<p>
[quote]
By creating a seller's market, the federal government has driven up the price of education and caused universities to have no incentive to keep costs low. It has simultaneously created a debtor's mentality, whereby graduates take on enormous amounts of debt, sometimes into the hundreds of thousands of dollars, without understanding the long term ramifications of that debt....
[/quote]
</p>
<p>Avoiding the political extensions (government handouts lead to dependeny, etc, etc...), the questions as this relates to higher education are interesting:</p>
<ol>
<li><p>Do we too often ignore the long-term issues with large loans because of the short-term benefits?</p></li>
<li><p>Does the availability of loans for students allow colleges to raise costs at will? Would college cost less if there were no student loans available (or were restricted)?</p></li>
<li><p>Should loans be tied to the possibility of repayment (e.g., a loan would be easier for an engineering major to get than for an art history major)?</p></li>
<li><p>Should we concentrate on making student loans easier to pay off, or on the overall cost of education?</p></li>
<li><p>And my (of limited means) question: Shouldn't finances have more of an impact on a student's decision on where to go?</p></li>
</ol>
<p>If you reply, please, please, please avoid the larger philosophical, political, polemic arguments about the role of government and reply in relation to college costs.</p>
<p>The availability of easy money increases the price of things. It happens with credit cards, mortgages, home loans, etc. Increase the supply of money and it will find places to go.</p>
<p>Any economist will tell you that subsidies create artificiality in the marketplace.</p>
<p>In a true market economy, Harvard would charge 80K per year (or some number above what it charges today.) Clearly Harvard is too cheap since tens of thousands of people try to go there only to be denied. Or it could charge 100K per year and then provide aid to the kids they want who can’t afford 100K or some variant thereof.</p>
<p>University of New Haven or Sweet Briar or High Point would charge 25K or some number less than Harvard- there is clearly a price at which they could met their enrollment targets but it is surely less than the one they currently charge.</p>
<p>The colleges between High Point and Harvard would set a price somewhere in the middle- reflecting what people think their product is “worth”. And their costs and expenses would need to go down to reflect less revenue.</p>
<p>Some colleges would boost enrollment- spread out their fixed costs over more heads allowing them to either charge less or offer more on the variable cost/service front. Some would go out of business- at some point you can’t reach scale. Many of the for-profit colleges would go out of business immediately- between Pell scams and other government subsidized loan abuses, their revenue base dries up asap.</p>
<p>Colleges would take a hard look at the “arms race” to provide the same amenities as a five star resort. Good- bye climbing wall. Good- bye 24 hour espresso bars. Sayonara sushi in the dining hall. Deans would be evaluated on how effectively they could contain cost increases on non-instructional items. We’d go back to the good old days where freshman lugged box fans into their dorms since August and September are pretty hot in most parts of the country and A/C was a luxury which colleges could not afford.</p>
<p>That’s what happens without loan subsidies. There are about 12 people in America who would take out a private, unsubsidized, market term loan to attend a third tier private university to get a BA in Recreation management. So the schools offering that degree either get their cost structure in order or go out of business.</p>
<p>Ironically, the availability of loans also allows colleges to raise the limits of their need-based aid, since cash is fungible. </p>
<p>Think about it this way: HYP et al have been criticized (historically) for not seeking out more low income/disadvantaged students. If the feds eliminated educ loans, HYP would have replace that loan money with HYP grants, or lose the students (and risk the wrath of the NYT). But since federal loans are free to HYP, they can use the grant money that they would have to otherwise give to low income students and spread those funds to those making up to $180k income.</p>
<p>Generous government loans, not to mention grants and scholarships, create a sort of “third-party payer” system not unlike health care. People with good insurance don’t question what their doctor or hospital charges because they pay only a small part (if any) of the total.</p>
<p>Loans are an insidious form of subsidy, though, because they are foisted on inexperienced individuals who likely have never dealt with sums of that magnitude before. The immediate pain of paying tuition is removed, but it’s a temporary cure.</p>
<p>Institutional grants, like need-based scholarships, are a form of price discrimination that lets the school raise prices for those who can afford it but still enroll students with lesser means. I’m not opposed to helping needy students, but individualized pricing is problematic for middle-class families who may not get need-based aid but who aren’t wealthy enough to just write a check each semester. Imagine if you went to your car dealer and asked how much a particular model would cost and before giving you a price the dealer did was ask how much money you had in the bank!</p>
<p>Your preaching to the choir with me Roger! Agree but as long as colleges can hide under their non- profit statues they get away with it…Nothing has shifted hard earned wealth away from the middle class more than college funding and abusive credit cards. Without college loans and government funding many 3rd and fourth tier schools would go under. If the recession continues, some may…</p>
<p>Roger - Whenever I suggest the idea of your above statement to someone it blows their mind. Most consumers of college services have no idea that the colleges operate under much different rules than other service providers.</p>
<p>HYP and a few others don’t offer government loans as part of their aid packages. If students want to take them out to help cover the family’s part of the bill, that’s up to them.</p>
<p>Considering that the total amount that dependent students can borrow for four years of studies with the Stafford Loan program comes to a whopping $27,000 (which is less than the one year in-state Cost of Attendance at many public universities), it is hard for me to believe that government loans for students are the bad actors. PLUS loans that are handed out to almost any parent with a pulse who asks for them, and Private Loans that are easier to qualify for than a car note or home mortgage probably do contribute to this spiral.</p>
<p>As has been discussed before, things really started to go downhill when the private loans were made exempt from bankruptcy. The second the lending bodies were able to collect forever, the rules were relaxed, students and families could borrow more, and there was less incentive to hold costs down on the part of the educational institutions themselves. New regulations that would make private loans (better yet, PLUS loans as well) dischargeable in bankruptcy would mean that lots of those loans would not be written, and many students would be suddenly looking for more affordable institutions. Our community colleges would explode, lots of for-profits would close down, and a whole range of mid-tier institutions would have to drop in price or shutter their doors forever. We’ve seen some of this already in the past four years as families that couldn’t borrow against their homes, and/or who lost jobs due to the recession were forced to re-consider their kid’s college lists.</p>
<p>I’ve been on this board for over a year now, and every time I come here, I read post after post of high school students saying, “I want to apply to Stanford, Rice, Brown, Emory, and Harvard, and I don’t care how much it costs!” Problem is, a huge chunk of students change their major at least once during their time in college, which explains why so many students take 5+ years to graduate. If I were going to one of these uber-expensive universities, and I took the educational path I ended up taking, I would be jealous of those students who would “only” have $100k in debt. Thank GOD for the community college I went to! It was cheap, relatively small, used the same textbooks, taught the same material, and it was run much more efficiently than any other university I’ve enrolled in. Some people just need to swallow their pride, enroll in their local community college, and transfer as a junior. Some call it the “back door method,” but I have NO debt and no regrets about taking the community college route. I only wish I had done it directly out of high school, instead of wasting 1.5 years at a state school, and spending another 1.5 years in “rebuild mode.” I would have graduated 3 years earlier, be in the workforce right now, and I would have Arnold Schwarzenegger’s signature on my BS degree.</p>
<p>The students CAN’T have $100k in debt unless someone else co-signs for them. Or unless their parents take out PLUS loans with some kind of promise on the kid’s part to pay those PLUS loans back. It really is that simple. Without co-signers students are limited to the Stafford maximums (and the Perkins if the institution offers it). The only way a student can end up in that kind of debt is if the adults in his/her life are (yes I am going to say it) fools.</p>
<p>Usually those “I don’t care how much it costs!” posters simply haven’t learned the facts yet. Once they do, they rant about their tight-wad parents in the Financial Aid Forum and then start looking for ways to make their educations affordable.</p>
<p>Back to the original point… at the macro level, the answer is almost certainly “yes.” Outstanding student loans top a trillion dollars now, and these loans don’t have rigorous credit standards. Just as easy mortgages flooding the market caused home prices to rise just about everywhere, easy college money enables tuition to increase without the normal market reaction.</p>
<p>The other factor is an irrational belief that higher tuition signifies higher quality. I haven’t seen a good study on this, but anecdotal evidence suggests that schools that let tuition lag behind their peers actually see a decline in quality and/or quantity of applicants. So, every school follows the leader to maintain comparable sticker prices, and then tries to increase affordability by offering more aid. Great, except for those who end up having to pay the sticker price but don’t have unlimited resources.</p>
<p>From an economic standpoint, desirable colleges behave a lot like luxury products (e.g., Rolex, Louis Vuitton). For most products, lowering the price increases sales. (Remember the demand curve from Econ 101?) Luxury brands don’t always behave that way. If people saw these brands being discounted, it would tarnish the exclusivity of the brand and, paradoxically, reduce sales in the long run. An Ivy (or comparable) degree is a brand that lasts for the life of the recipient, hence the willingness to pay ever-higher tuition by using debt.</p>
<p>Vienneselights - wow… re: “do we really want market forces to be responsible for higher education?” In one word, Yes. Getting closer to the true cost would open eyes and be the first step to real reform. </p>
<p>I guess there are some who think is all some sort of game of Monopoly with funny money but for some of us, we are already paying in real market dollars. (real market forces at work!) </p>
<p>I think the more important question is not do we really want market forces to be responsible for higher ed but does higher ed grasp the enormous bubble coming and does it want to voluntarily want to take steps to minimize the damage?</p>
<p>I think that even Alan Greenspan said that they couldn’t recognize them until after the fact. In markets, though, one can just look for the parabolic rise. The thing about bubbles like the tech and mortgage bubbles is that those that gain from the bubble (brokers, lenders, etc.) do everything that they can to inflate it higher and higher until it really pops.</p>
<p>“If people saw these brands being discounted, it would tarnish the exclusivity of the brand and, paradoxically, reduce sales in the long run.”</p>
<p>I know of no economic environment that so well reflect Thorsten Veblen’s “theory of the leisure class”. And, it should be noted, as they’ve raised the list price, the number of applicants has increased virtually in tandem.</p>