In 1946, the future Nobel laureate economist Milton Friedman was in his first year on the faculty of the University of Chicago and had just co-authored a pamphlet attacking rent controls, “Roofs or Ceilings,” which itself was savaged for being “political.” It was the beginning of the controversy and distinction that would follow a career in which Friedman would assail the withholding tax he helped invent and promote various forms of deregulation and privatization, as well as what he called a natural rate of unemployment since full employment would spur inflation.
Friedman mostly agreed with his critics about the problems confronting America, they just disagreed about many of the solutions he proposed. He beavered away.
In 1955, he published “The Role of Government in Education,” which held that it was bad for everyone if students in higher education took out loans to pay for it, since the return on education was variable depending on the fields the students entered but the cost was fixed. Instead, Friedman proposed a system in which the more one earned after graduation, the more one paid. It would be progressive and it would, in his view, replace debt with equity in a truly chosen field. Income-based payments would be automatically deducted through the tax system.
It is an idea that is getting a fresh look in a few quarters these days because we have mostly come to the conclusion that student debt is problem, we just have not agreed about what is to be done.
We have several Democratic presidential candidates and other Democrats on the left who lately have proposed or demanded that student debt be eliminated. We can see the motive. In 2019, almost 45 million student borrowers owed about $1.56 trillion, an average of more than $34,000 per student. That makes student loans the second-highest category of U.S. debt now, behind only mortgages. It was about $300 billion 15 years ago.
The situation is so bad that Education Secretary Betsy DeVos recently said, despondently, that her department’s Federal Student Aid agency does not want this massive loan portfolio, which she called an “untamed beast.”
But here is a catch: Even if you wiped out student loan debt at one stroke, as Democratic presidential primary candidate Bernie Sanders has proposed to do, or eliminated most of it, as fellow candidate and senator Elizabeth Warren has argued, beyond the disputed fairness – it largely benefits people who went to expensive colleges and small, private ones – there is a bigger problem: The debt will start racking up in the same broken system the next day.
A debt jubilee is a pricey gimmick. With a plan like Friedman’s, we would address the day after as well, while having the government refinance existing loans under the new terms.
Real reform could not end there. Congress would also have to use its authority to cap public and private tuition costs by limiting increases for all students, including borrowers. It is certainly not as simple as making all schools tuition-free, as some Democrats lately have advocated, but it has the virtues of being more realistic and probably less destructive of the fabric of American higher education, which still leads the world.
With just income-based student loan repayment alone, we could profoundly change the circumstances of graduates, Chris Farrell, senior economics contributor at Marketplace, the public radio finance program, said recently. “They can take that job for love, not money.”
We do not think of promoting love as one of the core functions of government. Yet as long as it is in the business of education, perhaps that is exactly what it ought to be doing.
