A recent defense of student loans by Jason Delisle of the American Enterprise Institute is, uncharacteristically for him, off-base. He defends the federal student loan program, which he correctly notes is criticized by those on the left (“college should be free”) as well as on the right (“student loan programs have raised the price of education”).

Delisle cites research showing that students borrowing aggressively tend to get better grades, graduate more successfully from college, and get better jobs, promoting not only their own well-being, but that of society.

While in a longer essay I probably would disagree somewhat as to the reliability of the research that Delisle cites, my much more important point is that Delisle does not see the forest for the trees.

Specifically, he ignores a fundamental problem that student loans have helped create: Too many people are getting overly expensive college degrees, while many others drop out before degree completion or end up underemployed, doing jobs historically done quite competently by high school graduates.

Do you really need a college degree to drive a taxi or be a bartender? Many doing those things today have degrees. Are taxi rides faster and safer, or drinks tastier because they are mixed by college graduates? I think not.

A student taking a solid course in the principles of economics by the third or fourth week, if not earlier, should be able to manipulate demand curves to discover that federal student loan programs serve to increase college attendance, one of their goals.

When federal student loans are readily available, the number of students wanting to go to college rises (demand for higher education increases), pushing up both price (college tuition fees) and attendance. If the demand increase induces a supply response, that would increase enrollments even more. The proportion of adult Americans with bachelor’s degrees has more than tripled since 1970, when federal student loan programs were in their infancy.

The Impact of Federal Student Loan Expansion

Six facts seem relevant to the half-century of rapid student loan expansion:

  • First, as just stated, a much larger proportion of adults have degrees in 2020 than in 1970, although the cost of them has soared dramatically.
  • Second, the proportion of recent graduates from the bottom quartile of the income distribution (“the poor”) has declined somewhat over time.
  • Third, despite having a much larger proportion of college graduates, the rate of American economic growth has fallen substantially. Having more college graduates has not enhanced human enrichment.
  • Fourth, income inequality in the U.S. has risen, perhaps enhancing the popularity of the Sanders/Warren brand of politician that arguably is a threat to the capitalistic foundations of the nation that has provided so much prosperity.
  • Fifth, partly financed by higher tuition fees made possible because of student loans, American universities have become profoundly more ideologically uniform, disdainful of intellectual diversity, and dismissive of free expression.
  • Sixth, loan-induced enrollment expansion has led to more genuinely unqualified students attending college, leading to declining academic standards and grade inflation that has led to reduced student work effort and performance.

The simultaneous occurrence of a number of things does not necessarily mean they are causallyrelated, but my reading of statistical evidence suggests they are.

To cite one example, in modern times the American states spending the largest portion of personal income to finance public higher education have had, other factors held constant, relatively lower rates of economic growth. Similarly, I think it is no coincidence that states like California that support public higher education generously often have relatively high levels of income inequality, while ones like New Hampshire with lesser support tend to have lower levels (some empirical evidence is consistent with this observation).

Indeed, American taxpayers arguably have created an anti-egalitarian academic aristocracy concentrated in elite private schools dependent on the federal government’s student loan program and other largess, including special tax benefits and outsized federal research grants.

And while Delisle seems eager to cite in some detail a few studies showing how student loans benefited recipients academically, he basically ignores discussing an impressive literature published by respected organizations such as the National Bureau of Economic Research and the Federal Reserve Bank of New York.

That literature suggests that a majority of per-student federal loan assistance (probably about 60-65 percent) does not result in net additional financial support of college students. Instead, it increases the resources of colleges through higher tuition fees. Those fees have materially funded academic perversities such as vast administrative bureaucracies and, occasionally, large subsidies for ball-throwing competitions. The student gets a dollar more in student loans, but ends up paying 65 cents of that back to the university in higher fees.

Why Does the Student Loan Program Endure Despite Its Many Faults?

In spite of all the dysfunctional dimensions of federal student financial aid and attacks on the system from both the left and the right, why does the system persist with only minor modifications? Why is a system with so many deficiencies so popular politically?

Several concepts from public choice economics are relevant here—I will touch on four of them.

Concentrated Benefits and Disbursed Costs

Currently, perhaps 12 million Americans are either receiving student loan assistance or are college employees benefiting from the high tuition fees the programs permitted. However, another 320 million Americans are not direct beneficiaries and, indeed, shoulder some of the costs. But it is worse: The government usually claims the student loan program finances itself (and maybe even makes a profit). Recently, however, fiscal watchdogs like the Government Accountability Office have revealed that these programs impose real financial costs. A relatively small community of beneficiaries have powerful lobbies like the American Council of Education to pressure Congress to continue and expand these loan programs.

Rational Ignorance

Most Americans are simply ignorant of the costs of the student loan programs, but for good, rational reasons: the per-capita costs are not overwhelmingly large. Moreover, because of dishonesty in federal accounting (if it occurred in the private sector, it would lead to jail sentences for the perpetrators), those costs, such as those for loan “forbearance” and “forgiveness” programs, are largely hidden from the public.

The Short-Sightedness Effect

The policymakers creating student loan policies are politicians whose job security depends on getting re-elected—typically months or a few years in the future. They tend to favor policies that have short-run visible payoffs even if they impose greater long-run costs. Moreover, these costs are largely disguised.

The Law of Unintended Consequences

Sometimes, actions have quite different effects than intended, and that is particularly true of student loans. The student loan programs were created in the 1960s and 1970s to expand access to higher education, especially for lower-income students. In reality, however, these programs led to much higher tuition fees. Since lower-income persons are more sensitive to the price of college, higher fees made college relatively less attractive to lower-income applicants, leading to the decline in their degree completion.

I think a strong case can made that the federal student loan program has led to unproductive overinvestment in higher education, lower academic standards, an explosion in costs, and a decline in low-income Americans on college campuses. Changing the system to make it work better will be extremely difficult.

In general, alternative modes of financing, such as privately funded income-share agreements, need to replace federal programs. Yet, given the important lobbying groups supporting the status quo, such change will be difficult to make. A gradual reduction in student loan eligibility, tightening lending standards, and raising academic standards could lead to improvements. But the chances of that happening appear relatively slim at the present.