Monday, September 14, 2015

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. . . .


  1. They posted a correction about incomes and now they have risen over time

    Correction: September 27, 2015

    An article on Sept. 13 about college tuition referred incorrectly to CUNY when describing a program that helped improve the graduation rates of its community colleges. It is the City University of New York (not Universities). The article also referred incorrectly to a measure of income in a comparison of 1974 income and current income when adjusted for inflation. It is median family income, which has risen to about $64,000 a year from $62,000 in 1974, not median household income. And the article also described incorrectly the change in median family income over the past 40 years. It has risen slightly, not fallen.

  2. The correction is at "Is College Tuition Really Too High?"