Of all of his proposals, Bernie Sanders’ platform regarding higher education — namely, making college free for everybody — has been the most widely discussed.
On his website, he lays out a six-part plan on how to make this happen:
- Make tuition free at public colleges and universities;
- Stop the federal government from making a profit on student loans;
- Substantially cut student loan interest rates;
- Allow Americans to refinance student loans at today’s low interest rates;
- Allow students to use need-based financial aid and work study programs to make college debt free; and
- Fully paid for by imposing a tax on Wall Street speculators.
Sanders’ higher education platform is — to put it in the nicest possible terms — pure fantasy. He relies upon populist emotionalism, questionable economics, and illogical cross-national comparisons to serve as the shaky philosophical foundations of his plan, and I would like to address and debunk his primary talking points.
Make Tuition Free at Public Colleges
His first step reads like a Nike slogan: “Just do it.” The first bullet point simply says, “Make tuition free at public colleges and universities.”
Without elaborating further on this point, Sanders instead defaults to his usual argument of “well, Europe is doing it.” He alludes to Germany eliminating its tuition fees. For those who are familiar with the unique German education system—where a bifurcated student pathway leads students down a path of either vocational apprenticeships or traditional liberal arts academia, starting at as young of an age as 10 years old— they should know that the comparison goes beyond apples and oranges. It’s more like apples and orangutans.
California hosts about the same amount of public universities as Finland, Norway, and Sweden combined.
He also references tuition-free Finland, Norway, and Sweden, arriving at the conclusion that “if other countries can take this action, so can the United States.” If one ignores the size, demographics, and tax rate of these countries, then one can jump to the same illogical conclusions as Sanders.
For perspective, California hosts about the same amount of public universities as Finland, Norway, and Sweden combined. In addition, these three countries combined represent roughly half the population of California. To suggest that the same policies can easily transplant themselves into a completely different national context is intellectually lazy.
Scandinavia might represent a microcosm for Sanders to infatuate about, but it is not representative of the larger, vastly more complex American narrative.
Liberals get frustrated when conservatives attempt to draw comparisons on gun policies between the U.S. and Switzerland —so why isn’t the same logic applied in these circumstances?
Stop Federal Government from Making a Profit on Student Loans
This is a situation where you are damned if you do or damned if you don’t in the eyes of Sanders.
Prior to 2010, the primary financial institution that was leveraged for student loans was the banking industry. The federal government guaranteed the loans, and the banks functioned as the intermediary that collected the interest payments. Considering Sanders’ rhetoric regarding banks, it would be hard to fathom him wanting to return to this financial model.
Sanders would obviously prefer that student loans stay within the sphere of the public sector without any corporate favoritism demonstrated toward the private sector. However, he would prefer that the government not profit from this practice.
But how much does the government profit from student loans? Estimates vary.
According to the Government Accountability Office, from 2007 to 2012, the federal government generated $66 billion in profits from student loans.
However, that figure has been challenged by the Congressional Budget Office for not using the preferred fair value accounting methodology, because it entails a more comprehensive analysis that includes market risk and a wide variety of macroeconomic conditions.
When using this methodology, the federal government actually projects an $88 billion loss in net revenue from what it takes in (or rather shells out) for federal student loans.
Regardless of the figure, Sanders’ logic is still missing the mark. A profit made by the federal government is wholesale different from a profit generated by a private entity. Profits generated by a business are returned as dividends to shareholders and investors; for a public entity providing a public good, revenue generated is reinvested back into the program (in theory).
Rarely does the federal government have the capacity to generate revenue that is sustainable and can be regenerated by investing more dollars back into the program. Considering the scale of our country’s deficit, perhaps the federal government could benefit from a little profit motive here and there.
Cutting Interest Rates and Allowing Current Debtors to Refinance at Lower Rates
In December, Senator Sanders tweeted the following message: “You have families out there paying 6, 8, 10 percent on the student debt but you can refinance your home at 3 percent. What sense is that?” (Please note that following the fallout of this tweet, Sanders’ camp deleted it.)
For anybody with even a basic understanding of economics, this rhetoric should be infuriating.
Profits generated by a business are returned as dividends to shareholders and investors; for a public entity providing a public good, revenue generated is reinvested back into the program (in theory).
For student loans, the primary requirement for applicants is at least half-time enrollment in a post-secondary program, registration with the selective service (if you’re a male between the ages 18 and 25), and being a U.S. citizen or eligible non-citizen.
There is no consideration of the applicant’s ability to repay the loan, so it’s quite easy for a student to finance a degree with low market value with tens of thousands of student loan dollars. There is no risk assessment of applicants’ potential for default, all while student loans traditionally have a higher default rate in comparison to mortgages. There is no collateral requirement, so loans are not secured and recipients invest nothing initially into their loan disbursements. Also, recipients aren’t required to make payments until after they have completed their degree or drop below half-time status, so whoever owns the debt might not see a return on a single account for years.
Needless to say, student loans represent a higher risk than home loans. Based on this risk, it makes complete economic sense for interest rates for student loans to be higher than home loans. Even if current debtors are allowed to refinance, it would be doubtful that any underwriter would offer a rate comparable to what is available for mortgages.
Increase of Need-Based Scholarships and Work Study for Low-Income Students
Sanders would require that public universities “meet 100% of the financial needs of the lowest-income students” and all financial aid should cover room and board, books and living expenses.
Hard to argue with this one, right? Everybody likes scholarships for poor kids, right?
If only it were that easy.
The most prominent needs-based scholarship is the Pell Grant. Established with the passing of the High Education Act of 1965, Pell Grants have been considered the stalwart revenue stream for America’s most needy college applicants.
In recent years, the Obama administration has worked tirelessly to increase access to Pell Grant funding for America’s neediest students. Between 2007 and 2011, public investment in the Pell Grant increased from $13 billion to $41 billion—a 205 percent increase.
However, studies have found that the Pell Grant directly contributes to inflated tuition prices. The Federal Reserve Bank of New York found that every dollar awarded by Pell Grants resulted in a 55 cent increase in the “sticker price” of college tuition for students. This residual effect, in conjunction with federal student aid, has continued to inflate the price of tuition year after year.
Throwing more public money toward higher education has seemed to create an opposite effect on the affordability of college. In inflation-adjusted figures, public investment in higher education is ten times higher now than it was in 1960. (For perspective, military spending is only 1.8 times higher.) Meanwhile, college tuition is 1,120 percent higher during roughly the same time period.
Furthermore, this pillar of the Sanders plan seems to stand in contrast with the first pillar. Is the goal of his higher education plan to make college accessible for the poorest Americans or for all Americans? If public education is suddenly free (as step one magically accomplishes), then why the need for increased financial aid? Also, making college free for everybody means making it free for the wealthiest Americans who could otherwise afford it. Isn’t Bernie supposed to be adamantly opposed to any subsidized handout to the sons and daughters of the richest 1%? These questions present fundamental philosophical flaws to the proposal.
Tax on Wall Street Speculation
Considering the general sentiment toward Wall Street (replace “sentiment” with “condemnation”), this is an easy sell politically. Sanders points out, “If the taxpayers of this country could bail out Wall Street in 2008, we can make public colleges and universities tuition free and debt free throughout the country.”
This is a great populist sentiment, but not really a realistic political or economic vision. According to a panel of 22 economists (representing the full spectrum of ideological persuasions), twelve stated the speculation tax wasn’t feasible, six were uncertain, and four thought it was feasible. In response to the possible imposition of a 0.5 percent tax on stock trades and 0.1 on bonds, economist Richard Thaler states, “Though a case can be made for a transactions tax, these rates are really high.”
(By the way, this same panel almost universally agreed that the “make tuition free” portion of the plan was completely unfeasible.)
One oddity to take into consideration is that colleges and universities often rely upon endowments that are directly linked to the exact trading that Sanders proposes to be taxed. Colleges leverage endowment funds to pay for operational expenses, including their own private, institutional scholarships that typically are used to meet the need of their lower-income students. Granted, endowments are typically associated with elite, private colleges, but public schools are equally exposed to this tax. In fact, 20 of the largest 40 college endowments are owned by public schools. The “robbing Peter to pay Paul” metaphor is marginally applicable here.
Research on the historical effects of financial transaction taxes (FTT) are not very rosy either. According to a report released by the Tax Policy Center (a nonpartisan think tank), empirical evidence suggests that FTTs reduce trade volume, increase market volatility, and distort market values. The report also points out the oversight and compliance costs that would be necessary to accurately report, track, and audit approximately 25 billion annual trades. In addition, the report highlights that FTTs disproportionately and negatively impact smaller investors—such as the pensions of middle class families who are trying to maintain financial solvency with a child in college—in comparison to larger corporate entities. “The notion that the FTT would hit ‘banks’ or ‘investment houses’ is misguided,” the report states.
Sanders is offering the same, tired “tax and spend” agenda that has failed higher education for the past five decades.
The vicious cycle works like this. College bound students can’t afford college, so they complete the Free Application for Federal Student Aid (FAFSA) to demonstrate their need. Their need is accessed by the Department of Education, who in turn provides its assessment back to the colleges. Colleges generate a financial aid package based on that assessment, which includes the variety of grant and loan programs that students qualify for. Students enroll with their “discounted” tuition bill, thinking they have achieved the most affordable option. Colleges get reimbursed by DOE with a huge influx of public funds based on the terms of the financial packages agreed upon with enrolled students. Sometimes these funds cover traditional educational expenses, but most of the time they are used for a wide variety of non-academic purposes (new construction, student life enhancements, administrative positions, etc.). These increased expenses justify the gluttonous budget, but sets the stage for new projects that “need” to be completed in order to keep up with the “prestige arms race”—resulting in the need for further funding that can be easily compensated by increasing tuition. And with the increase in tuition, next year’s batch of college bound students can’t afford college. Time for the FAFSA again.
If Bernie is interested in public funds used to reduce college tuition, then he might consider bypassing the middle men in this equation—the colleges and universities—and paying students directly. Armed with a public stipend, college applicants would be courted by colleges trying to offer the better deal to maximize their federal check, possibly leaving extra to cover books and housing. At least in this scenario, a little competition exists, and may inspire post-secondary institutions to sing for their supper.
Furthermore, if Sanders is serious about reforming higher education, he will also need to develop a national strategy on how to change the partisan composition of Congress before he even begins crafting legislation. Considering his national popularity at the moment, Sanders should consider piecing together a plan to take back at least five seats in the Senate and at least twenty in the House by identifying competitive elections and encouraging his “Feel the Bern” followers to support the potential Congressional candidates who could help fulfill his vision.
Otherwise, many analysts anticipate Republicans to continue their control of both houses in 2016. And if you thought they were combative battling a president who they falsely accused of being a socialist, just imagine how much will get accomplished with a president who actually embraces the label.
It is the opinion of the author that even these suggestions—direct payments to students and a Congressional recruitment strategy—won’t be enough to fix the underlying, systemic issue impacting the price of tuition: the codependent relationship between colleges, who cannot rein in their expenses, and the Department of Education, who continues to enable the wastefulness of higher education. Until you break up this unhealthy relationship, we will continue to see tuition prices increase unabated.