Why is College So Expensive? Blame Government!

If you’re wondering how college became so expensive over the past few decades, take a few minutes to read Glenn Reynolds’s piece in the New York Post. He should know, he’s a law professor. Thankfully, he’s an honest law professor who doesn’t have a problem calling it like he sees it.

At best, …[Obama's student loan plan is] a band-aid solution. The real problem is that we’ve been running a higher education bubble, one that — like the real-estate bubble — has been pumped up by cheap government money. Since 1999, student loan debt has increased by 511%, while disposable income has increased by only 73%.

That’s because when the government subsidizes something, producers respond by raising prices to soak up as much of the subsidy as they can. College is no exception. Tuition has been increasing much faster than disposable income, and families — believing that a college education is a can’t-lose investment, much as they used to think houses were — have been making up the difference with debt. After all, we’re told, student loan debt is “good debt,” because a college degree guarantees more earnings.

Tell it to the Occupy Wall Street protesters, many of whom note that they’re deep in debt for fancy degrees that didn’t get them jobs.

The problem is, “college” isn’t an undifferentiated product. Companies can’t hire enough mechanical engineers, but there’s no bidding war for majors in Fine Arts or Women’s Studies, degrees that cost just as much, but deliver a lot less in terms of employment. In an economically rational market, it would be harder to borrow money to finance fields of study that were unlikely to produce enough income to pay back the loans. But since the federal government subsidizes everything – and makes student loans un-dischargeable in bankruptcy — there’s no incentive for lenders to care, and even less incentive for colleges and universities to care. They get their money up front, after all — just like the people who wrote the subprime loans that fueled the housing crisis.

For serious student-loan reform, we’re going to have to look well beyond the Obama proposal. We need something that aligns incentives with reality. Here’s my proposal:

You have to read the whole thing to find out his solution, you won’t be wasting your time.

Personally, I’ve never agreed with the proposition that every child needs to go to college. As noted above, it’s extremely expensive, and many occupations don’t require it. Why start out your adult life with crushing debt if you can attend a technical school or find a job that provides training? Hey, if everyone goes to college, who’s going to bring food to market or fix our houses and cars when we get old?

Update: Linked by The Other McCain – thanks!

Tags: bubble, created, education, government