With federal deficits at high and unsustainable levels, there is an urgent need to find ways to cut federal spending. Fortunately, new Cato research has found that a suite of higher education reforms could help reduce the deficit by more than $200 billion over the next 10 years. These reforms emerge from several basic principles of good governance.
Obsolete Government Programs Shouldn’t Be Immortal
Perhaps the most straightforward reason to end a government program is that the problem it was intended to address is no longer a problem. Unfortunately, government programs have a tendency to become almost immortal, even after they are obsolete (see mohair subsidies). In higher education, the best example of this problem is the work-study program, which was created during the Great Depression to keep students enrolled and out of the labor force. This was the wrong solution to high unemployment at the time, and it is certainly not an appropriate goal for policy with today’s low unemployment rate. Yet the program is still in operation.
Programs That Fail to Achieve Their Purpose Should Be Ended
The next good reason to end a government program is that it fails to achieve the desired purpose. In higher education, the various tax credits and deductions fall squarely into this bucket. While designed to improve college affordability for the middle class, these tax benefits utterly fail because colleges respond to the programs by raising tuition and cutting other financial aid. When colleges harvest aid intended for students to enrich the institution instead, students are left no better off than they were without the program.
The Government Should Treat People Equally
Another principle is that the government should treat people equally, and programs that fail to do so should be terminated. The main offender of this principle in higher education is the Public Service Loan Forgiveness (PSLF) program, which forgives the loan debt of government and nonprofit workers after 10 years of payments. This program exhibits bias in two ways. The first unfair treatment is that of other workers, who need to repay their loans for 30 years before having them forgiven, compared to only 10 years for workers favored by PSLF. The second instance of bias is against the PSLF workers’ colleagues. Government and nonprofit workers who do not take out student loans receive no benefit, while their colleagues who receive PSLF get an average of almost $98,000.
The Government Should Treat Colleges Equally
Government policy should not privilege some colleges at the expense of others (other than performance-based rewards or punishments). Unfortunately, the campus-based aid programs (the Federal Supplemental Educational Opportunity Grant program and work-study) violate this principle. Instead of allocating funding based on the number of needy students at each college, these programs disproportionately privilege rich colleges with political power. These favored colleges typically rail against real and perceived instances of unearned privilege and aristocracy yet are conspicuously quiet about these programs.
Loans Should Charge Interest
Borrowing money entails an opportunity cost, a cost that is most commonly dealt with by charging interest. Waiving interest doesn’t make this cost disappear, and in practice merely transfers the financial burden from the borrower to the taxpayer. But there is a growing tendency to waive interest on student loans, which should be reversed. In particular, subsidized student loans should be ended, and the interest waiver in the new Repayment Assistance Plan should be scrapped.
Cost-Plus Contracts Are a Bad Idea
A final source of low-hanging budgetary fruit is to avoid cost-plus contracts. These types of contracts reimburse colleges for whatever they spend, which of course gives the college absolutely zero incentive to control costs while leading to ballooning federal spending. This is the story of research overhead spending for the past few decades, and colleges are currently sitting in a minefield of PR nightmares. The last time Washington dug into the books, it discovered that Stanford University had been recording the depreciation on a yacht as a research expense. There are almost certainly a lot of hidden yachts out there, waiting to be exposed.
Overall, our new report found reforms that would reduce the deficit by more than $200 billion over the next ten years.