December 1, 2014

Student loans.

I'm sure I'm not the only one who loves school. I learn lots of cool stuff, meet interesting people, and build my future one day at a time. But it is really, really expensive. We've all heard the stories from our parent's generation, when a person could go to school and support themselves with a part-time job. Over the past few decades, this has changed. What is to blame for the rampant increase in tuition costs? Who's fault is it?

It's simple, really. Blame the loans.

Having a college education can be an important stepping stone for many people seeking a high salary. Sure, there are some that can pull six figures without anything past high school, but they are relatively uncommon. For most, college is the key to a high standard of living. College is an investment in the future.

Businesses need college grads to fill many roles. Through the magic of econ that we are all familiar with, this increase in demand works to (generally) increase college costs. And these increased educational costs should reduce the supply of available college graduates, since fewer students can pay as prices go up. However, due to easily obtained government loans and grants, the market is highly distorted. More and more people are using government money to go to school, which pushes the costs even higher.

When viewed through the lens of malinvestment, it becomes easy to see where many of these problems arise. How many people are there that go to school and choose a degree path with very few real-world applications? How many history majors are out there for every history job? How many East Asian Studies graduates are out there working retail? Not to knock the history or East Asian buffs, but every unused degree will increase tuition costs for everyone else, even those going into high-demand fields such as computer science or engineering. When college money is so easy to obtain, students wont be so selective in what course of study they choose. Just go to school and figure it out later, the loans don't have to be repaid until you're done. And you'll have a good job by that time, right? Right?

Government loans and grants for higher education cause the market for college grads to become saturated. Not only are education costs higher as a result, but salaries are potentially lower due to the overabundance of college educated workers.  It is impossible to say exactly how much a job would pay if the supply of potential workers was reduced by, say, 30%, but it is logical that that job would pay more simply due to the scarcity of labor supply. Combine those effects with billions of dollars of loans that end up in default, and it becomes a very bad situation.

It's a harsh reality, but tuition costs would drop if student loans were not available. Over time, students and families would find other ways to pay for school. Equal access to a college education is clearly the goal of student loan programs. And while this certainly is a "warm and fuzzy" type of idea, it is simply not realistic or beneficial in the long run.

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