Colleges are cutting tuition for MBA programs. But it’s not out of charity or because they got another taxpayer-funded subsidy to “fix” exploding higher education prices. Rather, and perhaps counterintuitively, it’s because Uncle Sam finally capped the previously unlimited federal loans for graduate students.
At first blush, this sounds like it would make the problem worse. Fewer borrowing options for students seems like it would shift more of the cost of attendance to today, when students are young with relatively low incomes. But that assumes—unrealistically—that the cost of education is fixed, and that colleges don’t respond to changes in the market.
It’s a demonstrably proven fact that endless government subsidies for education via ever-growing student loan availability have caused tuition to explode. Even the Federal Reserve’s researchers (hardly right-wingers) came to that conclusion.
Likewise, research published by the National Bureau of Economic Research found that providing unlimited graduate school loans didn’t expand access or increase degrees awarded. Instead, colleges just raised the cost of attendance, almost dollar-for-dollar with the new federal loan money.
As the Department of Education increased the amount students could borrow and offered the money at artificially low interest rates, colleges and universities smelled blood in the water. Instead of making higher education more affordable, bottomless federal funds only saddled young Americans with insurmountable debt.
Students regularly graduate with the equivalent of a mortgage in student loan debt but a minimal increase in their income compared to four years prior. The Department of Education recently highlighted a prime example: New York University’s master’s in film and video studies leaves borrowers with an average of $168,000 in federal debt and median earnings of just $47,000.
That’s a handout to the higher ed establishment, not a hand up to students. Furthermore, young Americans who are buried in debt and for whom unprofitable degrees are their only shovel to dig out from that debt were prime targets for the Obama-Biden “forgiveness” schemes.
That was a euphemism for a taxpayer-funded bailout, where the federal government simply wrote off massive tranches of student loan debt—about one-third in many cases. Now, courtesy of the Working Families Tax Cut, it’s universities, not students or taxpayers, feeling the financial pain as the spigot gets turned off.
The new tax bill capped aggregate federal borrowing for most graduate students at $100,000, and $200,000 for professional degrees like law and medicine—both were previously unlimited. The result has been sharp and quick as these caps are forcing colleges to live in the real world and submit to the laws of supply and demand.
The University of California at Irvine recently announced it’s dropping tuition for its Merage Flex MBA by $30,000, down to $99,000. While the university wasted no time engaging in all manner of virtue signaling about the price decline, there was no reason to pat itself on the back. The change was a response to market conditions, not a newfound altruism.
It’s no coincidence that the MBA program now costs just under the student loan cap. And while students can still turn to private loans, those come with real interest rates and actual underwriting standards, so not everyone automatically gets a check.
Now, tertiary schools are having to compete on price and value instead of relying on the taxpayer to backstop a perpetually growing academic establishment, complete with burgeoning ranks of administrators.
In short, this is a move away from a command-and-control socialist economy and back to a functioning free market for higher education.
For years, government and universities effectively colluded to drown college students in debt while school endowments grew. It’s long past time that the Department of Education reversed this march towards oblivion.
Furthermore, this will lead to better education outcomes for students. By forcing schools to compete more intensively for a tighter dollar pool, quality will improve. That’s just Econ 101—a course colleges supposedly teach—and now colleges are about to relearn the lesson.
E.J. Antoni, Ph.D., is chief economist at the Heritage Foundation and a senior fellow at Unleash Prosperity.
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