Hillary Clinton made headlines with a proposal to allow anyone to attend public colleges and universities without taking on a loan. It should be obvious that this is not possible without an enormous amount of unintended consequences, and that it is a recognition of the current financial havoc that federal intervention has brought upon higher education.
What may be less obvious, but perhaps more important, is that her program would lead to a further encroachment of the federal government into the independence of our higher education system.
Much has been written about how federal government loan programs have driven up the price of higher education tuition. Ten years ago, I published a Cato Institute paper titled “Making College More Expensive: The Unintended Consequences of Federal Tuition Aid,” making the point that if you subsidize the purchase of a good or service, you will increase the demand for it and drive up the price. Just recently, the Federal Reserve Bank of New York released a study showing that federal loan programs and Pell Grants have resulted in substantial increases in tuition.
Another unintended consequence of federal intervention in higher education is a massive increase in student debt. Today, student debt stands at more than $1.3 trillion and is the highest form of household credit, with more than 43 million Americans owing it.
This is not something we should be surprised at — providing loans at subsidized rates to people without much credit history will lead to a lot of borrowing. And, as James Buchanan, a Nobel laureate economist, pointed out 45 years ago, when students are subsidized when purchasing higher education, they will buy more of it than is economically efficient, and they will view at least some of their purchase as entertainment rather than educational investment.
Mrs. Clinton’s proposal tries to deal with these unintended consequences with vastly more federal government intervention. It would use another $350 billion of taxpayer money to address the same higher tuition costs and massive student debt that the current programs have encouraged.
Her solution — to add more federal money with constraints on state public universities and colleges in order to receive the money — cannot possibly reduce the incentives for students to take on more debt, and its attempt to freeze prices for higher education will only create more misallocations in the higher education market.
The most insidious part of her proposal is the use of federal money to encroach further into the independence of higher education in America. While the details as to how her program would work are sketchy, states would be required to increase state spending on higher education (while already increasing their spending on Medicaid to get federal money under the Affordable Care Act), and the colleges and universities will have to alter their spending to meet federal government requirements.
Once the Clinton program is in place, it would be very difficult for colleges to withdraw from the federal government largesse when more and more requirements are placed upon them. My institution, Hillsdale College, does not take any government money and replaces any federal loan or grants with private-sector grants in order to maintain its independence. Unfortunately, no more than a handful of institutions practice this level of financial independence.
Economist and philosopher Friedrich Hayek pointed out more than a half-century ago that democracy only makes sense if you can form an opinion independent of your government. If the vast majority of students attend colleges that are bound by federal government restrictions, this ability to inform their own opinions will be further degraded.
As an example, what will keep the Department of Education from requiring colleges and universities to spend more money on classes in “gender studies” or less on “classical literature” in order to receive the new federal government largesse?
The Clinton proposal is clearly an attempt to promise the 18- to 45-year-old demographic something for nothing. The “cost” of the program in terms of extra federal government spending is to be borne by “the rich.”
Magically, higher education will be produced in a way that Mrs. Clinton can fulfill her wish: “I want every parent to know that his or her child can get a degree.” She should keep in mind what Marianne Faithful sang in 1967: “Don’t make promises that you can’t keep.”
• Gary Wolfram is the William E. Simon professor in economics and public policy at Hillsdale College.