Drama unfolded in Washington this summer, when inaction by Congress allowed the Stafford Loan rate to double from 3.4% to 6.8%. For the past couple years, an extension to keep the rate at 3.4% had been scheduled to expire on July 1, conveniently manufacturing a crisis as students begin to plan for travel to campus the following month. Willing to set aside their differences and put on a strong bipartisan display of their good intentions, Congress acted quickly and decisively to reverse the increase, restoring the illusion that they are here to help. However, college tuition rates have accelerated over the 20 years since the start of subsidized federal student loans. As compared to inflation, the most drastic tuition increases occurred just as the lowest rates were in force.
Partisans in Washington would prefer we didn't realize that feel-good subsidies like this don't solve problems, or that they invariably produce unintended consequences. The idea that the Stafford program has directly led to tuition hikes occasionally gets a snippet of mainstream media coverage (here's an example). If you want more detailed analysis and proof, try obscure sources like the ones here, and here. But in general, few pundits have correctly pointed out such subsidies and other economic policies are not only unaffordable, but counter-productive.
Many Americans do stand to benefit from affordable college education, of course. The cost to cut the Stafford rate, from 6.8% to 3.4%, is only about $6 billion. This sounds like a big sum, a sum we don't have and will need to borrow, but it is tiny in comparison to the overall federal spending budget. When Stafford loans were first made available, more students were able to get federally subsidized loans at lower rates and could "afford" college, so more dollars went after a given number of college courses. Then, as predicted by economists such as John Locke, this increase in demand resulted in higher college tuition. From 2001 to 2003, the federal student loan rate fell from 6% to 4%. As illustrated by the knee in the curve below, this increased "affordability" caused tuition rates to outpace inflation threefold, compared to the twofold increase when rates were determined by the market. Graph is thanks to inflationdata.com, emphasis in blue was added.
Since colleges are the ultimate recipient of subsidized borrowings, they are benefiting handsomely and growing in size and endowment. Students don't get much of a break since they need to borrow and spend more, and the quality of college education is not increasing with the price. Faculty are not getting rich — schools are just hiring more staff as needed. If the original problem was college tuition rising at twice the rate if inflation, government subsidy has only made things worse.
Another unfortunate consequence of these higher tuition is that poor students who become ineligible for the federal loans will be even less likely to pull themselves out of poverty through education. Politicians obsessed with social engineering wrote in eligibility limitations for these loans based on minor drug and sexual-offense convictions. So, say you foolishly experimented with steroids, or forwarded a sext your buddy sent you in 10th grade. If your parents are able and willing to afford these higher tuitions, that's great for you. But if not, college and the "American dream" are even more out of reach thanks to years of these federal student-loan subsidies. Think of it as education-rationing: If your value to society is determined to be insufficient, you could be denied a student loan.
As some of us would benefit from affordable college, all Americans would naturally benefit from affordable health care. Unlike the relatively tiny student loan subsidy, however, federal health care spending consumes a huge part of our national budget. The unintended and unforeseen costs of the Affordable Care Act, such as doubling insurance premiums for comparable coverage, are already being voiced by everyone from Howard Dean to Fox News. Georgia is in crisis mode over its AFA exchange. These consequences were predicted by the basic tenets of microeconomics, and come as no surprise to those who recognize the futility of trying to solve economic problems by government fiat.
If you think that capitalism and market competition have made a mess of health care in our country, just wait. The measly amount spent to subsidize student loans increased college tuition at least 50% faster, without any benefit to students. The nature of such unintended consequences predicts what the price tag of "Obamacare" will do to already rising health care costs and limited resources, on an unimaginable scale. If you have cystic fibrosis, or are in need of knee reconstruction at age 95, your "value" to society may determine whether or not you are eligible for care. How many of us will become expendable, to ensure that health care stays affordable?