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Why College Tuition Is So Expensive

15 April 2010 19 Comments

College tuition is increasingly expensive these days – even for the top online schools. To battle the rising costs, our wonderful politicians seek ways to get more people access to education funds and debt.  As Peter Schiff discusses in one of his recent posts, this “solution” is exactly the problem.

Take the recent student loan reforms that were slipped into the health care bill. Obama wants to reduce the cost of providing student loans by taking the profits out of the industry. According to Obama, student loans are too expensive because banks profit from making them. If the government nationalizes the function, we would apparently bring down costs by eliminating those pesky profits.

First of all, why the heck was this “fix” inserted into the health reform bill?  Why don’t we have separate legislation for completely separate solutions?  This is ridiculous.

He continues…

This is a Marxist argument, pure and simple. If true, it would apply to all industries, not just banking. States like Cuba and North Korea would be the envy of the world, as they prohibit profits across the board. The truth is that profits, earned from free-market competition, keep cost down. By taking the profits out and putting the bureaucrats in, any incentive to provide better service or lower costs is eliminated. It’s not hard to predict that student loan costs will now rise faster than ever.

That is clearly not the result we want. To solve the problem, people must understand that college tuitions are so expensive specifically because the government has guaranteed student loans (see my video blog on this topic for a detailed explanation). Guaranteed loans don’t mean more access to education, but rather that universities are free to charge more per pupil than if their customers were paying out-of-pocket.

Obama’s plan only serves to remove more market forces and creates an even bigger moral hazard. Under the new rules, students will be required to repay a much smaller portion of what they borrow. As a result, students will be willing to borrow even greater amounts of cash to pay inflated tuitions, making it that much easier for colleges and universities to raise them.

This is one of the best market based explanations for rising education costs I’ve read.  This is the kind of discussion surrounding the nation’s fiscal matters that is so lacking these days.  Schiff sums up his position on education and other areas with the following:

Whether it is in education, housing, health care, automobiles, insurance, or banking, greater government involvement in the economy means higher prices, lower productivity, more bailouts, bigger deficits, increased taxes, diminished industrial capacity, fewer private sector jobs, less freedom, and a falling standard of living.

Amen.

19 Comments »

  • Tom said:

    I think that the costs are going up because education is another speculative bubble like housing was. People perceive a degree as an automatic ticket to the good life (like people perceived a house as a guaranteed good investment) and because of this they are willing to take on ever greater amounts of debt to get a degree. So as long as easy credit is widely available for education and people have this mindset the costs will keep getting driven up by competition for enrollment spots (just as irresponsible buying and easy credit drove up the price of houses).

  • UptownDenver said:

    I would agree with the stance that Schiff takes if it weren't for the fact that most (basically all) of these loans were fully backed by the government anyway. This allowed banks to loan with zero risk and profit from it. That is not a free market either! Taking out the middle man was a smart way to reduce the costs of a program that was already government run. These are the kind of solutions I love seeing at the federal level. I will admit that it had no place in the health care bill, but that is a whole different debate.

    Fact is, this CUT government spending and increased the availability of student loans. If you want to take the government out of the equation entirely, and I think there are some very good arguments for that, then do it. But the government controlled this anyway, now its just doing in on the cheap.

  • Wingtipwalker said:

    I don't have any evidence to back what I am going to say (but you didn't provide any either)…just as long as we both agree we're making stuff up…

    The banks had some overhead involved in administering these loans…sure it doesn't take a lot of manpower to underwrite a government guaranteed loan, but I think we can all agree that it cost something and reduced the "greedy/evil/etc" profits of the bank.

    So, now the government is taking this over soup to nuts, and you're saying they're going to be able to do all of the overhead tasks (or more likely outsource it right back to the banks that were doing it before) for LESS than what the banks were doing it for while making some minor margin on the loans?

    I have never seen the government doing anything better or especially cheaper than private industry. So, your "fact" that this is going to cost less sounds like baloney to me.

  • 20smoney said:

    Ummm.. Did you read the article? I (Schiff) didn't say it will cost less, I (Schiff) said it will cost MORE — "It’s not hard to predict that student loan costs will now rise faster than ever."

    But at the same time, they will allow students to make smaller payments which allows them to borrow MORE and therefore pay more to schools — thus, tuitions will continue to increase.

    Either I'm reading your comment wrong or you didn't read my article. Thanks for the comment either way… i guess.

  • Wingtipwalker said:

    I was responding to UptownDenver's comment that "this cut government" spending. I agree with the article…I agree with Schiff….I agree with 20smoney, I DISAGREE with UptownDenver.

    Thinking about it more, I could envision a situation where on the front end, student loan costs don't increase to the student. This would be good political banter for an election season. But this would either lead to 1) more inflation from the govt eating the loss or 2) higher taxes as they try to fill the gap, so the net effect will be increased cost across the board. This is inevitably going to result in higher costs to provide the same student loan service.

  • Aileen said:

    Nice post.. and I think modernization is the reason beyond the increasing tuition fee for college.. Well, as far as I know, even the tuition fee for grade schools are increasing.. That's why we all have to save money, especially college students.

  • Addam613 said:

    I do believe Mark makes a valid point. However, according to the argument presented, prices would fall in response to limited governmental assistance. I don't know… Other variables like inflation, population expansion, mass immigration, and marketing have also created a tremendous demand. I failed to mention that even though for-profit universities cost significantly more than their state-sponsored competitors, enrollment continues to soar.

  • Irving Coxum said:

    great post.

  • Tony said:

    Haha- good to see you found a way to call Obama a Marxist in your post!

  • finance_future said:

    Your demonstration is brilliant: people fail to understand that college tuitions became expensive because of the student loans our government has guaranteed student loans . The mechanism is quite complicated: because of the fact that they don´t have to pay the whole tuition tax, the students are more and more willing to indebt themselves to pay higher and higher taxes. What is also interesting that that I think this people will have to report the tuition reimbursement as income: In the case in which one pays more than what he actually was reimbursed for, I guess he doesn´t need to do it. One just needs to take what he paid for qualified tuition and fees and subtract the amount of his reimbursement and that is what he can claim for the tutiton and fees adjustment.

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