Obama Student Loans Plan Will Make College Costs Soar Too

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Obama Student Loans Plan Will Make College Costs Soar Too
April 07, 2010 10:02 AM ET | Brandon Greife
By Brandon Greife, Thomas Jefferson Street blog

Quick. How much does an MRI cost? Or an appendectomy? Or a cesarean section? Now, how much was your college tuition? If you're like me, you couldn't even give a ballpark figure for any of the medical procedures, but are intimately aware of how much you paid for college. President Obama's recently passed student loan reform may begin to hide the true costs of college tuition. However, as soaring healthcare expenditures attest, hiding the cost is not always best for the bottom line.

Student loan reform was desperately needed. The current system was an adulterated mess of government subsidies ensuring both private lender profits and an affordable education. Students can also find reason to cheer. The new legislation allows for lower monthly caps on student loan payments—down to 10 percent of discretionary income. It also shortens the forgiveness period to 20 years, after which the federal government may forgive the balance.

The applause from young adults may be short-lived. With one swipe of the pen President Obama sought to slam the brakes on runaway healthcare costs while unwittingly stepping on the college tuition accelerator.

The cost of healthcare has been removed from the free market. On average, patients pay only 23 cents on each dollar of medical expense incurred, skewing economic perceptions of healthcare costs. As the direct link between consumers' wallets and medical costs becomes more attenuated, there is less market pressure to keep costs low. As Ezra Klein recently wrote,

Imagine if people who touched a hot stove felt only a small fraction of the pain from the burn. That's pretty much what's happening in our health system. It hurts enough that we would prefer it to stop, but the urgency is lost . . . The surest way to cut healthcare spending would be to make people shoulder more of the burden directly.

The same problem is occurring with college tuition. According to the College Board, the average published tuition of a four-year, in-state public college is $7,020, and the average grant and tax benefit per student is $5,400. That means on average, students pay 23 cents of each dollar going toward college tuition. By increasing Pell grants, shortening the debt forgiveness period, and lowering the cap on payments, the student loan reform legislation will further decrease the out-of-pocket costs of a college education.

Although students will be excited to know they have more weekend spending money, the long-term impacts of the recently enacted reforms will cost taxpayers in the long run. The reason is that as rational economic actors, colleges will incorporate any increase in federal assistance to students in their tuition decisions. As former Secretary of Education William Bennett explained,

If anything, increases in financial aid in recent years have enabled colleges and universities to blithely raise their tuitions, confident that Federal loan subsidies would help cushion the increase.

By divorcing the cost of college from the free market, the government is unintentionally driving up the cost of a college education. Students would normally be the ones to pay in the form of higher tuition costs. However, since the lifetime of many loans will now be capped, someone will be forced to pick up the slack. That someone is taxpayers, who will increasingly be forced to subsidize the ever-increasing costs of a college education.

The unfortunate reality for students is that one day we too will be taxpayers. Enjoy the extra beer money while you can—we'll be making up for it in taxes for the rest of our lives.