How are good intentions creating the next financial disaster?

I was flipping through radio stations on my way to work this morning. I accidentally landed on a channel, which claims to be one of those talk radio programs where “serious issues” are discussed. Serious issues are definitely talked about, however, the station doesn’t really “discuss” issues, it merely attempts to stir up discontent with whatever topic of conversation is on air. Today, the hosts were beating their chests over the student loan tuition crisis in America. The hosts were trying to blame colleges and colleges only for the crisis. One of the hosts said “I’ve already sent 1 student to college, but I won’t be sending my younger son, it is too damn expensive.” No solutions were offered, just discontent.

As much as I connect with the feelings of the hosts, and as much as I agree that colleges charge way too much, the only way to fix the problem is by understanding how it got that way. I can’t help but ask “How the hell did it get this way?,” “How do we fix it?”

First, let’s look at a chart of student loan tuition inflation.

student loan tuition inflation and rising housing prices

Second, let’s look at

Annual Loan volume for the federal family education loan program

The two charts use different date ranges. However, if you look line up the dates, you will see the increase in college tuition costs and the increase in student loan debt to be in lock step with each other. Some people would say, “Duh! If tuition goes up, you need to borrow more. Blame the damn schools, why are they so expensive?” In fact, because I am a third year law student, a lot of times I feel this exact way. In my head I ask my school, “How can cost so much?” “Why do you pay professors so much?” “Why do you waste so much money?”

However, one point often not discussed is this. What enables schools to charge so much? In every problem, there is always a reason for that problem. Nothing simply becomes a certain way on it’s own. There are always events and systems that promote and guide the direction of a problem.

Let’s go through the logic:

A) Colleges and universities charge students tuition

B) Without demand (paying students), colleges and universities would go out of business

C) Colleges and universities have increased tuition steadily over the past 50 years

D) In the last 50 years colleges and universities have not gone out of business. They have expanded.

Let’s focus on point B, because without point B, the whole system would fall apart. Paying students. How does a student become a paying student? The majority of students use federal assistance in the form of student loans to pay college tuition. In 1965, the Higher Education Act was signed into law by President Lyndon B. Johnson. This law had good intentions. The purpose of the law was, “to strengthen the educational resources of our colleges and universities and to provide financial assistance for students in postsecondary and higher education.” Basically, federal money was set aside to create low-interest loans for students.

These, low-interest loans for students create a boon for colleges and universities. Similar to how cheap interest rates and guaranteed loans with relaxed credit standards fueled home purchases, students too had and currently have cheap interest rates, guaranteed loans, relaxed (zero) credit standards. Without these guaranteed loans, schools would think twice about raising tuition. If the federal student loans did not exist, or capped out at lower levels, schools could not raise tuition as quickly.

There is now close to $1 trillion in outstanding debts from federal student loans. And… guess what? My school’s tuition is going up 15% next year:)

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