The Higher Education Act of 1965's purpose was "to assist in making available the benefits of postsecondary education to eligible students.” Sounds nice. But what's the result today? Student loans provided at artificially low interest rates by the federal government have greatly contributed to the drastic tuition increases, exceeding the rate of inflation for the past 30 years.
Inflation Data reports that "Economists predict the cost of attending state colleges will soar to $120,000 by 2015. Currently over $40 billion in student loan debt has forced many former students into financial bondage or even bankruptcy."
How are artificially low interest rates on student loans causing tuition to increase?
Interest is essentially the price placed on loanable money. If someone is going to lend you money, therefore, deferring their ability to use that money, it is going to cost you. There are many factors that determine interest rates but here are some of the top five, according to The Concise Encyclopedia of Economics:
Let us focus on how interest rates work as the price you pay to borrow money.
Since consumers tend to rely on oil heavily for transportation, oil shortages are quickly felt. During oil shortages, in order to make sure oil is allocated efficiently to those who need it the most, price gouging occurs. This prevents people from taking more than they need by minimizing hoarding and causing people to use less of it to ensure the maximum amount of people can get some oil.
The example regarding oil shortages and price gouging is simple supply and demand. The demand for a product that is scarce causes prices to go up. But the free market helps correct that. Now what do I mean by the free market? It's not a mysterious intangible entity. What people mean when they say free market is "an array of exchanges that take place in society."
When the price for a particular product increases, this attracts other individuals to go into that industry and produce/provide that product, which eventually causes the price to reach equilibrium (supply = demand). The same happens for interest rates.
Congress sets a fixed interest rate on student loans, meaning they are baseless and for the most part do not take into account any of the 5 important factors we mentioned previously. To qualify for grants (free money) or loans an individual basically just has to be a living, breathing, legal, non-felon, full-time college student.
The massive student loan debt we have today is a result of the fact that student loans are relatively easy to obtain. According to HuffPost Politics, student loan defaults are the highest in two decades. Think about it, students are given money they are expected to pay back without even knowing if they will have a job once they graduate.
Here are some shocking numbers:
Since college is more accessible because of student loans, students do not consider the tuition cost as much as they would if they did not so easily qualify for student loans. Thus, colleges have much less of an incentive to keep the prices of tuition low because students are not as concerned with price. It also sends the false signal that students have the money to pay for high tuition costs.
Making college more accessible does not make it more affordable. If students had to pay for tuition out of pocket or simply take out loans with regular interest rates (determined by usual factors), there would be more of a reluctance to attend colleges with relatively higher tuition costs. Thus, colleges would not only have to be appealing, but well-priced and actually affordable.
All that being said, I think college is an extremely valuable experience; however, I think it is extremely important for individuals to acknowledge all of this information before deciding to attend college, and whether it is worth it.
Let's allow the free market to do its thing and determine prices.
Inflation Data reports that "Economists predict the cost of attending state colleges will soar to $120,000 by 2015. Currently over $40 billion in student loan debt has forced many former students into financial bondage or even bankruptcy."
How are artificially low interest rates on student loans causing tuition to increase?
Interest is essentially the price placed on loanable money. If someone is going to lend you money, therefore, deferring their ability to use that money, it is going to cost you. There are many factors that determine interest rates but here are some of the top five, according to The Concise Encyclopedia of Economics:
1. The strength of the economy and the willingness to save.
2. The rate of inflation.
3. The riskiness of the borrower.
4. The tax treatment of the interest.
5. The time period of the loan.
Let us focus on how interest rates work as the price you pay to borrow money.
Since consumers tend to rely on oil heavily for transportation, oil shortages are quickly felt. During oil shortages, in order to make sure oil is allocated efficiently to those who need it the most, price gouging occurs. This prevents people from taking more than they need by minimizing hoarding and causing people to use less of it to ensure the maximum amount of people can get some oil.
The example regarding oil shortages and price gouging is simple supply and demand. The demand for a product that is scarce causes prices to go up. But the free market helps correct that. Now what do I mean by the free market? It's not a mysterious intangible entity. What people mean when they say free market is "an array of exchanges that take place in society."
When the price for a particular product increases, this attracts other individuals to go into that industry and produce/provide that product, which eventually causes the price to reach equilibrium (supply = demand). The same happens for interest rates.
Congress sets a fixed interest rate on student loans, meaning they are baseless and for the most part do not take into account any of the 5 important factors we mentioned previously. To qualify for grants (free money) or loans an individual basically just has to be a living, breathing, legal, non-felon, full-time college student.
The massive student loan debt we have today is a result of the fact that student loans are relatively easy to obtain. According to HuffPost Politics, student loan defaults are the highest in two decades. Think about it, students are given money they are expected to pay back without even knowing if they will have a job once they graduate.
Here are some shocking numbers:
- Outstanding student loan debt is GREATER than $1,000,000,000
- There are about 37,000,000 Americans who have student loan debt
- Ranking compared to other debt is 2nd only to mortgages
Since college is more accessible because of student loans, students do not consider the tuition cost as much as they would if they did not so easily qualify for student loans. Thus, colleges have much less of an incentive to keep the prices of tuition low because students are not as concerned with price. It also sends the false signal that students have the money to pay for high tuition costs.
Making college more accessible does not make it more affordable. If students had to pay for tuition out of pocket or simply take out loans with regular interest rates (determined by usual factors), there would be more of a reluctance to attend colleges with relatively higher tuition costs. Thus, colleges would not only have to be appealing, but well-priced and actually affordable.
All that being said, I think college is an extremely valuable experience; however, I think it is extremely important for individuals to acknowledge all of this information before deciding to attend college, and whether it is worth it.
Let's allow the free market to do its thing and determine prices.
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