Who is to Blame for Student Debt?

As Occupy Wall Street protesters clamor that student debt is too high, are they targeting the wrong people?

Neal McCluskey and Vance Fried explain at the New York Daily News that they believe that it is federal politicians who are to blame for soaring student debts.

“The real guilty party here is federal politicians, who for decades have been fueling high profits — and prices — at both for-profit and nonprofit schools.”

Thanks to recent congressional hearings and battling over new regulations for for-profit schools, most people — including many college-aged, profit-disdaining Wall Street squatters — are probably at least vaguely aware that for-profit colleges are making good money, reports the Cato Institute.

“But not just openly profit-seeking schools are making big bucks. If we define profit simply as revenue derived from providing a service exceeding costs, putatively nonprofit colleges actually have much higher margins than for-profit schools.”

McCluskey and Fried claim that, because nonprofit schools take excess revenues coming from undergraduate education and distribute them throughout the college in subsidies for research, graduate education, low-demand majors, low faculty teaching loads, excess compensation or featherbedding.

“In other words, rather than rewarding investors, colleges pay themselves.”

Calculating all the inputs required to educate undergrads, from market-rate professors’ salaries to photocopying costs shows that roughly $8,000 to educate an undergraduate at an average, residential college.

The average tuition and fee charge at a private bachelor’s college was $13,515 in 2008. Subtract the $8,000 from that, and just from tuition and fees the school made about $5,500 per student, a margin of 41%, writes McCluskey and Fried.

“Add donated money like endowment funds, which are often intended to help undergraduate students, and the margins become even bigger.”

The Cato Institute claims that colleges have been able to achieve these stunningly high profit margins by radically increasing the prices they charge students. Inflation-adjusted tuition and fees have tripled in the last 30 years.

“Politicians have enabled schools to charge these skyrocketing rates in the name, ironically, of helping students. Indeed, inflation-adjusted federal aid to students has quadrupled since 1980, going from $35.4 billion to approximately $146.5 billion. Meanwhile, total student debt has leapt ahead of total credit card debt, blowing past the $800 billion mark.”

Though McCluskey and Fried claim that Washington can be a major part of the solution.

They suggest changing financial aid rules that give schools sizable advantages over students when setting after-aid prices.

“When students apply for aid the feds give schools students’ total financial pictures, enabling colleges to change their after-aid prices on a student-by-student basis. Students have no such insider knowledge about schools.”

They alternatively suggest to phase out the big subsidies to students that enable schools to raise prices with impunity.

“That means reducing everything from Pell Grants, to cheap student loans, to tuition tax deductions.”

McCluskey and Fried acknowledge the outcry would be that this will hurt students.

But it would do the opposite, they claim. It would “force schools to keep their prices in line with the real cost of providing education, and saving both students and taxpayers big bucks. And that is what everyone should want.”

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