The transfer of a sizable portion of the college debt load from students to taxpayers will only cause tuition to soar even further, economists are warning.
It’s “basic economics,” says Adam Kissel, a visiting fellow in higher education at the Heritage Foundation.
“Students will be incentivized to take on more debt in the hope of cancellation later. This will encourage colleges to raise tuition even higher,” he told Fox Business.
President Biden’s $300 billion deal, signed last month, transfers $10,000 from from borrowers earning less than $125,000 a year to taxpayers. And $20,000 in debt is “forgiven” those who received Pell Grants.
Colleges, in fact, have been raising tuition at a rate many times higher than the general inflation rate, as many parents well know. Costs at public universities spiked 213% between 1980 and 2018. And there’s a simple reason for that, economist Stephen Moore points out to his students.
As with health care, government loans and subsidies distort the market. In a free market, universities and colleges would would need to lower prices to draw more students and survive.
“Imagine for a moment that there were no public subsidies for education, and parents paid for their kid’s schooling the way we pay for everything else – by shopping around and finding the best quality at the best price,” Moore wrote in a 2014 column for the Heritage Foundation. “What if there were no government-guaranteed student loans for college or other federal aid to underwrite tuition? Does anyone believe that colleges would cost $30,000 or $40,000 or $50,000? No way.”
Former eduction secretary Bill Bennett came up with what is now know as the Bennett hypothesis, which holds that government aid for students leads directly to an increase in college costs. The Federal Reserve verified the hypothesis, finding that for every dollar in student aid, tuition increases 65 cents.
And while the Biden loan deal likely will drive up tuition, it ultimately will not eliminate the overall student debt burden. The outstanding student debt will return to the current $1.6 trillion in just four years, according to an analysis by the Committee for a Responsible Federal Budget.
And if all debt were canceled, as many progressives demand, the debt would return to today’s level in 15 years, the report said.
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Brian Riedl, a senior fellow in budget, tax and economic policy at the Manhattan Institute, told Fox Business in August that “historically 60% of all student aid increases have been captured with tuition hikes.”
The Biden plan, he said, “will be treated like an increase in student aid moving forward, which suggests that 60% will be countered by tuition hikes.”
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