As the size and scope of the federal government have exploded over the past 75 years, we have learned a great deal about the confidence games that accompany the growth of the state.

There are Ponzi schemes, such as Social Security, where the government claims to “save” workers’ money while actually funneling it straight to current beneficiaries – at least until the inevitable day when the money runs out. There are sleights of hand, such as confiscating huge amounts of wealth through taxation and then expecting citizens to be grateful when they get a small fraction back in benefits. And then there’s the federal government’s classic two-step.

First, Washington meddles in a private market, usually to tame the extremities of “unregulated capitalism.”  Then, having made the market suitably dysfunctional, politicians lay the blame at the feet of industry and claim that only government has the wisdom to save it.

Silently and subtly, the Obama Administration is applying this strategy to higher education in America.  While President Obama’s proposals to incrementally bleed the private health care and energy sectors are receiving far more coverage in the mainstream media, his plans for education are dramatically more radical.  For what the White House has in mind stops just inches short of the total abolition of private lending for college students.

What Obama intends is the elimination of the Federal Family Education Loan Program, a public-private partnership that is the primary vehicle for providing college loans in America.  According to the Congressional Budget Office, his plan would save $94 billion over 10 years by eliminating the private lenders and leaving the loans fully controlled by Washington.  Expect to hear that figure often in this debate, as it is the sedative by which the White House will seek to pacify fiscal conservatives.

What this number misses, however, is that the federal government’s current spending on the FFELP program is so high because Washington guarantees the private loans, pays a special allowance to lenders, and is actually buying many of the loans outright through the TARP.  So Obama is right when he talks about the need to achieve savings by “cutting out the middle man” in student loans. He simply fails to recognize that the government is the middle man.

Alongside the wholesale change in lending, Obama is also intent on turning federal Pell Grants into an entitlement program, using the ostensible savings from eliminating FFELP to provide funds for an estimated 130,000 additional college students.  This initiative will probably pass easily (there’s not much of a constituency on Capitol Hill for appearing to make college more difficult to afford), but it betrays the fact that Obama is either intellectually unprepared or ideologically opposed to meaningful reform in how higher education is financed.

As the legendary economist Thomas Sowell has pointed out, part of the reason the rate of inflation for college tuition consistently outpaces the market is because of precisely the kind of subsidies that Obama is touting. It’s a matter of basic economics. Making more financial resources available for college tuition drives up demand.  This in turn allows colleges to raise tuition rates.  What’s more, formulas that allocate federal aid on the basis of tuition levels create a perverse incentive for universities to keep their rates high enough to receive government money.

The increase in students also creates inflationary pressures of a non-financial variety.  As a generation of programs from the GI Bill to Pell Grants have flooded the nation’s universities with students who wouldn’t have otherwise attended college, they have driven the value of a bachelor’s degree (and its attendant wages) down sharply.  Thus, over time a college education has become roughly the equivalent of what a high school diploma once was – a prerequisite for a basic standard of employment rather than a mark of intellectual distinction.

Higher education remains one of the more inefficient industries in America. And one of the tragedies of Obama’s policy is that it will subsidize that status quo. A new generation of entrepreneurial colleges and universities should be focusing on how to leverage technology to shorten time to graduation, lower tuition rates, expand class offerings, and break the tenure cartel.  Given the natural lethargy of the academy, such an ambitious agenda will probably take years to develop.  But if Washington ends up minding their purse strings, it may prove nearly impossible.