Student Loans and Rising Tuition

In the past, I have analyzed many problems that have manifested from failed government attempts to engineer social justice. Today, we see that same social justice in the form of “education for all”, student loans, and rising cost of tuition. Double-speak pundits will attribute this increase in tuition to the “rising cost of education”. While this is true on paper, there are complex economic factors at play. The mainstream remedies are nothing but the ills of government masquerading as its own cure.

The solutions being tossed around are nothing short of catastrophic. Liberals want to make college “free” for everyone. They think education is a right (it’s not), and that same mentality has led to zealous government loan programs. These programs arbitrarily drive up demand without any consideration for supply. As a result, the price of the good (a diploma) has become very price inelastic, yet its value has not increased relative to the price.

Of all the problems in higher education, the majority can be traced back to federal student loan practices. Most of these loans come from the Department of Education to the tune of $30 billion per year. The problem with government lending is that the incentives are much different and that makes them more expensive. Private lenders use their own capital obtained through smart business practice, not compulsory taxation. They will not lend $100,000 at a near-zero interest rate to someone seeking a degree that will not produce repayment. Thus, capital, as a resource, has been saved for more efficient investment that will likely create more wealth. The borrower repays the lender with an increase in wealth generated by the use of the $100,000, whether it be from increased income from a diploma or business investment. It is only when that increase does not happen where a deficit and inefficiency is created.

Conversely, when government lends money, there is little or no consideration for what the loan will yield because there is no concern with creating wealth, only reallocating it. Government obtains its money through forced taxation, not frugal loaning. Government will lend (or give) $100,000 to someone seeking a degree with no thought of whether said degree will create more (or enough) wealth for the person to repay the loan. The end result is the loaning of money to people incapable of paying it back and the misallocation of capital resources. This money, as with all government money, is first taken from someone. For every government dollar loaned, a dollar is destroyed from the private sector or even more qualified candidates able to repay the loan.

Proponents of “free education” make the argument that education is beneficial to the public economic utility and should be heavily subsidized. The government spender is always short sighted and ignores where the subsidies come from. All forms of government money must first be taken from another by force. The misconception here is that taking $1 from Person A and giving it to Person B makes them both better off, or increases the ever-ambiguous “public economic utility”.

How can this possibly be true? If Person A is a blue collar, tax paying welder, it’s a safe assumption that Person A has no desire to attend a four year school any time soon. Person A has made a voluntary choice as such. With this in mind, where is the benefit of forcing Person A to fork over $1 to pay for Person B’s education? If Person B will obtain a marginal benefit from receiving a diploma, there is no justification to force Person A to subsidize it. Person A, not the government, should be entitled to a portion of this marginal benefit for footing the bill. Furthermore, taking money from Person A is money that will not be spent on goods, saved in a bank, or invested in retirement. Person A is now worse off because of Person B’s desire for education and the resulting government theft. Thus, there is no such thing as a student loan contributing to a public economic utility.

With the pitfalls of government loaning in mind, how does that tie back into “rising cost of tuition”? Economic incentives will, again, come to bear. Every university knows that the government will give out loans to anyone with a pulse. The higher education market becomes a competition for government funding, as opposed to customer demand. Instead of focusing on direct educational improvements and cost control, universities spend insane amounts of money on questionable ventures to attract new students. This spending may not increase the value of a diploma, but it certainly inflates the operating costs of the school. Further complicating things, universities lobby for more federal aid so that they can set their tuition higher. If a customer is paying with easy government money, there is no limit to what you can charge.

These incentives focus on the supply side of diplomas, but government loaning also impacts the demand. When loans become cheap or free, the incentive is to borrow, even for short-sighted student’s now experiencing sticker shock. With money readily available, the admissions (and applications) at universities increase rapidly. Ordinarily, when demand increases so doe prices, and consumers are restrained and their willingness to pay diminishes, which stabilizes the price at market level. However, government has taken on the role of removing the limit on demand and upsetting a crucial balance. As a result, demand has climbed with almost no effect on supply, and prices have increased to no end.

As it goes in the free market, entrepreneurs have stepped in to offer a solution for students seeking out lower cost, higher value education. Of course, these institutions have been demonized by the academia establishment. In my opinion, for-profit colleges will become the new revolution in higher education. As consumers seek out more direct, employable skills at a lower cost, we have seen for-profits experience rapid growth. Certain people are slowly shifting away from attending pricey four year schools with classes ranging from Basket Weaving to Pop Culture to Racial Sensitivity.

For-profits have hundreds of small, decentralized campuses around the country, as opposed to a large, central campus. This keeps their operating costs very low and allows students to avoid inflationary costs of room and board. Furthermore, for-profits offer direct, career related education that is not filled with demanding “General Education” requirements that add little or no value to the product. The economics of having shareholders keep operations in check also changes the dynamic. Pundits fear the thought of this, but, in short, it does the students well to have prudent financiers keeping school operations from running awry.

Like with all topics here, we must acknowledge a number of other factors. College athletics are a huge portion of operating costs and add no educational value to the institution. However, tax payers and students are forced to subsidize it with no return. Universities also have the luxury of being protected by accreditation boards, which makes market entry virtually impossible. Admissions practices at universities are subjective, costly, and influenced by government funding. Research grants attract even more funding and increased student interest, even though said researchers will likely never teach a day. Unions, tenure, and other teacher-favored employment practices further disrupt the market at the cost of students. The microeconomics of academia are complex and filled with bureaucracy. With more government involvement, it has become more expensive and less valuable.

If we want to start alleviating the problem, we need to make some major policy changes. The Higher Education Act of 1965 should be repealed. Accreditation boards should be dissolved. Government lending and the Department of Education should both be eliminated. Furthermore, regulation needs to be loosened so that for-profit schools can directly compete with non-profit schools. This competition will force non-profits to become more price conscious and product driven, as opposed to focusing on the “college experience”.

“As the price of college continues to outpace both inflation and the growth of average family incomes, students, parents, and policy makers are demanding to know just what families are getting for their money. The short, unsettling answer: No one really knows.” – David Glenn, The Chronicle of Higher Education

For more information on runaway student loans: http://www.downsizinggovernment.org/education/higher-education-subsidies

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