America’s Student Loan Crisis: What’s Going Wrong and How Can We Fix It?

The topic of student loans was one of the more prominent issues discussed in the election season. The price of tuition for colleges in the United States is rising alarmingly. “The average annual increase in college tuition from 1980-2014 grew by nearly 260% compared to the nearly 120% increase in all consumer items,” according to Business Insider. Student loan debt has now surpassed $1.3 trillion in the U.S. Government subsidization of college education, coupled with increasing demand, has contributed to this large increase in both tuition prices and student loan debt.

The criteria of obtaining federal student loans is a good place to start. The qualifications for these loans are fairly unrestricted with some basic requirements of demonstrated financial need, being a U.S. citizen, having a Social Security number, and being enrolled in Selective Service to name a few. The eligibility for these loans is also viewed primarily through the lens of financial need. Now, it is important to make clear that there are borrowing limits depending on the types of loans you take out, the school you attend, etc. While this overall relatively easy access to federal student loans at first glance may seem like a great and noble means for students to afford college, there are drastic consequences.

Since students can easily obtain student loans from the government, universities have realized that they now no longer have any incentive to compete with lower prices as other markets do to attract consumers. Instead, colleges now compete to make themselves more attractive to students with luxury perks – such as facilities, amenities, and more administrators – that often have little to do with enhancing the actual quality of education, which is the main reason students attend college in the first place.

The byproduct of this realization is rapidly increasing tuition that forces students to take out more loans that the government will easily give out, thus creating a positively reinforcing cycle of higher tuition costs and more student debt, which Charlie Kirk of Turning Point USA characterized as the Game of Loans. Jordan Weissmann, in an article for summarized some of the conclusions from a recent New York Fed report stating, “Looking at both public and private nonprofit colleges during the mid-2000s, they found that schools raised tuition by 55 cents for each $1 increase in Pell grants their undergraduates received, and by 60 to 70 cents for each extra dollar of subsidized student loans.”

While the Game of Loans is one of the major contributing causes of higher tuition prices, another major reason is simply that the demand for college education is increasing. When the demand for a good or service increases, suppliers, universities, in this case, raise their prices. Furthermore, the demand for college education I would argue is fairly inelastic, meaning that the demand for a college education does not reduce much in response to higher tuition prices. With these market forces in play contributing to higher prices, increasing the availability of student loans seems like a very tempting and reasonable response; however, this reaction only further exacerbates the problem dramatically.

The attractive solution to this issue is that government should play a more active role in making college affordable and go so far as making it completely “free,” as some proposals argue. To put it bluntly, government needs to back off since government’s actions have only exacerbated the problem. When politicians tell you that they will make something free, in this case college, they are not only being deceitful but are also blatantly lying. This political rhetoric is an example of the free lunch myth, which is the belief that government can provide something to you for free. There is no such thing as a free lunch. When politicians tell you that they’ll make college “free” or “affordable,” they are just shifting and hiding the costs of college.

How? The reason lies in the simple nature of how government is financed. Government’s only source of revenue is through taxation. It either uses its force to take the money from you directly, borrows it from other countries, or prints money via the Federal Reserve and taxes you in the form of inflation. When the Federal Reserve prints money, it reduces the value of currency in the economy. Inflation is best thought of as a tax because it yields the same result: It leaves you with less money in your pocket.

These aforementioned proposals also ignore the vital role of costs and prices. Every action has an opportunity cost. For example, as economist Thomas Sowell points out, “costs are not just prices arbitrarily put on things. Whether the economic system has prices or not, there are real costs for everything.” When governments implement price controls, like subsidizing the costs of college tuition, they demonstrate a fundamental lack of understanding of the role of prices. Prices serve as the mechanism by which resources such as capital and labor are efficiently used in an economy, guiding and incentivizing both producers and consumers in the decisions they make. By subsidizing the price of higher education, government incentivizes the inefficient use of scarce resources that ultimately drive up the costs of higher education not only for the students and colleges but also for the economy as a whole.

This blatant ignorance of costs and prices on the part of government and politicians is a reflection of the differences in nature between free markets and government. Producers in the free-market are incentivized to provide the best products and services at competitive prices because they must convince consumers to voluntarily give them their money for what they’re offering. Government, on the other hand, has no such incentive, which is why so many government run operations not only have poor quality but also are alarmingly expensive and inefficient. This includes the typical examples of the DMV and the public school system, and if some politicians had their way, “free” college would most certainly be on that list.

If making college “free” is not the way to address the student loan crisis, then what is? First and foremost, the requirements for federal student loans need to be more restrictive, such as inquiring about the type of degree and what major the applicant wishes to pursue. Transitioning loans to the private sector, without the federal government undermining them, would incentivize a more efficient allocation of funding and resources for students who apply. Over time, colleges would recognize that they would now have to compete by lowering tuition costs to attract students because obtaining loans are more challenging and costly. While borrowing students may be faced with a higher interest rate on their loans, it is important to understand that the interest rate in not artificially chosen, rather, it is chosen to cover the risks of loaning in the first place.

Secondly, this proposal would incentivize those who need student loans to pursue fields of study that offer higher job security and income. If the private sector is going to voluntarily risk its money for individuals to go to college, it must be assured that the students they loan to are a good investment and worth the financial risk. This increased scrutiny means that students would be incentivized to pursue more lucrative careers, but also compels students to prioritize whether or not they are serious and fully committed to attending college in the first place.

While some students still may graduate with a high amount of student loan debt, on the whole, they will be much better able to pay off the loans by, first, being more employable and, second, earning a higher income. This reduction in debt also means that students will be better able to prepare for their future by planning for retirement, buying a car, a house, etc. since they will not have to worry as much about their student loans. Society as a whole would also benefit by having more students graduate with degrees in fields that are more beneficial to society and also by having less unemployment for these graduates – alleviating some of the burdens of financing our bloated welfare system.

On the whole, going to college is still worth the costs. However, the rising costs of tuition and student loan debt have been exacerbated by irresponsible government meddling in higher education. As more students seek to go to college, government making college “free” is the last thing it should do.

About the Author

Cullen Steffann
Cullen (FCRH '17) is an economics major with double minors in psychology and marketing. He is pursuing a master’s degree with Fordham’s five-year BA/MA program.