Tipsheet

Will Colleges Raise Tuition Due to Biden's Student Debt 'Forgiveness' Plan?

Mia Cathell
Mia Cathell  |  August 26, 2022 9:00 AM

President Joe Biden announced a monstrously expensive plan Wednesday to "cancel" $10,000 per student loan borrower, "forgive" $20,000 for those who received Pell Grants, and extend the two-year repayment moratorium once again through Dec. 31 of this year after multiple pandemic-era pause extensions.

Biden's program could cost American taxpayers as much as $600 billion over the next 10 years but White House officials are scrambling to abate concerns over a potential reflexive reaction from colleges that might drive up tuition, given that schools have little incentive to control costs and that abundant student loans can make the bottom line appear more affordable in the consumer's eyes. So while the Biden administration is signaling that there's no reason to panic or question the federal government's business logic, experts and history are saying otherwise. Should we sound the alarm on an inevitable steep increase in college costs?

CLAIM: Susan Rice, the White House's director of the Domestic Policy Council, was asked at a press briefing Wednesday discussing Biden's announcement if there's "a worry" about colleges raising tuition rates. "You heard the president emphasize in his remarks and a key element of our plan is to ensure that colleges that have jacked up prices and taken advantage of students, particularly those that have made wild promises about how much people will be able to earn based on their degree program, which are not backed up by reality, and while people are earning, or are incurring huge volumes of debt, that is something that Department of Education has already cracked down on and is going to continue to crack down on," the ex-senior Harvard fellow replied.

"And the Department of Education is going to be vigilant," Rice, who serves as the Biden administration's domestic policy advisor and "drives the formulation and implementation" of Biden's domestic policy agenda, added. Rice noted that the Education Department will publish an annual list of collegiate institutions that are "the worst actors in terms of the delta between what they promise, what they charge, and what they deliver."

According to the White House's fact sheet outlining how Biden's student loan "relief" program will work, the Department of Education watchlist will hold colleges accountable that have contributed to the crisis by tracking who has the worst debt levels in the country, "so that students registering for the next academic year can steer clear of programs with poor outcomes." Institutional improvement plans will also be requested from colleges.

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FACTS: While the cost of college continues to soar, Biden's student loan "cancellation" plan could cause an even greater spike in tuition rates, according to what several education and economy experts are warning.

"Students will likely feel liberated to borrow more money on the assumption of future loan forgiveness, and universities will take advantage of the additional borrowing by raising tuition," the Manhattan Institute's senior fellow Brian Riedl, who focuses on budget, tax, and economic policy, told FOX Business.

Referring to the so-called "Bennett Hypothesis" that was tested back in 2015 by the Federal Reserve Bank of New York, Riedl said on-air Wednesday that the expected trend is "pretty similar to the fact that historically 60% of all student aid increases have been captured with tuition hikes, and this will be treated like an increase in student aid moving forward, which suggests that 60% will be countered by tuition hikes." Based on preliminary findings, the FRB of New York staff report had determined that increases in subsidized loans resulted in tuition hikes of about 60 cents on the dollar and up to 15 cents on the dollar for unsubsidized loans.

Riedl then asserted that Biden's "inflationary" initiative will encourage college students to over-borrow, drawing a comparison to the overwhelming border crisis to illustrate how removing some of the financial consequences of taking out loans one cannot afford is opening the floodgates to greater student financial irresponsibility.

"Students have already been over-borrowing for decades, and if they believe that any borrowing will be at least partially forgiven in the future, all restraints are off," Reidl stated. "This is kind of like what we see with immigration amnesty whenever Congress passes amnesty for immigrants, it encourages more immigrants to come and cross the border in anticipation of future amnesties. So, there's always the assumption that these one-time policies will be renewed and, therefore, you encourage the same behavior."

Other industry experts argue that Biden's taxpayer-funded handout will worsen inflation, a move that's at odds with the Biden administration's purported push to reduce inflation. "Even after spending over $300 billion and worsening inflation, canceling student loan debt will raise tuition prices for future generations," said Americans for Tax Reform's policy communications specialist Isabelle Morales. "The primary driver of tuition costs has been the federal government's subsidization of college. If colleges and universities expect the government to forgive large chunks of the cost of their education, they'll be motivated to raise costs on students."

"Further, canceling student debt will signal to future borrowers that their debt will also be canceled at some point, creating a moral hazard," Morales continued. "College students will take on as much debt as they wish, as they expect no consequences of taking it on. This, too, will allow colleges to continue to raise prices."

Biden's "unfair" and "regressive" student debt transfer "scheme" will "lead to further increases in college costs in the future," concurred Lindsey Burke, who is The Heritage Foundation's director of the Center for Education Policy. "It requires working Americans to pay off the degrees of bachelor's and professional degree holders while being yet another handout to woke universities." Adam Kissel, a visiting fellow in higher education at The Heritage Foundation, agreed that "canceling student debt will drive tuition up," in turn incentivizing students to take on more debt "in the hope of cancellation later," which he explained "will encourage colleges to raise tuition even higher." Kissel declared, "Government subsidies cause prices to rise—that's basic economics."

According to a 2021 report by the Foundation for Economic Education, new students will demand year-after-year that their loans be "forgiven" too, turning the cycle into "a sort of college UBI, where the government just hands out $10,000 to every college student." While some argue that such an investment in college education would lead to a better educated populace, the FEE article cautioned that society would be outputting a horde of students majoring in subjects "the market doesn't value" and another batch "taking a four-year vacation on the taxpayer's dime." Before now, graduates sought marketable skills in order to repay their college loans. "But when student loans are forgiven as a matter of course, graduates bear no cost for wasting our collective resources by studying things the market doesn't value, or by not studying at all," the FEE report projected.

Colleges and universities will "respond to this new reality by raising tuition commensurately," FEE said. Tuition and fees maintained a constant 18 percent to 19 percent of family income from the 1960s until 1978. Then in 1965, the federal government started guaranteeing student loans, and in 1973, Congress established Sallie Mae and charged it with providing subsidized students loans. So by 1978, tuition and fees had started "a steady march" to 45 percent of family income today, per FEE. "When the government makes it less painful for students to borrow, whether by guaranteeing, subsidizing, or forgiving loans, it takes away some of the pain of student borrowing, which makes it easier for colleges and universities to raise tuition," the FEE think-piece forecasted.

More than a decade ago during President Barack Obama's presidency and the nationwide Occupy Wall Street protests, the federal government back then was to blame for the high cost of attending college, according to a 2011 op-ed by former White House speechwriter Mary Kate Cary. Obama believed he'd calm the protestors down by easing the terms of repayment and forgiveness, signing legislation that ended subsidies for private banks giving federally guaranteed student loans. The federal government, not banks, became the lender of choice for most students. "Tuitions are artificially high directly because of federal financial aid," Cary posited, creating a cycle of politicians buying votes by throwing money at students and colleges increasing expenses.

"The more money the federal government pumps into financial aid, the more money the colleges charge for tuition," Cary wrote, observing at the time that inflation-adjusted tuition and fees had tripled over the last 30 years while aid quadrupled, which meant that student aid went up faster than tuition itself. "Thanks to the federal government, massive sums of money are available to pay for massive tuitions..." Cary penned. "Colleges can raise tuition with impunity because colleges know they'll get paid no matter what."

Meanwhile, the non-profit Committee for a Responsible Federal Budget estimates that, not accounting for other reforms in federal financial aid, outstanding federal student loan debt will return to the current $1.6 trillion level soon after, in just four years after $10,000 per borrower is "cancelled." If all debt were to be "cancelled," the debt would return to today's level in 15 years, last month's CRFB report (with conservative assumptions) found.

RATING: Rice's claim that Biden's plan will protect against universities jacking up the price tag on tuition is FALSE, according to experts and historical patterns. Time, of course, will tell, but history tends to repeat itself.