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SOTU
On College Affordability, Obama Swings and Misses

President Obama was right to highlight college affordability at his State of the Union address last night. America’s exploding student loan debt has become a national scourge, helping to hold back consumption and household formation, increasing inequality, and—in the long-run—causing wider trouble as borrowers start to default at higher rates. But his proposed solutions fell short of the mark:

And we have to make college affordable for every American. Because no hardworking student should be stuck in the red. We’ve already reduced student loan payments to ten percent of a borrower’s income. Now, we’ve actually got to cut the cost of college. Providing two years of community college at no cost for every responsible student is one of the best ways to do that, and I’m going to keep fighting to get that started this year.

The first of Obama’s proposed policy responses—extending and deepening student loan subsidies—is likely to make the problem worse in the long-run. One recent study found that federal loans account for almost all of the increase in college tuition over the last generation. As our friend Glenn Reynolds likes to say, “when you subsidize something, the cost goes up.” This is as true of higher education as it is of any other service. This doesn’t mean that the government should get out of the student loan business all at once, but it does mean that, if serious cost reduction is your long-term goal, extending subsidies is not a sustainable strategy.

The President’s second proposed policy, publicly funded community college, is also not a wise allocation of resources. As we’ve noted before, just one in four people who enroll in community college today will have a degree in the next five years. Many enrollees are there for remedial high school coursework. We are not optimistic about pumping more money into an inefficient system that already allows so many students to fall through the cracks.

A better approach would combine tighter criteria for student loan subsidies with regulatory changes that would enable a more dynamic higher education system. A study commissioned by Vanderbilt University found that federal regulatory burdens, which have grown and grown in the last decades, cost American universities around $27 billion per year. Moreover, the federal monopoly on higher education accreditation stifles competition, preventing new and alternative forms of education delivery from getting traction. To his credit, the President has taken steps to support vocational education, but the government could still do more to make room for alternatives to the four-year brick-and-mortar college, like online education.

In higher education as in healthcare, the answer is to be smarter, not merely spend more.

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