The president gave a speech on August 22 in Buffalo outlining his proposal to “reform” the student loan program. He acknowledged that the program has some problems, but assured the audience they are easily fixed. Just take the principles behind Obamacare and apply them to education. The president personally “guaranteed” that his proposals would make college more affordable.
Here’s the plan. The government will rate colleges based on fees (the lower the better) and graduation rates (the higher the better) and student success in finding a job. Then student loan funds will be allocated to schools according to the rating. Students will also be guided to the best-rated schools via government web sites. And schools will get more funding if they set up demonstration projects to reduce costs. This will all encourage more “competition” among schools. Yes, you heard that right: more government control of colleges will increase market “competition.”
We don’t have a 2,000 page bill in Congress yet, but it’s all quite familiar: government will take even tighter control of higher education just as it has taken even tighter control of medicine, and use Obamacare as its operating manual. Of course, Obamacare not only rated medical insurance policies; it mandated what would be in them at what prices, which in effect put government in charge of defining what healthcare is. Presumably, the government rating of schools will in due course also lead to mandates and the government defining what higher education is. Obamacare also set up government sites where people would be steered to buy government approved policies, and set up demonstration projects, even though the history of government-inspired healthcare demonstration projects has been dismal.
There is a lot more in common between Obamacare and Obamaschool than these superficial characteristics. Obamacare came into being because of a crisis in medical care. As usual, that crisis had been caused by earlier government interventions in medicine, especially price controls. At present, Medicare price controls about 7,500 medical procedures. Because payment varies by location and practitioner (e.g., doctors employed by hospitals get paid more than other doctors), it has been estimated that Medicare price-controls six billion medical transactions at any one time. As government has come to dominate medicine and price-control it, prices have inevitably risen at a rate that threatens to bankrupt the economy. Obamacare has doubled down on the price controls, mandating allowed price increases under Medicare and installing a price control board. All of this will no doubt lead to the kind of legislation recently passed in Massachusetts where any “material” change in a medical practice, in either prices or services, must be approved by the state.
Obamaschool is coming into being for similar reasons. In this case, the government set up a student loan program which was ostensibly designed to subsidize students. But whenever government subsidizes demand without increasing supply, prices inevitably rise, and this was no exception.
As President Obama pointed out, “Over the past three decades, the average tuition [and fees] at a public four-year college has gone up by more than 250 percent. 250 percent. Now a typical family’s income has gone up 16 percent. That’s a big gap.” Yes it is.
In reality, both the 250 percent and the pitiful 16 percent have been caused by government policies, especially price manipulations and controls. The 250 percent increase in fees (mitigated somewhat by increases in student aid) has specifically been driven by government’s mistake in flooding schools with student loan money. That money did not help students; it enabled schools to keep raising fees. What students mostly got out of the loan program was an early initiation into massive debt. If leaving school with heavy debts is not exactly slavery, it certainly represents some kind of indentured servitude.
Obama was more than a bit mendacious about this debt burden. He took credit for keeping student interest rates down. He even said that “government shouldn’t see student loans as a way to make money; it should be a way to help students.” But the reality is that his administration is currently borrowing money at negligible interest rates and then relending it to students at much higher rates. The difference is booked elsewhere in the federal budget under “deficit reduction.” If that isn’t a clear case of using student loans as a way to make money, then what is?
What will really happen if the federal government completes its takeover of higher education pricing? The certain result will be even higher prices, which will then lead to calls for a complete federal takeover, just as advancing prices under Obamacare are now leading to admissions by Senator Reid and Congresswoman Pelosi that it was only intended to be a stepping stone to a “single payer” system in which government in effect nationalizes all healthcare. Nationalizing healthcare would make the crisis worse, not better, but Reid and Pelosi don’t understand that.
The president’s specific proposals for student loans will have some other presumably unintended effects as well. If schools get more federal money as their graduation rate increases, they will simply stop taking students who are more likely to drop out. That of course means they will stop taking disadvantaged students who need help the most.
The administration says that it will get advice from schools in devising the rating system. This is all we need: closed door meetings in Washington between the government and special interests with the consumer excluded. This is exactly how Mussolini ran Italy and Roosevelt tried to run the U.S. with the National Recovery Act. The results of dismantling a consumer-driven market economy will be no better now than they were then.
Hunter Lewis is cofounder of Against Crony Capitalism. He is the former CEO of Cambridge Associates and the author of eight books, including two new books, Free Prices Now! and Crony Capitalism in America: 2008-2012. He has served on boards and committees of 15 not-for-profit organizations, including environmental, teaching, research, and cultural organizations, as well as the World Bank.
This article comes from the Ludwig von Mises Institute and was published under a Creative Commons Attribution license.