There is little doubt that failure to reduce college debt levels will dramatically worsen the economic situation of many people who borrow for college. However, free college or debt-free college is not a viable economic program. This proposal targeting aid towards first-year students is part of an economically viable program to reduce burdens caused by college debt.
Description of program: The federal government would provide all accredited four-year and two-year universities with funds to cover 50 percent of the tuition of the average four-year state university for all first-year students with household income less than a threshold. The subsidy would be phased out for students above the threshold. Schools and states could differ on the income threshold defining the group of students obtaining a subsidy. Schools that wish to participate in this program would be required to match 25 percent of the federal contribution.
Comment One: The program is far less costly and far less ambitious than the programs offered by Senator Sanders and Secretary Clinton. The total estimated cost of Senator Sanders’ proposal is $70 billion a year, with around two thirds of the costs of the program borne by the federal government and one third borne by state governments.
Comment Two: The program described here allows for greater control at the state level than the program advocated by Hillary Clinton. Hillary Clinton’s proposal would provide grants for tuition assistance only in states that fund public universities at a high level. Her proposal also includes penalties for universities that fail to meet certain goals including reducing costs, earnings of graduates, and reduced tuition. These conditions are problematic because state differ in their resources and priorities. Moreover, this approach would favor state university systems that emphasized research over teaching
This program is designed to allow schools and states to select a sustainable subsidy level. The subsidies proposed by Sanders and Clinton will prove to be unsustainable during economic downturns.
Comment Three: The four-year exclusively-for-public university benefit would have a devastating impact on enrollment in all private universities including historically black colleges. Many of these universities have excellent track records for educating students and preparing students for careers. This benefit is available at both private and public universities but the total cost of the program is much lower because it targets first-year students only.
Comment Four: First-year students with no academic track record past high school are more likely to drop out of college than students further along in their academic career. The possibility of failing academically and incurring debt at the age of 18 may deter some students from entering college even though education past high school is increasingly necessary for career advancement. Targeting financial aid for first-year students is the most effective way to enroll students who might otherwise be deterred from every trying college.
Comment Five: The government pays interest on some student loans until the student leaves school and starts repayment. On other student loans, the cost of interest is borne by the student as soon as the loan is issued. Cumulative interest on student debt is highest when debt is issued years prior to the initiation of repayment. Cumulative interest on student loans are best reduced through subsidies that reduce loans incurred by first-year students.
Comment Six: Students who drop out of college after one year of school have lower salaries than students who complete more college. The lower salaries of students who only complete one year of college suggests that a program targeting first-year students will be more progressive than a program targeting all students throughout their entire career.
The lower salaries for students who incur first-year debt and leave school will also result in higher default and delinquency rates. Programs that reduce loans for first-year students will result in a larger improvement in default or delinquency rates than financial aid programs targeting all students.
Comment Seven: The requirement that schools publish the percent of first-year students incurring debt will provide valuable information to students on the cost of their education prior to students incurring too much debt. This requirement will create an incentive for colleges to expand assistance for first-year students, which as shown in the comments here results in substantive benefits for the borrowers and the government lender.
Concluding Comment: The increased financial assistance in this proposal is far smaller than the increased assistance offered under the more expansive proposals presented by Secretary Clinton and Senator Sanders. A totally free college program provides extensive assistance to many people who do not need help. Around 30 percent of graduates from four-year institutions finish school with no debt and many student borrowers have sustainable debt levels
The principle, that subsidies should target people who would not otherwise do the socially desirable action is central to proper public policy. One should not target tax subsidies for fuel efficient cars if people were eager to buy the car without the subsidy. Similarly, financial assistance should target students who could not enter or complete school without taking out large amount of debt.
Other initiatives including other forms of targeted financial assistance, improvements in loan forgiveness programs, initiatives to improve on-time graduation rates and improved information on school quality and costs will reduce college debt burdens in a way that is fairer to taxpayers than free college for all.