Student Loan Programs Fail to Make College “Affordable”

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Dear class of 2013: You’ve been scammed.

In his commentary over the weekend, financial columnist Brett Arends wrote of a “College Industrial Complex” that’s inflated the cost of attending a four-year university by 300% over the last 30 years. Several universities have somehow managed to convince students (and their parents, who should know better) that $100,000+ is a reasonable price for a BA in English.

In another piece on the problems facing higher education, Reuters columnist Felix Salmon reported on an equally troubling trend: many universities have been redirecting financial aid that was thought to be designated for need-based scholarships toward so-called “merit scholarships.”

For those not inclined to read the full paper, the math goes like this: If I’m the dean of admissions, why would I give one bright kid from the Bronx $20,000 for four years when I could offer four kids from Long Island $5k each for four years and collect the balance ($15k x 4 x 4 = $240,000) instead?

So then, college tuition is getting ridiculously expensive, and us regular, old 99 percenters 47 percenters folks who were taught that college was a merit badge granting one admission into the middle class are just barely covering the bills. Oddly, neither columnist directly identified an obvious factor in this mess: Government aid.

Student aid programs, their noble intentions notwithstanding, have had insidious effects on the post-secondary education market. First, they distort the mass-negotiation process that occurs in every market transaction: setting the price. Consider this from the sellers’ perspective – they know you all have at least $X to spend each semester, so they can raise their minimum acceptable selling price accordingly.

Second, and more tragically, federal student aid crowds-out other need- and merit-based aid that many universities (and private organizations) would offer otherwise. Any kid smart enough to be accepted is smart enough to handle those federal student loan forms.

Government aid also obliterates the private student loan market, which would have the know-how to set mathematically sound interest rates that could reflect the real cost of getting a BA in theater arts.

And where have federal tuition subsidy programs gotten us today? Well, your English degree is far more common and no more useful, practically speaking, than it was in 1983, and you’re facing the prospect of trying to pay a $50k debt on a $10/hour barista job. But hey, at least you got to live in a newly-constructed, kick-ass dorm room! And all those vice presidents the university hired in the last two decades—I’m sure they contributed to your education in some meaningful way. Anyway, it’s cool, because once the economy turns around and you get a real job, meet that special somebody, and decide to settle down, there’s this government program that helps people afford hous— Oh, wait…

The lesson is that markets where there’s guaranteed government money tend to get pretty screwy. See also: Medicare, “green” energy programs, any utterance of the phrase “Too Big to Fail” in the last five years, or the abysmal rate of retirement savings in this country.