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The Lethal Linkage of Medicaid Costs and Tuition

President Barack Obama has been busy recently traveling to college campuses across the country, talking about student loan debt and pitching his proposal to keep the interest rates on some federal loans at 3.4 percent for another year. His Republican rival, Mitt Romney, also supports a one-year extension.

While I agree with both that we need to make it easier for students to afford college, the president is not telling the whole story about how we got here and how we’re going to pay to fix it.

What the president needs to tell students is that his own health care policies are the principal reason that tuition and student debt are rising.

Medicaid mandates on states are soaking up dollars that would otherwise be spent on state universities and community colleges, forcing up tuition and resulting in more student loans and debt. Even worse, the federal government is trying to make a profit by overcharging students on their current loans and using part of the profit to pay for the new health care law.

According to the Congressional Budget Office, this takeover produced approximately $61 billion for the government — $8.7 billion of which went to pay for the new health care law.

The president’s new student loan proposal would, for one year, keep rates at 3.4 percent on new subsidized Stafford loans (those for which the federal government pays interest until students graduate), rather than increasing to 6.8 percent under current law. These loans account for about 40 percent of all federal student loans. According to the Congressional Research Service, the average student takes out approximately $3,600 in these new loans and will save about $7 a month in interest payments.

Existing loans won’t be affected. So a student attending the University of North Carolina, which the president visited last month, will continue to pay the same rates over the life of their loans. It’s a fixed rate. We’re just talking about new loans made after July 1.

Senate Democrats have come up with their usual methods of paying for this proposal: Raise taxes on small businesses.

House and Senate Republicans have a better idea: Take the $8.7 billion the federal government overcharges students on their loans to help pay for the health care law and give it back to the students.

And here’s another idea: Let’s be honest about what’s pushing up tuition costs.

When I was governor of Tennessee in the 1980s, the same thing would happen every year as I put together my state budget, and it’s the same thing happening in every state capital today. After allotting money for the things we had to fund with state tax dollars — roads, schools, state agencies — we’d have to choose between spending the remaining money on Medicaid or public higher education.

My goal was always to increase funding for public higher education because I believe that’s the future of any state. We followed a formula according to which if you went to a public college or university, the taxpayer would pay 70 percent and the student would pay 30 percent.

That has since turned completely around in Tennessee, where taxpayers now pay 30 percent and the students pay nearly 70 percent.

Why? Federal Medicaid mandates. Governors and legislatures in every state are forced to take money away from public higher education to pay for those mandates — and public colleges and universities must ultimately raise tuition.

Just last year, state funding for Medicaid in Tennessee went up 16 percent. As a result, state funding for public higher education went down 15 percent. What did the University of Tennessee do? It had to raise tuition by nearly 8 percent. What did students do? They borrowed more money.

The president’s health care policies have made these problems worse.

His health care law requires states to spend even more on Medicaid and prevents them from changing the standards for eligibility, even though they have less revenue and are facing growing budget shortfalls.

College students deserve to hear the whole story about student loans from the president. The solution isn’t taxing our nation’s job creators — it’s stopping new Washington mandates that soak up money that ought to be going to public higher education. Those mandates are the main cause of tuition increases.

Sen. Lamar Alexander (R-Tenn.) serves on the Senate Health, Education, Labor and Pensions Committee. He was governor of Tennessee, U.S. secretary of education and president of the University of Tennessee. This post first appeared at Politico.

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John BallardBill Recent comment authors
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John Ballard
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Medicaid mandates on states are soaking up dollars that would otherwise be spent on state universities and community colleges, forcing up tuition and resulting in more student loans and debt. Dare I suggest that the federal budget and priorities are a tad different from those of the states? A state is like a youngster with a paper route stewarding meager resources, feeling pinched cuz even with the addition of his weekly allowance his income is still inadequate for his priorities. But he’s not worried about who pays the rent, puts food on the table and furnishes him with transportation until… Read more »

Bill
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Bill

Sen. Alexander makes an excellent point about limited state resources and the crowding out of other priorities by Medicaid spending in recent years. The irony is that both public education and medicine are largely driven by labor costs, and neither has been able to achieve signficant gains in labor productivity as a result of new and innovative technology investments. His personal values, which I respect given his experience, favor education, but that does not mean that we should excuse either of these two sources of state budget distress from closer scrutiny.