Tuition-free college is the Democratic Party’s flavor-of-the-month plan to increase educational affordability and access. At the first Democratic presidential debate, Sen. Elizabeth Warren called for tuition-free public college and the cancellation of up to $50,000 in existing debt. And, not to be outdone, Sen. Bernie Sanders proposed free public colleges, universities, and trade schools as well as the forgiveness of all $1.6 trillion in outstanding student loan debt.
All this “free” education is funded by taxpayers, and not just the rich ones. In reality, Sanders’ tax on “Wall Street speculators,” meant to pay for his proposals, is a tax on all Americans. It will divert trillions of dollars from savers and investors to the government. This means less money in retirement accounts, and less money for new and growing firms — therefore, fewer new jobs. Similarly, Joe Biden’s proposed reversal of the GOP’s 2017 tax cuts and Warren’s new wealth tax will reach well beyond the rich and into the pockets of the middle and working classes.
A better approach to increasing access to education is to move student financing out of the hands of government and into the private sector. When government gets involved, all the risk falls on taxpayers. This is dangerous: For federal student loans, unlike most other public or private credit programs, students are not required to prove the ability to repay as a condition of receiving the loan. As a result, over 10% of student loans are in default.
Free college is even worse, because there is never any student repayment and taxpayers must bear all the costs. Many of these taxpayers were themselves unable to attend college, or chose more affordable options, but are now forced to pay for others.
Yet as presidential hopefuls offer taxpayer-funded college, private financing programs are already available. Individuals, foundations, firms, and colleges themselves choose to take on the risk and bear some or all of students’ education costs.
For instance, many college and university endowments are hundreds of millions of dollars. Some even reach the billions — Harvard’s endowment is $39 billion. Endowment returns pays for merit and need-based scholarships, in addition to other institutional expenses.
Meanwhile, many private businesses from McDonald's to Microsoft offer higher-education scholarships. Tennessee Achieves, which aims to increase access to higher education within the state, raised $16 million in private funds from 2009 to 2014 to help cover college costs. Purdue University uses Income Share Agreements as an alternative to student debt accumulation. In these agreements, investors agree to pay a portion of a student’s education costs in exchange for a percentage of post-graduation earnings over a predetermined period.
Endowment-funded grants and corporations have long helped students pay for college. Programs such as Tennessee Achieves and Purdue University’s ISAs are, however, relatively new. They are creative movements away from the government student-loan monopoly toward private-sector, voluntary financing options, transferring education expense and risk from the taxpayer to students and investors, where it should be held.
Yet innovative private-sector solutions are difficult to develop because of massive education subsidies and the federal government’s expansion into student aid. Democratic proposals to expand government’s education-funding footprint will certainly further deter private solutions. But if the government reduces college financing, it will incentivize innovative private-sector engagement, provide taxpayer relief, and empower individuals and private organizations to choose their preferred type and level of collegiate funding.
Policymakers should embrace an entrepreneurial spirit, and encourage states and regions to experiment with private programs tailored to fit their unique needs. The diversity of students, colleges and universities, disciplines, and post-graduation employment opportunities alone justifies moving away from the federal one-size-fits-all approach.
With high and rising costs, free college may sound appealing. But remember, when any politician offers something for “free,” the costs eventually fall on all Americans.