Before we begin, let’s do a little thought experiment.
Imagine you were auctioning off a really nice chair and there were fifty people in the room, each with $100 available, bidding on it. What’s the most that chair is going to sell for? $100 of course. Now let’s say that the government decided it was really important for everyone to have a nice chair so it gave everyone another $100 to buy a chair with. How much is that chair likely to sell for now? My guess is that it will go for closer to $200.
Now imagine that that chair was just a regular chair but instead of being in an auction house, it was in a lecture hall at a university. And let’s say that the students’ parents can give them $10,000 to sit in that chair for a year, and that the government will loan them another $10,000 if they want it. How much is that lecture hall chair likely to sell for? If you guessed $20,000, go to the head of the class! All the money being thrown at higher education is doing nothing but bid up the price of tuition. It doesn’t help the students, because they have to pay it back. But it is sure making the colleges very wealthy.
Consider these recent news stories:
From the Wall Street Journal:
Student Debt Rises by 8% as College Tuitions Climb
Americans owed $904 billion in student loans at the end of March, nearly 8% more than a year ago, the New York Fed said Thursday in a quarterly report on consumer credit. That compares with the $679 billion they owed on credit cards at the end of the first quarter. Between the fourth quarter of 2008, when credit-card debt peaked, and the first quarter of 2012, this borrowing fell by $187 billion, or 21.6%, the Fed said. Over the same period, student-loan debt rose by 41.4%, or $264 billion.
Fed: Student loans soar 275% over past decade
NEW YORK (CNNMoney) — Student loans have more than tripled over the past decade, according to new data from the Federal Reserve. Student loan debt hit $904 billion in the first quarter of 2012, up from $241 billion a decade ago, according to the Federal Reserve Bank of New York quarterly household debt report. That’s up 275% since the same period in 2003.
And in 2010 from Boston.com:
College chiefs’ salaries increase
More entering million-dollar ranks, survey says
The club of millionaire college presidents is becoming less exclusive, with 30 heads of private colleges nationwide cracking the once-exalted barrier in a new salary survey. As recently as 2004, no college presidents received more than $1 million in annual compensation. But in 2008, the most recent data available, Ivy League and lesser-known colleges alike lavished their presidents with at least that much in salary and other compensation.
This is madness and it will end in catastrophe. There is no way that this near trillion dollar debt will be paid. The default rate has been increasing and will continue to rise. College loans can not be discharged in bankruptcy, and I fear that the government will coerce millions of young people into years of some form of public or perhaps military service in exchange for release from their college debts. And the taxpayers will have to absorb that $900 billion (and growing) hit.
Meanwhile the colleges have already gotten the $900 billion and and lavished it on outrageous salaries for their administrators, faculties, and staff, and have constructed all sorts of fancy new buildings and facilities.
The only reason colleges charge the astronomical tuitions we are seeing today is because they can. If the government stopped making student loans the colleges wouldn’t just go away. They would alter their business models so that the tuitions could actually be afforded. They would need to cut their bloated payrolls, force their professors to actually teach instead of spending their days doing “research”, and would have to stop constructing palatial facilities to impress prospective students. Some of these college campuses look more like the Grand Bahamas Resort than a place of learning. No wonder they are unaffordable!
Our universities would need to be businesses that supply a product that their customers can afford. And what’s wrong with that? That’s what every other industry has to do (with the exception of the medical industry, which has also been totally screwed up by the government.)
So let’s say the government stopped pumping billions into higher education, and the schools learned the meaning of the word “efficiency” and cut tuitions in half. And let’s say there were still many bright young people who couldn’t even afford the newly reduced tuitions. Well banks could still make student loans, just like the old days before Obama forbade them from doing so. And student debt could be dischargeable in bankruptcy just like the old days. The banks would require that students keep their grades up or they would call in the loan. That would provide a pretty good incentive to study instead of party. And there would be no more $100,000 debts to get a degree in the humanities or womens studies. The banks would only loan money for the pursuit of a degree in a field that had the earning potential to enable the student to pay back the loan. Plus, the loans would be much lower since tuitions would be lower.
The lesson to be learned here (and I am not going to charge you for it) is that the government can not make something more affordable by throwing money at it. That makes it less affordable. This fact of economics applies to any field. If the government decided it was really important for everyone to have very good plumbing, and sank billions of dollars into plumbing subsidies, America would would have a plumbing crisis today in addition to the education and health care crises we already have.