One of the best personalities in the financial world is consistently humorous Josh Brown, otherwise known as The Reformed Broker. Unfortunately, though, sometimes he blogs about more serious or sad subjects, such as his most recent entry titled “The Student Loan Bubble Illustrated.” The article is viewable here. It’s “grotesque,” he says, what the higher education system has become here in America. Tuition has nearly doubled in a decade, 2011 student debt more than encompasses 2001 student debt and for the first time in history, student loan debt is larger than credit card debt. It’s disturbing to think of the trouble one must go through, nowadays, to receive an education that is almost mandatory in today’s workplace to get hired at a respectable job. But what makes it sad, is that nobody really understands WHY! Are tuitions higher because the supply of schools are down? Nope. Can schools charge more because the average household income is higher? Nope. Can schools charge more because students can pay back the tuition easily once graduated thanks to lofty incomes in a prosperous job market? Hellllll no. It’s quite simple, really, a matter of supply and demand; schools charge more because the demand for an education (that is, there are more students) is higher.
In an efficient market, there would be more students for various number of reasons. There is a plethora of jobs all paying desirable salaries, perhaps. Or, secondary education is of higher quality making university and graduate level education easier to comprehend. Whatever the reason, in an efficient market equilibrium would be satisfied at some intersection of supply of schools and demand of schools that is best for all. So why the increasing rate of students? Certainly America isn’t getting smarter at the secondary level, citing this article as a perfect example. And as we all know, the jobs market is a trainwreck right now.
The answer, unfortunately, is government intervention.
A scenario: A bank in the business of making student loan’s is approached by two individuals with aspirations of attending university. Student A comes from a well-off household, capable of paying 70% of the tuition costs and Student B from a broken home that will need 70% of the tuition costs paid for by the bank. Student A can clearly pay back the 30% loan whether he immediately finds a job post graduation or not. Student B, on the other hand, will absolutely have to find not just a job, but a very good paying job, in order to satisfy the repayment demands of the loan. A bank, interested in making money and not going out of business, as a bank should be, is only going to give the loan to student A. And, rightfully so.
But if government enters the situation and starts skewing the market’s equilibrium by subsidizing loans (that is, paying them back should the students default), then BOTH students will get the loan. Unfortunately, this extra demand of schools from students receiving loans that don’t deserve them allows schools to consistently increase costs, because there is an ever-increasing population of students looking for loans AND getting them, thanks to government subsidies.
I know what you’re saying… “So you’re telling me that two students both capable of handling university will see one succeed and one fail because of costs!?!?”
Well, no. For one, if government subsidies were removed from the equation, school costs would have to come down. Because demand would shift, price would drop in an effort by schools to find equilibrium again. Further, we’d be able to return to an era similar to that of about 40 years ago, where those who had to work their way through school, did it. For example, if student B knew he had demanding loan payments looming over his head, he could work and pay back some of the loan while in school, rather than waiting until graduation. Also, a student coming from a lesser funded household can apply for grants/scholarships, etc., available to only those households that fall underneath a specific umbrella. Lastly, some students would be denied a university level education. These students, though, would be the ones undeserving of such education, having performed unsatisfactorily in secondary school. If you want it, you have to earn it.
In the end, this dilemma of government intervention via subsidies is the same that drove speculation in housing that eventually led to a devastating crash and by the looks of it, the student debt market is going down the same path.
This is my first foray into Austrian Economics on this blog. Austrian Economics is rooted in laissez-faire economic thought. That is, don’t mess with the market, for it shall work itself out exactly how it should be.
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