Discussion of the economics of college funding is something that makes most people roll their eyes and look for the nearest exit. Many folks seem to think that it’s great and is responsible for everything from the post-WWII boom to the computer revolution and they don’t want to hear otherwise or apply any critical thinking to the issue.
However, us political economist types don’t have that luxury. We have to apply a series of analytical tools to the issue to get a real view of what is going on with student loans. What we find is that the market for a college education is no different than any other market in terms of how it functions. A scarcity of dollars will cause prices to go down as competing universities chase a diminished supply of capital. Conversely, when dollars are plentiful, prices rise. See where I am going with this yet?
When the government dumps lots of cheap dollars into the system and the FED keeps interest rates artificially low (encouraging private lenders to do the same), then the price of tuition will necessarily rise as well. This creates an inflationary spiral that feeds the need for more and more student loans, grants, and scholarships which causes prices to rise further.
I’m currently working on a graduate degree that costs me $3300 every two months. If you take the national average price inflation since the inception of the GI Bill, these classes should only cost about $800. If that were the case, I could easily pay for this degree out of pocket as I go. Instead, I am forced into the public financing system and as a result (assuming I don’t pay it down as I go), I will be approximately $105,000 in debt when I finish. In the absence of public funding, that debt would be zero.
The only real solution to the problem of the education cost is to get the government out of it and to strip the Federal Reserve of the ability to manipulate interest rates. The resulting price deflation would make it possible for millions of people to attend college without racking up a huge debt obligation as well as allowing private lenders to make low interest, manageable-sized loans for those that truly need it.
This is an issue that is critical to this audience and understanding the economics is key to joining and winning this battle. We are all rightly concerned about the new legislation to create a government monopoly over education funding. Such a system will be unsustainable, create huge debt obligations for new graduates, and assure that the cost of education will remain out of reach to those unwilling or unable to go hat in hand to the government for help.Published in