Government's Role in 'Encouraging' Excessive Individual Indebtedness for Student Loans ... 'Cost Based Pricing' Plus Government Subsidized Loans for College Harm All Americans, and Especially the Poor and Middle Class

In my opinion, the ongoing American debt debacle impacting individual Americans is profound ways was both encouraged and facilitated, if not created, by misguided government programs and policies.

Free lunches don't exist, no matter what the politicians may say. In the end, somebody always pays, and the ones who pay the most are the intended beneficiaries --- the poor and middle-class.

Let's look at the costly combination of monopolistic 'cost based pricing' and government subsidies today. In a free market based system, 'price based costing' prevails. To stay in business, sellers have to provide both values to their free-to-choose customers and profits to their free-to-choose investors.

In the case of college tuitions, however, it is a cost based pricing environment, and colleges have no incentive to control what they charge. They just add their costs up and pass them on --- to students and government, aka taxpayers. In addition to what the student pays, government grants and guaranteed loans cover the additional charges.

Cost based pricing is how monopolies work, and it's also why the idea of 'free' college is a bad one. Nothing comes free, and cost based pricing makes for a very expensive offering.

Perhaps these debt driven programs were well intentioned and aimed to help provide all Americans with an affordable way to secure their college degrees. But even if that was the desired outcome, the results have been undeniably negative, and their troublesome aftereffects will be with us for a very long time. See Student Debt Payback Lags for a timely review of the debacle.

In fact, all Americans will be paying the price as widespread debt debacles always harm the performance of the general economy by slowing economic growth. They are never easily or quickly resolved.

Now let's look closer at where we are and how we got here. Facts are stubborn things, but recognizing and accepting them are essential steps to finding real and lasting remedies.

Consider what's happened over the past four decades to American income levels, house prices and college tuition costs. The relevant facts are as follows: since 1974 inflation adjusted median family income has declined by ~20%; home prices have increased by ~67%; tuition for private colleges is a huge three times higher; and tuition charged to attend public colleges has quadrupled.

To repeat, median income is down, but home prices and college costs have skyrocketed. And individual debt burdens are the root cause.

Meanwhile, that debt has fallen primarily on poor and middle-class Americans. And worse yet, that debt was encouraged, facilitated and guaranteed by government, aka taxpayers. Government agencies Fannie Mae, Freddie Mac and the FHA now finance ~75% of home mortgage loans and outstanding student loans are in excess of $1.2 trillion. The vast majority of both these enormous home and student loan balances are underwritten by taxpayers.

That government 'help' doesn't relieve the borrower from personal responsibility to repay the loans. But in this slow growth, high debt and high unemployment economy, good jobs are tough to come by and healthy pay increases are rare. Thus, pay levels are stagnant, and unaffordable debt burdens abound. These factors will cause a slow growth economy to remain in place for the foreseeable future.

But that's not all. In addition to guaranteeing loans, this government encouraged debt created a great deal of buyer demand. In turn this debt enhanced demand caused selling prices to rise to much higher levels than otherwise would have prevailed. As a result, many of the 'government encouraged' buyers became unable to service the debt resulting from these 'government encouraged' high prices. But the price increases kept climbing -- until the bubbles burst.

Now let's look at the high cost of college today and how it's grown over the past forty years. Is College Tuition Really Too High? tells the story:

"To understand the feeling of crisis that many see in higher education right now, it’s useful to start with some figures from 40 years ago. In 1974, the median American family earned just under $13,000 a year. A new home could be had for $36,000, an average new car for $4,400. Attending a four-year private college cost around $2,000 a year: affordable, with some scrimping, to even median earners. As for public university, it was a bargain at $510 a year. To put these figures in 2015 dollars, we’re talking about median household income of $62,000, a house for $174,000 and a sticker price of $21,300 for the car, $10,300 for the private university and $2,500 for the public one.

 

A lot has changed since then. Median family income has fallen to about $52,000, while median home prices have increased by about two-thirds. (Car prices have remained steady.) But the real outlier is higher education. Tuition at a private university is now roughly three times as expensive as it was in 1974, costing an average of $31,000 a year; public tuition, at $9,000, has risen by nearly four times. This is a painful bill for all but the very richest. For the average American household that doesn’t receive a lot of financial aid, higher education is simply out of reach." . . .

But the great national crisis is the fact that too many other young adults are not going to college or, if they do, don’t graduate, in large part because they can’t afford it. Every American benefits when every other American has access to as much schooling as he or she wants. When accessibility to higher education declines, we all end up paying for it.

 

. . . there are the nonselective public, community and private for-profit colleges that admit nearly every paying applicant. A vast majority of people pursuing postsecondary education will start in these schools. They vary greatly in quality. . . . Some of these places, especially the private for-profit ones, seem to be little more than a scam, recruiting students, taking their government-funded loans and offering them a degree of minimal worth. Well more than half of all new students at four-year schools in this segment won’t finish. But still they will be burdened with debt or will default, leaving taxpayers to foot the bill. . . .

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Put simply: Without greater access to higher education, the United States is likely to have even greater income inequality, a huge segment of the population will see its income fall and some of our core assumptions about national identity — ours as a land of opportunity, a prosperous democracy — will be at risk.

 

Since the 1980s, most states have decreased their per-student spending on public higher education, some of them quite substantially. Federal aid has risen, but not enough to make up for the state cuts and significant increases in enrollment. Tuition, meanwhile, has gone up far more than inflation....

 

College aid — all the federal and state grants and subsidies, the various scholarships and aid packages offered by schools and foundations — evolved in piecemeal fashion over decades. Considered as a whole, it is a bizarre system. Students who go to private nonprofit schools, disproportionately children of middle-class and wealthy parents with college educations, receive an average of $25,000 a year in aid. Those who go to less-selective public schools receive an average of $13,500 a year. And students who attend public community colleges, who are most likely to come from disadvantaged backgrounds and parents without college degrees, receive an average of $8,000 a year. In other words, our system gives three times as much aid to the least needy as it gives to the most.

 

This makes no economic sense: Once students drop out of community college, taxpayers will continue to pay their bills. That’s not called education funding; it’s called welfare or criminal-justice or health care expenditures. The difference is significant. In the language of economics, education funding is an investment; it more than pays back its initial costs over time. The other expenses are known as transfer payments; which means they make society poorer. In an economy that demands and rewards education, those who have it will pay the bills for those who don’t."

 

Summing Up

 

Government programs and policies are primarily responsible for the well established and ongoing American debt debacle.

We the People know that there really is no such thing as a free lunch. Meanwhile, our 'helpful' government officials tell us there is, and we act as if we believe them.

Of course, their 'helpful' programs continue to get them elected while continuing to do We the People great harm.

Our national debt disgrace will necessarily take a long time to resolve, simply because it's a biggie and took a long time to unfold.

But the sooner We the People come to fully grasp what's been done to us in the name of 'helping' us, the sooner we will resolve our national debt dependence, both as individuals and as a society.

That's my take.

Thanks. Bob.