Solutions to the Student Debt Crisis

Solutions to the Student Debt Crisis

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The price of a college education has been spiking in recent decades. Although this may now seem like a fact of life, it was not always this way. In fact, the spike distinctly began around 1982.

Data from the

So, what happened? Supply (the number of degrees awarded per year) remained steady, so the rapidly increasing cost indicates an explosion of demand. What caused this demand?

Educational Reform Bills

In 1978, the United States Congress passed a slew of educational reform bills. Among them were the Middle Income Student Assistance Act of 1978 (MISAA), and the Education Amendments of 1978. These two bills did two very important things. MISAA drastically increased the scope of federal subsidies to college students through amending the Higher Education Act of 1965, while the Education Amendments of 1978, among other things, provided broad access to cheap, federally-backed credit to college students. These bills, and others that followed them, had the effect of ballooning the amount of money students could afford to pay on their college education.

It costs a lot of money to build a college. But, after colleges are already built, it costs very little to add an additional student. In economics, this model is categorized as a high fixed cost, low marginal cost venture. Following this model and taking into account the overwhelming importance of a college education in future fiscal success, the result is a system where the only determining factor of the price of college is what prospective college students are willing to pay. This is why airlines and hotels quote different prices to different customers depending on the buying power of the concerned customer — to capture as much of the consumer surplus as possible.

Need-Based Financial Aid

And this is precisely the cynical philosophy behind colleges instituting so-called need-based financial aid. This allows them to set prices no lower than precisely what they think a potential student can afford. It is through this kind of individualized price-setting that Pell grants and federal student loan programs allow colleges to raise college tuition. These programs, through artificially lowering loan interest and providing access to easy credit, inflate the amount of money students can borrow to pay for their college education.

The result, as you might expect, is not cheaper tuition. Students, upon getting access to an abundance of cheap credit, are financially able to borrow more money. Colleges, realizing this, increase prices. In the end, the result of this policy is that students still end up paying as much as they can afford out of pocket. The only difference is that they borrow more and colleges greedily suck up any tuition subsidies. Accordingly, colleges that accept federal loans have tuition roughly double that of their similarly-ranked peers.

Artificially Inflated Demand

The problem here is a poorly designed federal policy that artificially inflates demand, allowing student subsidies to flow from the taxpayers into the pockets of colleges without giving any benefits to the students. So, what exactly is the solution to this? Well, there are two main potential fixes with any promise, with various ideological motivations or levels of political feasibility.

Solution #1: No Government Intervention

The first is to return to the model that was in place before the federal government was involved in the market for college education. This would cause college demand to plummet and as a result prices would also fall, but it would also have major societal downsides. Colleges would become, as they once were, places more or less exclusively for the rich. The poor and lower middle class could not afford a college education, and this would widen the opportunity gap between the rich and the poor. Education is one of the most important factors in financial success, and making it harder to access for people born to poor families would widen the opportunity gap between the rich and the poor.

This potential fix is closest to the official deregulatory stance of the Republican party, although Republicans fall short of complete dismantlement of grant programs, instead favoring significant cuts. Although partially fixing the issue, it would also result in far less equity between classes due to the pressures of affording college, while preserving the inflated college prices arising from an economy mixing government grants with a free market.

Solution #2: Direct Government Involvement

The second potential fix is to have the government directly pay for college. This would give the government immense bargaining power, making them able to negotiate with colleges on equal terms for fair tuition rates. Although it would result in higher taxes, these could be mitigated through the government requiring students to pay for some portion of their tuition (if they are able). Since the government is not a for-profit institution, they would have a financial incentive to seek the lowest price possible from colleges, as well as an electoral incentive to charge the lowest price possible for students. The effect of this solution would be to lower college tuition while preserving equity between the rich and poor, and this is the solution that I would support.

This solution does not currently have a feasible path to becoming law. Although it has surged in popularity following Bernie Sanders’s influential 2016 democratic primary campaign and a significant part of the Democratic Party now endorses it, it has virtually no support from Republicans. Since it looks almost inevitable that the Republican Party controls the Senate for the foreseeable future, they will have the power to block any such ideologically extreme legislation even if it passes a Democratic house.

Meanwhile, the mainstream Democratic college reform plan, the AIM Higher Education Act, completely ignores the root causes of the college debt crisis, instead choosing to actually expand the Pell grant program and focus on social wedge issues like allowing undocumented immigrants to apply for federal tuition grants.


Although there is bipartisan agreement that our current healthcare system is flawed, there is currently no plan from either party to fundamentally change it. The problem here is that, although both nationalization or privatization are economically feasible, anything in between is doomed to inefficiency arising from government involvement in a capitalist system. We, as a nation, have to decide whether college should be a public utility or a commercial commodity — it can’t be both.

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