Treat Student-Loan Borrowing Like Medicare

It’s time for the federal government to reduce higher-ed costs by fiat.

I recently turned 65 and became eligible for Medicare. Like other medical insurance, Medicare requires providers who accept reimbursement to agree to a set rate for the services they provide. Since Medicare is one of the largest healthcare payers in the country, it uses its size to negotiate very low reimbursement rates, sometimes even lower than the cost to provide services. Capping reimbursements for services is one of the reasons people have health insurance; the leverage of a big insurance provider helps to keep costs low. If Medicare paid whatever the provider billed, the system would soon go bankrupt. And yet, that is exactly what the Federal Student Loan program does with higher-education institutions.

The borrowing limits on the two main types of federal loans, Direct Subsidized Loans and Direct Unsubsidized Loans (both known as Stafford Loans), are set nationally, and loans are awarded to students by higher-ed institutions based on each institution’s total cost of attendance. There are limits to how much can be borrowed, but, by combining loan types and continuing on to graduate school, students can accumulate several hundred thousand dollars in debt.

The effect of linking borrowing limits to the cost of attendance has been to create a large subsidy for higher-ed institutions.The Federal Student Loan program is an artifact of the 1965 Higher Education Act and subsequent amendments to that act in 1992. In 1965-66, the average cost of attendance at a four-year, private institution was $1,128, which, adjusted for inflation, amounts to $8,500 in 2021-22 money. Lawmakers set the act’s initial borrowing limits in line with what institutions were then charging, and those limits are periodically updated by Congress.

The effect of linking borrowing limits to the cost of attendance has been to create a large subsidy for higher-ed institutions. As in the case of all subsidized goods, the result has been a rapid price increase designed to capture the subsidies. The effect has been significant. Average college tuition and fees increased by 1,200 percent between 1980 and 2020, while general (cpi) inflation was a mere 236 percent.

It doesn’t make sense that students and (ultimately) taxpayers should provide payment to cover some universities’ exorbitant rates when lower-tuition offerings abound. Even government-backed mortgage programs require a rigorous appraisal process to make sure that the consumer is not overpaying and that the government is not taking on too much risk. I propose a reform in which federal loans can be granted only at institutions where the cost-per-credit-hour is at or below a federal maximum. As a starting point, that cost could be $300 per credit hour for undergraduates and $450 for graduate students, figures that are close to the national averages for four-year, public institutions.

To be clear, this does not mean that a student’s borrowing alone would be limited to that amount. It means that an institution that wishes to receive federal loan dollars at all cannot charge more than the predetermined cost-per-credit-hour. Institutions would be free to charge non-borrowers any amount they chose, but student-loan borrowers’ rates would be capped, in the same manner that Medicare caps payments to healthcare providers but lets them charge other insurance companies different rates.

This proposal would have several beneficial effects. First, the aggregate amount borrowed would shrink sharply. Eventually, the tidal wave of student debt would shrink to a more manageable amount, and individual borrowers’ debt loads, especially at private, four-year institutions, would be dramatically reduced. Institutions would be forced to reduce their cost structures in order to accommodate the lower reimbursements, thus slowing the higher-education inflation rate.

Of course, this would be a radical turn of events for some institutions. The cost of four years’ tuition at Harvard was about $220,000 in 2021-22. The most that could be charged under my proposal would be around $36,000. There is, at present, a lifetime limit on undergraduate federal loan borrowing of $57,500, but most institutions would be capped at about 63 percent of that amount. The greatest benefit would be for graduate students, where the lifetime cap is $138,500. A two-year master’s or professional program would be capped at about $27,000.

Federal loans should be granted only at institutions where the cost-per-credit-hour is at or below a federal maximum.While this proposal would force high-cost private and public institutions into a dilemma, most institutions and students would be unaffected. More than half of all students in higher education do not borrow at all. And most institutions charge less than the proposed capped amounts, with a handful, like Hillsdale and Grove City College, electing not to participate in the Federal Student Loan program at all.

One of the reasons why the cumulative amount borrowed by students is so high ($1.7 trillion and growing) is that the Federal Student Loan program is a one-size-fits-all approach that does not evaluate credit risk. A student pursuing a gender-studies degree can borrow the same amount as an engineering or accounting student with lots of high-paying job possibilities.

Legislation capping colleges’ “reimbursement” rates should include an expansion of the private loan market for students. A smart student in a program with high earnings potential may need more money to finish his or her program, so let the university or private lenders make normal credit decisions about that student. A purely private student-loan system would have restrictions on eligibility set by private banks or the institutions themselves. You would not be able to get money to study a subject with little or no employment prospects, or, if you did, the interest rates would be much higher. This would discourage students from studying subjects with poor employment prospects (or institutions from even offering them), unless they could pay for it themselves through post-graduation income. It would push students into studying subjects that give them skills that are actually in demand.

In this new world, some students would have to consider options other than a four-year degree. Such an outcome might be better for them and better for the economy. As has been widely reported, some states, most recently Utah, have eliminated degree requirements for government positions “while bolstering apprenticeship opportunities to bridge the experience gap.” As recently as January 2023, Pennsylvania dropped four-year-degree requirements for government jobs. Easy access to student-loan debt encourages students to attend school longer rather than seeking out these better non-college alternatives.

The uncapped fee-“reimbursement” for student loans has resulted in a mountain of debt. This has led to political pressure to reduce balances and payments, or to forgive balances altogether. Shifting the loan burden to taxpayers and leaving higher education unscathed is unfair and counterproductive. Capping borrowing amounts at much lower levels would be a good start to resolving this problem.

Chris Corrigan was Chief Financial Officer at Andrew College (1998-2005), Emory College (2005-2008), and Armstrong State University (2015-2017).