School Loans Are Exploding! What Is The Answer? Free Market Capitalism, Of Course.

Students across the U.S. are demanding Congress act quickly to keep interest rates on student loans from doubling by July 1. To that point, protestors from Campus Progress, a student organization, gathered together to protest and demand Congress pass legislation averting interest rate increases.

In response, legislators are falling over themselves to assuage the fear and loathing of America’s college-age generation. For his part, House Speaker John Boehner (R-OH) pleaded with Democrats in the Senate to work with House Republicans to stop student rates from increasing apace.

Citing the weak U.S. economy, and slow job growth for college graduates, Boehner, in hopes of pushing the issue back on the plates of Senate Democrats, said that “ . . . the House has passed a student loan bill to make sure that interest rates on students doesn’t double on July 1st. The Senate had a couple of show votes last week, but I’m hoping that they’re going to be willing to sit down with us and the administration to resolve this issue. We’ve done our job, it’s time for the Senate to sit down with the House to make sure that students aren’t harmed…by the lack of work in this Congress.”

While Boehner is taking the state manipulated stance, Representative Justin Amash (R-MI), in a June 6 interview with Campus Reform, posited that the free market could ameliorate high tuition rates more effectively than Congress. “What we really need is a more market oriented system to take government out of the system, to encourage competition, to encourage schools and the loan industry to compete for the assets, to compete for their business,” Amash told Campus Reform. House Republicans appear to be, at the very least, inching their way toward Amash’s view: House Republicans approved a bill that would allow interest rates to rise or fall from year to year, which is a markedly different than keeping interest rates arbitrarily low, or freezing them outright. But while Republicans are pushing for more sensible, market-based interest rate setting, they still have not, as a party, addressed the public subsidization of school loans.

The question then becomes: Should the state shrink away as Amash suggests, or should the state have a hand in fudging school loan interest rates and subsidizing college tuition? The law of supply and demand lends Amash’s contention more weight. Indeed, according to the U.S. Bureau of Labor Statistics, throughout the last 50 years—which has seen an exponential increase in federally subsidized school loans, beginning with the G.I Bill during the latter half of the 1940s and flowing through the 1960s—tuition rates have increased by a whopping 945 percent, dwarfing the inflation rate of 193 percent during that same span of time. The fact that tuition rates increased by nearly 10 times that of the inflation rate suggests that manipulation in the market, keeping interest rates artificially high and loan subsidization, had a hand in causing price increase.

Economist Daniel Lin points out that government subsidies, which are meant to decrease the price of a degree, through grants, tax credits and student loans actually increase the price of tuition. The demand for college degrees has exploded precisely because of federally subsidized loans; if a product—education in this example—is made cheaper, the consumption of that product is subject to increase, leading to higher demand of the product. This leads to, what economists call, a negative feedback loop, whereby, policy makers are inclined to increase public funding of school loans even as those loans increase the prices they are meant to make affordable.

What is worse, universities and colleges have no compunction to decrease tuition rates because, frankly, they have no shortage of fannies in seats—that is, school enrollment, due in large part to government created demand for college education, is already filled to the rafters. Instead, they use tuition paid for by students to build, build and build; they build multimillion dollar parking structures, expensive arenas and sports medical facilities like the $35 million Ohio State University Jameson Crane Sports Medicine Institute—paid primarily by public funds.

And so it goes. Government subsidies in the form of grants, government backed student loans and tax credits are making college more expensive, not less. College students and their parents, instead of demanding policy makers cap interest rates or pardon federal loans, should be demanding answers as to why college tuition is out of control. But so long as there are politicians willing to doll out goodies, products like a college education will continue to become pricier and pricier.

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