Student Loans - Unintended Consequences

Stories are rife – college and professional school graduates are overburdened with student loan debt.

Certainly, that government-backed program made sense - superficially - twenty-five years ago.

If a person wants to go to college but doesn’t have the money for tuition, the Federal government will either insure or guarantee student loans at low interest rates.  After all, the more educated our citizenry, the better for all of us economically and otherwise. 

Not coincidentally, between 1986 and 2010, college tuition rates rose 500% while inflation rose 115% and outstanding loans ballooned to over $700 billion.  In response, President Obama has directed that student loan balances after twenty years be forgiven.  Since such loans are guaranteed by the Federal government, that means, of course, that U.S. taxpayers pay the balance.

How did this happen? Of course, this was not intended.  But that is no excuse, for those who promoted the policy failed to mind a simple economic lesson:  with increased demand, prices go up.

Education is a service product which must be paid for.  Like any other product, its price is a reflection of costs, supply and demand.  If the demand is limited, the provider must focus on costs to ensure that its product is affordable so that students can afford the school’s tuition.

However, if the price the student pays can be deferred, without worries (at least then) about affordability, the school’s incentive to control costs largely disappears.  And as the 500% tuition increase in twenty-five years shows, school budgets exploded with the influx of the student loan money.  With no apparent ceiling to the loan money available (remember the guarantee), the school spending increase generated ever higher tuition demands.  More buildings, more sports facilities and higher salaries, of course, required more tuition money.

But now we see the consequences, unintended (though hardly unforeseeable) as they may have been.  But isn’t that often the rule with government programs?  Gains are relatively immediate and thus alluring.  Even if problems down the road are foreseen by proponents, they are either ignored by the politically cynical or wished away by the well-meaning, and the taxpayer is left holding the bag. 

Does the sub-prime mortgage debacle ring a bell?