Diploma Mills and Debt Traps: How Washington Turned Higher Education Into a Government-Subsidized Racket

The Enrollment Pitch Nobody Scrutinizes

Every spring, millions of American high school seniors receive financial aid packages from colleges and universities. Buried inside those packages — beneath the scholarships, the work-study allocations, and the grants — are federal loan offers that carry terms no private lender would extend to an eighteen-year-old with no credit history, no income, no collateral, and no demonstrated ability to repay. The loans are offered regardless of the student's chosen major, the institution's graduation rate, or the median earnings of that school's alumni in that specific field of study. The federal government asks none of those questions. It simply lends.

The results of this arrangement are now well documented. According to Federal Reserve data, outstanding student loan debt in the United States exceeded $1.7 trillion as of 2024, held by approximately 43 million borrowers. The average debt load at graduation for a four-year degree has roughly tripled in inflation-adjusted terms since the 1990s. Tuition at four-year public universities has increased by more than 200 percent in real terms over the past three decades — a rate of inflation that exceeds healthcare, housing, and virtually every other major consumer expenditure. These are not coincidences. They are the predictable consequences of a system in which the price signal has been deliberately disabled.

The Mechanism of Distortion

Economists have a name for what happens when a third party guarantees payment regardless of price: it is called the Bennett Hypothesis, named for Reagan-era Education Secretary William Bennett, who argued in 1987 that federal financial aid was simply enabling universities to raise tuition with impunity. Decades of subsequent research have largely validated that intuition. A 2015 study published by the Federal Reserve Bank of New York found that for every dollar increase in subsidized federal loan availability, universities raised their prices by approximately sixty cents. The subsidy was not reducing the cost of education. It was financing its inflation.

The mechanism is straightforward. When students can borrow federal dollars without limit and without underwriting scrutiny, their effective purchasing power for education increases without any corresponding increase in their actual earnings or creditworthiness. Universities, as rational institutions responding to incentives, price to that purchasing power. The result is a spiral: federal aid expands, tuition rises, students borrow more, the federal portfolio grows, and the political pressure to forgive debt intensifies — which, in turn, reduces the perceived cost of borrowing and encourages the next generation of students to borrow even more.

This is not a market failure. It is a government-created distortion masquerading as a market.

Who Actually Benefits

It is worth asking plainly who wins in this arrangement, because it is not primarily the students. The universities benefit most directly: tuition revenue has funded administrative expansion at a rate that far outpaces faculty hiring or instructional improvement. The number of university administrators per student has grown by more than 60 percent since 1993, according to data compiled by the Department of Education. The bloat is not incidental — it is financed by the reliable flow of federally guaranteed tuition dollars.

The credentialing industry benefits from a system that has made the four-year degree a near-mandatory entry ticket to the professional middle class, regardless of whether the specific degree confers economically relevant skills. When employers use educational credentials as a hiring filter — in part because federal anti-discrimination law has made aptitude testing legally complicated — the demand for credentials becomes artificially inelastic. Universities can raise prices on a product that, for many students, feels non-optional.

The federal government itself benefits from the political optics: student loan programs appear on the budget as assets, since the government is technically a creditor. The long-term cost of defaults, income-driven repayment plans, and eventual forgiveness is systematically underestimated at the point of origination, allowing successive administrations to expand the program without acknowledging its true fiscal cost.

The Forgiveness Trap

The Biden administration's attempts to implement broad student loan forgiveness — ultimately blocked in significant part by the Supreme Court in Biden v. Nebraska (2023), which applied the major questions doctrine to reject the use of the HEROES Act as authorization — were politically understandable but economically perverse. Loan forgiveness addresses the symptom while turbocharging the disease. If borrowers understand that the federal government may ultimately cancel their debt, the rational response is to borrow more, not less. If universities observe that their graduates' debt burdens are periodically relieved by federal action, they face even less pressure to moderate tuition growth or improve post-graduation outcomes.

Forgiveness also fails the most basic test of distributive fairness. The majority of student debt is held by graduate and professional degree holders — lawyers, physicians, MBAs — who are, on average, among the highest-earning Americans. Blanket forgiveness transfers wealth from the working-class taxpayers who never attended four-year institutions to the professional class that did. It is, in the precise sense of the term, a regressive transfer.

The Free-Market Alternative They Won't Discuss

The most straightforward path to correcting higher education's price spiral is also the most politically uncomfortable: make lenders bear the consequences of their lending decisions. If universities were required to co-sign a percentage of their graduates' federal loans — taking on financial liability when borrowers default — the incentive to admit underprepared students into high-cost programs with poor employment outcomes would evaporate overnight. Schools would begin competing on post-graduation earnings, debt-to-income ratios, and completion rates rather than campus amenities and administrator-to-student ratios.

Private lenders, allowed to underwrite educational loans on actual credit and income-projection criteria, would price risk honestly — steering students toward programs with demonstrable economic returns and away from credentialing exercises with no labor market value. Income-share agreements, in which investors fund education in exchange for a percentage of future earnings, already exist in limited form and create exactly the alignment of incentives that federal loan programs destroy.

None of these mechanisms require the government to determine which degrees are "worthwhile." They require only that the parties making lending decisions face the consequences of those decisions — the foundational principle of any functional market.

The Verdict

A federal student loan program that insulates universities from the consequences of their pricing, lenders from the consequences of their lending, and borrowers from the consequences of their choices is not an education policy — it is a subsidy machine for an industry that has learned to extract maximum rent from the public purse while delivering diminishing returns to the students it claims to serve.