Tuition Hikes, Not Loan Access, Should Frighten Students

For months, the Wall Street credit crisis has made many families nervous that the widespread availability of student loans will dry up. But no matter how many banks fail, there is no danger that families will be deprived access to federal student loans. None.

More than 100 banks have stopped issuing student loans, but about 2,000 continue to originate federal student loans. The government maintains two "fail-safe" systems. To date, not a single student has been unable to get a federal Stafford Loan. Every family, regardless of income and credit history, is able to borrow at least $57,500.

The real danger during bad economic times is that tuition often skyrockets. Here's why: A bad economy depresses state tax revenue. To meet state balanced-budget requirements, states cut funding for higher education. To make up those cuts, public colleges hike tuition. Competing private colleges see the increases and feel empowered to increase their tuitions markedly as well.

Don't Stop Spending

We can stop this trend by adopting more flexible and sensible state fiscal policies: namely, a willingness to accept deficit spending for education. No one likes red ink, but it is precisely during bad economic times that aggregate education funding should not be cut. In fact, making education recession-proof nationwide without raising taxes is a way out of an economic crisis.

State budget officials know that low-cost federal student loans are widely available. That is why states cut higher education funding when tax revenue is short. They expect families will pay or borrow more for college after cuts occur.

They're right, but consider the impact. During the last recession that led to state budget cuts, in-state tuition and fees went up 39% in one year at the University of Arizona. From 2000 to 2003, they went up 44% at University of North Carolina-Chapel Hill. The average undergraduate leaves school with more than $19,000 in federal student loan debt, twice as much as a decade ago.

The Right Way

In response, organizations such as the Cato Institute, a libertarian think tank, argue that we should deter states and colleges from raising tuition by cutting student loan subsidies. But that would make college less affordable for the middle class and less accessible for the poor.

There's a better answer: The 49 states that have balanced-budget laws should revise them to allow deficit spending on education during recessions. We learned from the Great Depression that the way out is with a massive infusion of government-supplied liquidity. Consumer and government demand drives supply, which in turn drives jobs.

Look at what we've done on the federal level. We passed a $170 billion stimulus plan. We've committed more than $400 billion to ad hoc Wall Street rescues. We passed a $700 billion bank bailout plan. But the states are about to move in the opposite direction and cut spending. That's bad policy right now.

Too much deficit spending is a danger, but so is not borrowing a neighbor's hose when your house is on fire. We need sensible revisions to state budget laws that set flexible caps on deficit percentages, impose objective triggers and require public debt repayment during good times to prevent runaway spending. But adhering to a balanced-budget principle in an economic crisis is what Herbert Hoover did initially. We need the opposite.

Attention governors: Show leadership, revise your budget laws and make education recession-proof.