Tuition-free college could create a masssive moral hazard

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Tuition-free college could create a masssive moral hazard

As the number of Democrats running in the presidential primary approaches the size of a small football team, their specific policy proposals on every issue become even more critical in determining who gets the Democratic nomination. One such proposal that has gained attention, particularly in the college-aged progressive base, is the idea of tuition-free college and student loan cancellation. While Senator Bernie Sanders, I-VT, has led the way since his 2016 presidential run, Senators Cory Booker, D-N.J., Kamala Harris, D-Calif., and Elizabeth Warren, D-Mass., have been quick to follow suit with their own support of “college for all.” While obviously appealing to young people who carry tens of thousands of dollars in student loan debt, such policies would exacerbate the existing student loan bubble and create more problems than solutions. We must avoid this siren song at all costs. 

A college education, just like a house or a car, is an investment that requires a loan to purchase. Such simple transactions, while expensive, make it possible for the average person to live at a higher standard of living than would otherwise be possible in a world without credit. Student loans should be no different. Unfortunately, however, the policies of well-meaning politicians have corrupted the economic calculus and led to a pattern of graduates weighed down by mountains of student loan debt and unmarketable degrees. Furthermore, student loans carry a more substantial risk for lenders because a college degree cannot be repossessed like a physical commodity such as a house or car. Politicians have obfuscated his simple economic fact, however, by the doctrine of fairness popular amongst those on the economic and political Left. 

This phenomenon, while unintended, is not complex. Over the last few decades, Democrats and Republicans alike have expanded federal student loans to allow more young people to attend university. According to the National Center for Education Statistics, nearly 20 million students enrolled in American colleges and universities last fall compared to the little more than 15 million who enrolled in the fall of 2000, an increase disproportionate to the rate of population growth. This is not the whole story, however. The average graduate now leaves their undergraduate institution with a debt of $37,172, according to Josh Mitchell of the Wall Street Journal, an amount more than twice the average college debt in 2002 according to CNN Money. While some may say this is the necessary tradeoff for a better future, 43 percent of recent college graduates report underemployment (working a job that does not require their college degree) in their first job out of college, and of those, two-thirds report still being underemployed five years after graduation according to a 2018 report by the Burning Glass and Strada Institute. 

By extending loans to essentially all applicants, the federal government increased the demand for a college education, in part contributing to continually rising tuition prices. With more students willing and able to pay tuition thanks to taxpayer-funded loans, colleges raise prices. Rather than evaluating the long-term costs of loan repayment versus future earning potential, students are simply attending college because they have been told that is a necessary step towards professional success. Even worse, once students matriculate they are told to follow their passions and study what interests them rather than what they can use to earn money and repay their loans. Long gone are the days of careful calculation of compound interest payments used to determine whether a college education is the correct path. Education should be about much more than technical training with the sole purpose of earning a large salary, but going tens of thousands of dollars into debt to study an unmarketable discipline is a luxury most people cannot afford. 

The college system is already unsustainable system and the proposals of current Democratic presidential candidates threaten to make it even worse. While the propositions of tuition-free college and loan forgiveness by those such as Sens. Sanders, Booker, Harris, and Warren are extremely popular with young voters, they are disastrous. Just like the 2008 bank bailouts, student loan cancellation and free college would create an enormous moral hazard problem. Rather than holding students accountable for their decisions and expenditures, these proposals would allow students to waste real resources on questionable degrees. What is more, the resources used to finance the increase in students loans—whether through federal aid or private companies—are often the savings of average Americans, not the excess profits of massive banking conglomerates. Furthermore, these large debts often leave graduates in a worse position than they started as they work a job which does not necessitate a college degree. 

The real problem is the skyrocketing cost of college, not access to loans. If people demonstrate intelligence and hard work throughout high school, they will be able to get a private loan to pay for undergraduate years. And they will choose to take this loan only if they foresee their degrees paying off their loans. Refusing to hold students responsible for how they invest others’ money will only lead to lower quality of education and worse graduate outcomes. Common sense tells us that you play differently with house money than you do with your own. Unfortunately, common sense is something the current Democratic primary field lacks. Perhaps a refresher of their undergraduate economics course would help, and why not? The loans certainly are available.