Investor's Business Daily, September 28th, 2007
Economics: President Bush has signed a student loan bill that's being hailed as much-needed assistance for current and prospective college students. It looks like they caught a break -- but only if they don't look too close.
The College Cost Reduction and Access Act expands financial aid by $20 billion, including federal grant increases. It eventually will cut the 6.8% interest rate on federally subsidized loans to 3.4% by July 1, 2011; set annual loan payments at 15% of what Washington considers the discretionary income of students who go into low-paying jobs; and forgive the debts of those workers who have made consistent payments but have not fully paid down the loan after 25 years.
Under the law, students who choose some government and public-service jobs are allowed a special privilege: Nurses, first responders, police officers, firefighters, prosecutors, public defenders, librarians, early-childhood teachers and those who join the military will have the remainder of their loans forgiven after working and making payments for 10 years.
Special interests groups are trying to spin the bill as a shield from increasing education costs that will broaden opportunity. They're missing an important detail that's not getting the attention it should: Student loans have an inflationary effect on college tuition.
"It is clear that federal aid and tuition levels are very closely related," Gary Wolfram wrote in a 2005 Cato Institute policy analysis, "Making College More Expensive."
"There is ample evidence to suggest that (government aid) programs are counterproductive and have the unintended consequence of increasing tuition costs," Wolfram wrote.
Those hurt the most are, of course, the very people the aid is intended to help.
It's an immutable law of economics: Subsidize a good or service and demand for it will swell; as demand increases, so does the cost. The similarity with the increased federal help to the third-party-payer health care system that has fueled demand and pushed costs skyward cannot be dismissed. In both cases, consumers have lost their sensitivity to price because someone else is paying -- or appears to be paying.
An immutable law of human nature also is at work.
With more money available for loans, colleges feel a degree of freedom to increase tuition. In 1987, when he was secretary of education, William Bennett noted that rising federal aid had "enabled colleges and universities to blithely raise their tuitions, confident that federal loan subsidies would help cushion the increase."
Some critics just don't -- or won't -- understand the rules that are at work here. Even as the bill was being signed they continued to chirp about high tuition costs, and they want Congress to do something about them. Have they not noticed that colleges and universities are not charities? Do they think lawmakers should -- and are able to -- simply legislate lower tuition?
Yes, college tuition has soared through the years. It has consistently been above the general annual inflation rate, often running twice as high. In the past academic year, the average tuition at a four-year private college hit $22,218, a new high. At taxpayer-subsidized public schools, in-state students paid $5,836, while tuition for out-of-state students was $15,783.
None of this includes room and board, which adds $7,000-$8,000 to the yearly costs.
While some have merely watched tuition rise and have ignored contributing factors, economist Richard Vedder looked deeper and found that since 1994, government aid has gone up by 11% a year.
So, clearly, the answer to escalating costs is not an expansion of the student loan program. To do so only feeds the cycle that partially is responsible for the higher costs.
In addition to raising tuition, the bill also will have a negative effect on the private sector. With interest rates being forced down by half, many lenders will simply get out of the business. That will leave the already-dominant companies with fewer private-sector competitors and students with fewer choices.
But then that probably is what the left is hoping for: taking the private sector out of education altogether.
