While it’s unclear what exactly President Obama will propose, economist Richard Vedder calls the idea of student loan forgiveness “the second-worst idea ever—the worst was the creation of federally subsidized student loans in the first place.”
And he’s right: It is unfair to forgive student loans on the backs of waitresses and construction workers and the nearly three-quarters of Americans who didn’t graduate college. Increases in federal subsidies or student loan bailouts shift the burden of paying for college from the student—the person directly benefiting from college—to the millions of Americans who did not graduate from college.
Moreover, increases in federal subsidies over the decades have not reduced college costs. Even though federal subsidies like Pell grants have increased 475 percent, the cost of attending college has increased 439 percent since 1982—faster than the rate of health care increases.
Increases in federal subsidies give students increased purchasing power, which incentivizes colleges to raise tuition, in turn leading students scrambling for more student loans. It’s a vicious cycle that does nothing to mitigate the cost of attending college.
Instead of increasing federal subsidies or forgiving student loans, reforms like limiting the number of years a student is eligible for federal subsidies—or even encouraging state universities to put more course content online—would go a long way in popping the higher ed “bubble.”