The Higher Education Bubble

Subsidies in the form of loans or grants to students have been an integral part of higher education for decades. With the recent downturn in the economy, however, the federal government has sought to increase its role in education. Richard Vedder, from the Center for College Affordability and Productivity writes, there are two issues the federal government is considering – one, whether repayment of loans should be tied to income and two, whether private providers should be cut off from federal guarantees and subsidies.

Vedder says, “making loan programs more generous is setting us up for another financial crisis, albeit on a smaller scale, like that occurring in the housing market.” What he means is, subsidizing bad investment decisions on the back of taxpayers will only exacerbate the problem.

The Obama administration wants to tie repayment of loans to income levels, limiting the payments to 10 percent beyond subsistence. This raises two issues. First, how does the federal government define subsistence? Because most students have payments that are 10 percent of all their income, let alone beyond subsistence. Second, forgiving loans will only increase the liabilities of the federal government, the burden of which will be borne by taxpayers.

Vedder succinctly diagnoses the problem and his recommendation:

“Too many kids are going to college, borrowing too much money, enabling too many universities to employ too many people, do too many non-academic things, enjoy too large economic rents, etc. etc. Stopping the expansion of student loans would force either a mini-crisis of a financial nature that will lead to true reforms, or significant enrollment declines that are needed if the cost explosion is to be contained.”