately there were 50 other voices saying "going to college is a MUST if you want to get a good paying job!!!" well, at least he's getting good grades so far...I hope he can put his "degree" to use but I'm more realistic than that, I think he's just going to be stuck working at the friggin ymca.

  • Billford

    I think people are slowly realizing that buying education should be evaluated like any other investment or purchase. I wish people already did this. I like that government subsidizes education. Or, put another way to appeal to readers of this blog, it certainly subsidizes a lot of other things I would rather see cut before education.

    I think that while the private sector would provide loans to engineers, a whole lot of people would miss out because private companies would avoid loaning to kids who didn't have parents who could co-sign, or who hadn't yet begun to really reach their potentials as students, and that there is a lot of value of educating people in the liberal arts that would be lost without subsidized education (although obviously there would also be a lot of waste avoided as well).

    But, I think the level of subsidies right now is too much. For instance, maybe loans should only be made to pay for 80% of in-state tuition. The remaining 20% would have to be made up by working, private non-guaranteed loans, or gifts from family members.

  • bubbalew

    Banks and student loan businesses saw a great opportunity in the post-Reagan greed fest. They help Universities see that they could raise their tuition rates sky high and kids would still want to go to college. With easy loans and the greedy bankers standing by to offer the loan deals, it became a win-win for the schools and a big lose for the student and their family. When I went to college, the University of Illinois was $2,000/yr incl room and board. A kid could work in the bookstore or student union and pay for their tuition and board. Try that today with tuition and room and board at $31,000/yr., in state! The University of Michigan is $52,000/yr for out-of-state students!!! Even with Pell grants and merit grants, you're looking at $42,000-46,000/yr.