Could Dismantling the Submerged State Surrounding Student Debt Pay for Free Colleges?

Josh Eidelson has a great post at The Nation, “Fighting Privatization, Occupy Activists at CUNY and UC Kick Into High Gear,” that dives into the battles currently being waged against the dismantling of public higher education. One of the Occupy movement’s major objectives is combating the privatization of public higher education and its replacement with a debt-fueled economy of indenture.

While prepping a recent Occupy panel, Sarah Jaffe brought up how we subsidize student debt in a similar way to mortgage debt, that is, through allowing people to deduce the interest paid on this debt from taxes. According to Pew Charitable Trust’s website subsidyscope, the deductibility of student loan interest alone costs taxpayers $1.4 billion dollars. Instead of taking $1.4 billion dollars and directly making college cheaper, students take out massive amounts of student loan debt and we alter the tax code to make that debt $1.4 billion dollars cheaper.

This is an example of what Suzanne Mettler calls “the submerged state,” a pattern where the government has, as she says, “shunned the outright disbursing of benefits to individuals and families and favored instead less visible and more indirect incentives and subsidies, from tax breaks to payments for services to private companies. These submerged policies…obscure the role of government and exaggerate that of the market.” Instead of directly providing public options, we subsidize the purchasing of private goods, often using the tax code.

Let’s take the case of student debt and the tax code. How much would it cost to make public colleges and universities free? Rough estimates (quoting Jeffrey Sach’s latest book) put the price of free public higher education at $15-$30 billion, which fits other estimates I’ve seen. [Edit: These numbers are incorrect. The rest of the numbers in the posts are correct though.]

Now what are the costs of how we subsidize higher education through the tax code? There’s already the $1.4 from the interest exemption. Also from subsidyscope, there’s the exclusion of employer-provided educational assistance ($1.1 billion), exclusion of interest on student-loan bonds ($0.6 billion), exclusion of scholarship and fellowship income ($3.0 billion), exclusion of tax on earnings of qualified tuition programs: savings account programs ($0.6 billion), the HOPE tax credit ($5.4 billion), the Lifetime Learning tax credit ($5.5 billion), parental personal exemption for students age 19 or over($3.4 billion), and state prepaid tuition plans ($1.75 billion). There’s also the stimulus’s American Opportunity Tax Credit($14.4 billion) and some part of the deductibility of charitable contributions (education) ($4.9 billion).

Even without the last two, that’s $22.75 billion we are paying through the tax code to make college tuition and student debt more manageable. This amount is in the middle the range of the cost of just making public high education free. Now these aren’t equivalent — much of what is spent through the tax code will be biased more towards private and professional schools, which are more expensive. But this also isn’t anywhere near the full extent we subsidize student debt (a government creation from 1965).

But there is a choice in how to provide mass higher education. We can either use resources to reduce the price of the good upfront — make college free — or to subsidize the purchase of the good — here through the numerous hoops of the tax code. The amount of money we take from the tax code to try and make student debts and runaway tuition more bearable could be used instead to just provide free public colleges.

There are winners and losers in each case. When we subsidize through the tax code, people who are well off and pay more taxes benefit more. People who can afford support staff, such as accountants and lawyers, are also more likely to understand how to take maximum advantage of these benefits. These subsidies benefit private educational institutions over public ones, as they’ll make private education feel more “natural” while obscuring the role of the government in setting up these markets. They give public college a nudge towards corporatization and privatization.

Much of these subsidies are likely captured either by the higher education institutions themselves or the debt lenders. These subsidies will make tuition and debt easier to deal with, but providing colleges free as a public option would likely do far more to contain costs (also here).

Most importantly, it breaks the link between citizenship and education. The subsidy approach replaces the claim of a citizen to a necessary good to be full, participating person in our market economy with the claim of a consumer, whose claim is ultimately one of willingness to pay either through wealth or debt, with a “nudge” from the government. The first kind is the place where progressives have the stronger argument about freedom, as opposed to those who see the market as the only source of freedom available.

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15 Responses to Could Dismantling the Submerged State Surrounding Student Debt Pay for Free Colleges?

  1. Matt says:

    I love the politics of this post but the math is self-evidently wrong. There are 300mm Americans; say 5% of them are college-age and you get about 15mm people in free education at any time. That number accords with internet sources (http://wiki.answers.com/Q/How_many_college_students_are_there_in_the_United_States).

    $30 billion works out to $2,000 per year for those free public educations. You could provide some sort of education for $2,000 a year, but it is not related in any meaningful way to what we currently call a “college education.” Public secondary education costs a multiple of that (http://www.heritage.org/research/reports/2008/09/does-spending-more-on-education-improve-academic-achievement).

    These things matter. Your moral case is strong; your economic case is based on comparing real observable data (current submerged-state subsidides) to obviously fake imaginary “here’s what my plan would cost.”

  2. Felix says:

    I’m in agreement with the main point here but am confused about something: tax breaks don’t exactly “cost” anything when compared to spending money on education. In a sense, the amounts you suggest we “spend” on tax breaks are imaginary, right? Because they wouldn’t be income for the State if we didn’t have the whole loan system in the first place. So we have this weird make-believe system where we say people have to pay a certain amount, and then erase portions of that basically arbitrary amount through these “tax beaks”. Or am I misunderstanding the system?

  3. Steve says:

    I have the same objection as Felix. If we decided to spend the $15 billion that we’re currently “spending” on tax breaks on providing free college, people would no longer be borrowing to pay for tuition, and a large portion of the debt industry that’s affected by the breaks would disappear. This means you’re spending $15 billion directly on schools, but by removing the tax breaks, you’re not getting $15 billion back. Since people would have lower debt loads (they’re only borrowing to pay living costs, not tuition) you’d get back much less (I’d guess 50% at the most). So the math doesn’t seem to work out.

  4. robk says:

    The Bush tax breaks certainly seemed to be very real money when they were being debated.
    The larger point is that there is a lot of money circulating around which might be more beneficial if it just went directly to institutions educating students instead of through the banks, the students, the IRS, etc. The less affluent are going to be better served than someone who can lay out the cash yearly and wait for the tax benefit to return to him at the end of the year.

  5. Felix says:

    Oh yes, I definitely agree we can and should have subsidized public education for all who want it (I’m a student and single parent, so no need to sell me on it!) I’m just honestly confused about how this particular equation works out.

  6. Kelly says:

    Very interesting article, but I do find some flaws with the calculations, or at least some holes in the plan.
    1. Would Graduate and higher education be free, meaning Master’s and Doctorate’s, Law School or Medical School. I highly doubt you could provide all of that in the original estimate of $15-30 billion, and I also imagine that many of the deductions are related to the costs of these programs.
    2. Would living costs be paid for as well with the $15-30 billion? For many students this is where a bulk of the student loan money goes?

    Now maybe these are part of the calculations but from reading some of the references I don’t believe that to be the case. I am sure there are some other holes, but this was my quick run through on it, but I do agree that college costs are getting out of hand whether public or private and needs to be addressed in some meaningful way.

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  9. Great job Mike, you really got it right. A big thing here, though, is (huge) economies of simplicity, or diseconomies of complexity.

    Economies of simplicity is my term. If you google it you won’t find much, and nothing really with regard to how I mean it. I think it’s one of those (many) things where someday, someone with an ivy pedigree will write it up in a formal model, get it published in a top journal, and everyone will say, Brilliant! What a breakthrough! Why didn’t everyone think of this before? It’s so obvious now.

    But essentially, it’s the fact that when you do these Rube Goldberg systems to avoid the horrible government, you get tremendous complexity and convolutedness. This creates huge asymmetric information, poor information, and wrong information. And people now have to devote huge hours to learning this maze and keeping up with it. And they have the stress of having to constantly keep up with this, or pay a big price, big penalties.

    Straight government has huge economies of simplicity. If you just make the bachelor’s degree free at all public universities, with an equivalent voucher to go to an accredited (justifiably) approved private school, then you massively cut all of the very time and money consuming complexity. And everyone knows college (or a good, not sham, trade school) is completely affordable. No more do people not go because they think they can’t afford it, or they’re scared of the debt, or they heard some horror story of someone made an indentured servant for life. It’s totally clear, and simple, that money is not an excuse to not develop your potential. Obviously, this is great for national wealth and productivity.

    Sadly, economies of simplicity, or diseconomies of complexity, although enormous, are usually assumed to be zero in economic analyses. They’re very similar in that way to the monumental positional/context/prestige externalities.

  10. Grad91 says:

    I’m a self-employed teacher. I think the system needs a correction in how it operates. I couldn’t afford my education and went into debt that I haven’t been able to pay off yet. But even tho’ having taught privately over 12 years – a completely FREE education would not be my solution to this problem. When people pay a fair amount, they VALUE what they are receiving. Reducing tuition and making it fit a modest income, and making it available for the impoverished with work-study options would keep education respected and honored. I say this from experience. Giving low-cost lessons at a community center – people voiced an assumption that it was of less value. When I told them what my lesson cost in the private sector – then they “got it” – I was trying to serve the poor. Who I did serve incidentally was the children of thrifty professionals who could afford a higher cost.

  11. Dorothy says:

    I think the point is real… It is a matter of choices we have made to turn people into ‘consumers’ not ‘citizens’. ‘Consumers’ must pay for the right to live, ‘citizens’ have ‘inalienable rights’.

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