Government-funded education is hurting America’s youth

In 1972, the federal government created Sallie Mae and entered the business of higher education. The goal of Sallie Mae was to replicate in the student loan market what its cousin, Fannie Mae, had done in the mortgage market: subsidize borrowers by having the government guarantee their loans. Since 1972, Sallie Mae has grown from being a guarantor of loans issued by private lenders to itself a provider of subsidized student loans with a government-granted monopoly over the market.

Politicians justify this government intervention — and then takeover — as necessary to make college more affordable, and therefore the benefits of college more accessible, for students.

If only that were true. While noble in intent, government intervention has been disastrous in effect. The true legacy of Sallie Mae is higher tuition prices and lower education quality for America’s youth.

First, government loan subsidies have made college more, not less, expensive for students. Research from the New York Fed shows that colleges increase tuition prices $0.60 for every $1 increase in government loans made available to students. In other words, for each additional $1 that taxpayers lend to students, 60 cents is immediately taken by colleges in the form of higher tuition prices. The actual effect of every $1 provided to students is therefore $0.60 more of student debt.

This is the revolving door of government-funded education. Subsidized funding begets higher prices, which begets the need for more subsidized funding. The only true winners of this vicious cycle are the politicians who pander to the illusion of “free,” and the colleges themselves, which have no incentive to control costs — the number of professional staffers per student has doubled since the 1970s — while taxpayers continue offering them blank checks. Parents and students lose.

It is no wonder tuition prices have increased 1,400% since the 1970s, quadruple the increase of general inflation, and it is no wonder that total student debt is rapidly approaching $2 trillion.

Both are symptoms of well-intended but costly government intervention.

Second, government subsidies have hurt, not helped, student outcomes. By blindly giving students blank checks, the federal government is actually giving colleges the perverse incentive to maximize student enrollment instead of student performance. This happens because colleges get the benefit of enrollment without bearing the cost of bad outcomes. In other words, American taxpayers guarantee any college any amount of money so long as the college can attract any student.

Colleges, therefore, become not academic institutions but marketing machines.

Too often, the marketing is false advertising. New research from the St. Louis Fed found that the benefit of college has dropped precipitously post-World War II, and for those born in the 1980s — the last decade examined — the value is “statistically indistinguishable from zero.” Today, the value of college is very likely negative.

I blame bad policy. By not holding colleges accountable for poor student outcomes, the government is eroding college quality by empowering colleges to teach students not the skills that the market actually demands, but the skills that colleges think should be in demand. The consequence is that more than 40% of college graduates today are in jobs that do not even require a college degree.

Unfortunately, politicians are now ignoring these past failures by calling for even more government in higher education. Requests include the cancellation of student debt and tuition-free colleges. These proposals double down on the perverse incentives that created the problem in the first place. Therefore, the most likely outcome is that these policies hurt the precise students that they are intending to help by further increasing the cost and further lowering the quality of a college education.

Furthermore, these status-quo proposals will lead to even more taxpayer-funded bailouts in the future. Canceling student loans may lower total debt levels today, but does nothing to prevent the upward trajectory from re-starting again tomorrow.

A better policy solution to the student loan crisis is to fix its underlying cause. Congress should return the student loan market to private hands and allow competition among independent lenders to breed market efficiency. An immediate benefit of privatization is that the free market will hold colleges accountable for the performance of their own students’ loans, incentivizing those colleges to both lower tuition costs and improve student outcomes.

A longer-term benefit of privatization is that the private market will eliminate colleges that fail to produce outcomes for students that are commensurate to the cost of tuition. If for-profit colleges are in fact a scam — or if any college is a scam — what better mechanism is there than the private markets to eliminate them? Politicians calling for the government to cancel student debt are suggesting that the American taxpayers should pay for the failures of America’s colleges. I believe that colleges should pay for their own failure.

The American Dream is built on the promise of social mobility through hard work and education. We are failing to uphold that promise, and a higher education system that does more to burden young Americans with student debt than to equip them with the foundations of professional success is the root of that failure.

Bad incentives from misguided policymaking led to this bad outcome. Change the outcomes by changing the incentives.

William Faulkner grew up in Homer. He is currently studying as an MBA student at Stanford University.

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