Obama vs. the Student Debt Crisis

With a rise in the number of students attending two and four-year universities comes a staggering increase in student loan debt.

To give you some context, 40 million Americans now have at least one outstanding student loan, with the average borrower carrying four different education-related loans. These numbers have pushed the student debt crisis to epic proportions, setting the amount of collectively-held student debt at an all-time high of $1.5 trillion.

This crisis has also given rise to a generation of "boomerang kids," with legions of college graduates putting off moving out, starting a family and buying a home due to overwhelming student debt. The average class of 2014 graduate left college $34,000 in the hole.

Ironically, attending college has placed many Americans on the slow track to success.

Waging War on Student Debt

On the bright side, more students than ever have been able to attend college in the past few decades, partly because of the federal government (along with many state governments) stepping in to help subsidize the cost in the form of grants and loans.

In that vein, President Obama recently announced an initiative to make community college free or nearly free to all students who are willing to put in the time and effort to attend and do well.

While I applaud Obama's recent efforts, one can't help but wonder if this proposal is really the best intentioned.

A Different Perspective

Enter the "Bennett Hypothesis."

This theory, proposed in 1987 by Reagan Education Secretary William Bennett, contends that federal financial aid can lead to higher tuitions.

Bennett wrote that financial aid, "enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase."

Although many studies testing the Bennett Theory have been inconclusive, there may be some truth to his theory.

As explained in this piece from The Atlantic, it all goes back to the basic idea that if you subsidize something, you'll get more of it. Money raises the demand, which ultimately raises prices.

Since higher education typically receives money from the federal government, state governments, corporations, foundations and dedicated alumni, the possibility for tuition increases is substantial.

A More Complex Battle

Unfortunately, most efforts to combat the student debt problem have consisted of little more than slapping a band-aid made of dollar bills over a festering wound, rather than analyzing the factors at play.

For example, studies have shown that financial aid has a different affect on the tuition cost of public universities, private universities and for-profit institutions respectively. Tack on the obvious complication of offering financial aid to students who may not need it, and you've got quite a complicated situation in need of a pragmatic solution.

Moving Forward

Given the sizable stock the Bennett Hypothesis has held from 1987 until today (it even spurred a more complex Bennett 2.0), Obama's efforts seem a bit short-sighted, and better yet, wasteful.

Consider the fact that the projected cost of Obama's most recent initiative is tipping the scales at a whopping $60 billion. Factor in previous years of expensive, ineffective initiatives, and you've got double the financial problem.

The student loan crisis instead needs complex legislation that targets all of the issues individually, instead of employing various blanketed solutions for an increasingly intricate problem. Time and money are both better spent analyzing the situation, even if it takes years, in order to construct a proven, tailor-made solution. Although easier said than done, it's clear that we have the financial backing, statistical evidence and research to hit the student debt crisis where it hurts.

This post originally appeared on GenFKD in January of 2015.