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President Obama Doesn’t Understand the Higher Education Bubble

President Obama Doesn’t Understand the Higher Education Bubble

When the government subsidizes colleges with funding in order to achieve a sweeping policy outcome, college administration officials no longer have an incentive to lower costs.

WASHINGTON, DC - FEBRUARY 12: U.S. President Barack Obama, flanked by Vice President Joe Biden and House Speaker John Boehner (R-OH), delivers his State of the Union speech before a joint session of Congress at the U.S. Capitol February 12, 2013 in Washington, DC. Facing a divided Congress, Obama focused his speech on new initiatives designed to stimulate the U.S. economy. (Credit: Getty Images) 

In the State of the Union speech earlier this month, President Obama talked big on higher education. He addressed issues of cost and quality. He reminded us that “most young people will need some higher education” and consequently spoke of his desire to lower the cost of college. He blamed colleges for raising tuition prices and asked for more government regulations to pressure colleges to reduce the cost of an undergraduate degree.

Are all of these issues related to higher education? Of course. Do they all matter?  Certainly.  However, the most important issue in higher education is the existence of the government-created student loan bubble, which endangers the future of tomorrow’s college graduates.  Unsurprisingly, the president did not address this massive elephant in the room, seeming to suggest that higher education policy merely needs a few tweaks from Congress in order to make life better for college students. In reality, such misinformation is dangerous, if not downright immoral.

As with almost every sophism that the president crafts, the assertion that college administration officials are responsible for soaring tuition prices sounds plausible, but is ultimately simplistic. For decades, the federal government has pursued an aggressive pattern of subsidizing the higher education industry while increasing access to student loans. Such measures have been designed to promote the perceived necessity of attaining a college degree in much the same way that government policies encouraged all individuals to buy their own home in the 1990s and 2000s.  We saw how well that turned out for the housing market (and the entire financial sector) in 2008.  Homeowners were left out to dry then, and if the government continues down this road, college students will be left out to dry in the future.

When the government subsidizes colleges with funding in order to achieve a sweeping policy outcome, college administration officials no longer have an incentive to lower costs. They know that government will continue to cover funding increases by either increasing funding to the college or subsidizing the cost of student loans with taxpayer money. Colleges no longer respond to the price needs of their consumers (parents and students), but instead to the distortive effects of government policy. As a result, parents and students have to put up with the stress of high prices and poor job prospects.

This isn’t really too difficult to understand.  Even the Vice President, Joe Biden, admitted that government subsidies increase the cost of college tuition when he was confronted by a rather bright student earlier this month.  Why can’t President Obama realize the same thing?

It is important to note that the President did admit that taxpayers can’t continue to support increasing college costs forever.  Yet, instead of seeking to remove these destructive subsidies and aid grants, which would naturally encourage colleges to lower their prices in order to meet the demands of parents and students; the president wants Congress to force colleges to lower prices in exchange for receiving federal aid.  Essentially, this amounts to creating another government intervention to correct decades of failed government interventions in higher education.

Ultimately, this discussion of the student loan bubble matters because bad policies based on a poor understanding of the higher education climate will harm students, both now and in the future.  President Obama must understand this.  The student loan bubble promises to shatter hopes and dreams for college graduates in the same way that the housing bubble has already shattered the lives of homeowners everywhere.  So long as the government continues to prop up the bubble, artificially subsidize loans, promise that everything is alright even when it’s not, and encourage students to take on the increasingly risky college path, government will set our college students up for failure.

If President Obama truly cares about the future of the 53% of recent college graduates who are currently unemployed or underemployed, he would do well to remember the dangers of using the federal government to disguise and inflate bubbles.  Only by removing aid from colleges and forcing them to respond to the cost concerns of consumers will there ever be any downward pressure in the price of higher education and, consequently, a more stable future for tomorrow’s graduates.


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