On Tuesday House Speaker Paul Ryan and congressional Republicans released a wide-ranging blueprint laying out their agenda to fight poverty. While the blueprint paints more in broad outlines than in policy minutiae, its direction is generally promising on the higher education front. It sketches out investments in career and technical education, a reduction in the regulatory burden on colleges and universities, and reform of federal student aid.
However, the room full of elephants fails to address the elephant in the room: the need to not just reform federal student aid, but limit it.
The blueprint rightly notes the complexity of higher education subsidies. Currently Uncle Sam offers college students six different kinds of loans, nine repayment plans, four separate grant programs, and an array of tax credits and deductions. Certainly, simplifying all this should be a priority. But even if policymakers rolled all these programs into one, an excessive subsidy would remain.
Federal Pell Grants have a maximum annual award of $5,815—worth $23,260 if a student graduates in four years. Parents can also claim the American Opportunity Tax Credit against their child’s tuition for up to four years—that’s another $10,000. On top of that, dependent students can borrow up to $31,000 through regular student loans at subsidized interest rates. Independent students get up to $57,500. Go to graduate school or take out a Parent PLUS loan, and the depth of federal generosity becomes effectively unlimited.
Simply combining these myriad programs into one, without reducing the overall subsidy amount, would still leave many of the problems that plague American higher education.
For starters, such a generous subsidy drives increases in tuition. The reason is simple: when students can pay more, colleges charge more. This is the main reason college costs increased 422% since 1982, while consumer prices as a whole have only risen 138%.
Moreover, excessive federal aid crowds out a private market for college finance, as AEI scholars Andrew Kelly and Kevin James discussed in a report released last week. Since the government makes student loans at an economic loss, private lenders cannot compete. It might be a foreign concept to federal bureaucrats, but prolonged loss-making in the private sector means going out of business. This crowd-out is a shame—federal student loans are currently made with little regard to the student’s future prospects or the quality of the college. A larger role for the market would introduce more accountability, since private lenders would have their own money on the line (not the taxpayers’), and would hesitate before making questionable investments. With nearly half of direct student loans not in repayment, it is clear that the current, government-controlled market does not operate in optimal fashion.
Finally, generous federal student aid is regressive. While stories of students with six-figure debts and no jobs dominate headlines, the reality is the inverse. The vast majority of defaults come from small borrowers who likely dropped out of school and had trouble finding a well-paying job. By contrast, those with the largest debts—and thus those who received the most in taxpayer subsidies—usually incurred them by attending graduate school. These are the doctors, lawyers, and businesspeople of tomorrow: our economy’s biggest winners.
Simplifying federal student aid is important, but a holistic agenda would both simplify and reduce. Paul Ryan should be proud of his anti-poverty blueprint, but it is difficult to see how federal student aid reform would be effective without this crucial component.
Preston Cooper is a policy analyst at the Manhattan Institute. You can follow him on Twitter here.
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