Anybody with a modicum of knowledge of economics should know that when you subsidize something, you get more of it. When you subsidize something to the extent that we subsidize higher education in this country, you get a much higher than socially optimal level of consumption. The government sets interest rates on student loans, meaning that many students pay rates below what they would be offered by a private lender.
This means that they don’t have to fully weigh the costs of getting a degree in something of dubious practicality. Obama’s suggestion that student loans should be forgiven after 20 years further funnels people into higher education programs which don’t make people much more productive.
Since college graduates tend to be amongst the higher earners in society, subsidized student loans are regressive and a handout to the upper middle class. Barack Obama said that giving students loans at below market interest rates does not constitute a handout, but as National Review points out, he is simply shoveling money to college kids. College students may play a pivotal role in the election, so this a shrewd political move by Obama.
A couple of weeks ago, Mitt Romney responded to a heckler asking for free birth control by informing her that “The Other Guy” is the candidate of free stuff, indicating to fiscal conservatives, such as myself, that he would take a stand against the endless subsidies and handouts of the federal government which distort incentives and place a large burden on taxpayers.
Unfortunately, Romney, too, has come down on the side of free stuff, too often.
For example, Romney wants to extend the College Cost Reduction and Access Act in order to keep the rates of certain students loans at 3.4% rather than allowing them to rise to 6.8%. While Republicans will purportedly fund the cuts by taking money away from Obamacare to prevent an increase in spending, such subsidies remain fiscally irresponsible.
In contrast, Senator Mike Lee of Utah recently responded to a constituent at a town hall by saying that federal involvement in higher education is of dubious constitutionality. Its nice to know that a few Republicans still stand for fiscal sanity rather than pandering to important demographic groups.
At most, education subsidies should be handled by state governments rather than at the federal level. In reality, such subsidies distort incentives and cause people who shouldn’t go to college to waste four years something that isn’t applicable to the real world.