Senate’s Gift To Potential Students: Reason Not To Enroll

Basic economics dictates that, if the government subsidizes the purchase of an item, the price of that item will rise. In the case of college education, the government has done something a bit more damaging than subsidize the purchase of tuition. It has subsidized the cost of going into debt for that tuition.

But that has just changed:

“U.S. senators headed home for a Fourth of July recess without passing a bill that would prevent interest rates from doubling on student loans next week, leading to a ramp-up of political finger-pointing. Last year, Democrats used the looming increase in the cost of student loans to great political effect, pressuring Republicans in an election year and rallying young voters in support of President Obama’s campaign. Now, as a temporary extension of discounted interest rates is set to lapse, Democrats are at odds with one another over the issue, with the party’s leaders privately grumbling about a White House proposal nearer to Republicans’ solution than their own.”

I have no idea why the Democrats can’t deliver on Obama’s youth-vote-buying promise. All I can do is accept the political loss to them as an unexpected gift and be thankful. But I’m also thankful for the sake of college students.

“A new report from the Joint Economic Committee showed that student debt has risen significantly, from $550 billion in late 2007 to about $1 trillion in the first quarter this year. The same report said that without congressional action, the higher Stafford interest rates would add $4,500 to the cost of a four-year college degree.”

What this would mean is an immediate drop in the number of students entering college. That would be a good thing! Right now students are graduating with job prospects that don’t come near to allowing them to comfortably pay off their student loans. Rather than enticing these students through below-market interest rates, the government should stop obstructing the ability of young people and their parents to make rational choices about how to invest in their future.

Prices are signals. The widespread willingness to loan money is also a signal. By loaning to students who are not credit worthy and who could not secure a similar loan in the private sector, the government is distorting signals and leading people into irrational decisions. By allowing the cost of these loans to rise, students are getting more accurate signals about whether or not going into debt is a good idea.

While the entire story is told as if it is all about students, the student loan complex is really a form of corporate welfare to colleges and universities just like food stamps are a form of welfare to Wal-Mart. If we allow the cost of loans to rise, we might see one of the best things possible in education—we might see the cost of tuition in real dollars finally start going down.

Lower costs and less debt might be confusing for a time, but it will also be a change for the better!