Saturday, May 18, 2013

College Tuition Increases...

This article rants and raves about the cost of college tuition, which for the past 20 years or so has been rising much faster than inflation.  The author explores several possible reasons for the increase, but none of them are satisfyingly simple and obvious. 

There is such a reason, however: the fast ramp of college tuition almost exactly correlates with the easing of student loan availability.  Way back in the Cretaceous era when I was examining the possibility of going to college, there's no way that I could have gotten a student loan.  These days, thanks to numerous Federal and State programs, if you can fog a mirror and get admitted to any college, you can easily get a loan to pay not only your tuition, but your books and living expenses as well.

So why would that make college tuition increase?  Because the marketplace for college has been distorted by the government subsidies and guarantees in the student loan market – a student selecting a college no longer needs to worry so much about what it costs.  Because the loans are so easy to get, the only pricing pressure comes from a students deferred need to pay off the loan.  This greatly reduces the pressure on colleges and universities to keep their prices low, as the “buyers” not longer care so much about the price.  Instead, they are now motivated to spend more money to compete for student loans (the fact that a student comes along with the loan is just a cost of doing business for them, and a relatively minor one). 

This is yet another example of the government's intervention causing a huge distortion in the market.  Like the housing bubble, the taxpayers are going to be on the hook again – because a large fraction of all the trillions in student loans are guaranteed by some Federal program or another.  Of course “Federal guarantee” is just the polite way of saying “They're going to stick their hands in my pocket to steal the money”...

1 comment:

  1. Its because the marketplace works on perceived cost and perceived value. Not actual cost and value. If Solar panels cost... say 3for a system large enough to run a house, it is because the marketplace is willing to pay 30k.

    If the government then tosses in 10k of subsidies, that doesn't change what the marketplace is willing to pay. So fairly quickly the result is the price of the panels rising to an actual cost of 40k. Because despite the 10k of government money tossed into the mix, the marketplace was still willing to pay the perceived cost of 30k.

    If the government then tried again to stimulate more activity and tossed in yet another 10k, the actual cost would rise to 50k but the perceived cost would still be 30k.

    Little additional activity would occur in the market and the solar company just pockets more profit.

    It is a very inefficient scheme if what you want is better solar technology. It would be far more efficient to directly fund specific research projects. In fact, I would imagine that this type of incentive is the least effective thing they could do.