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Disrupting markets and destroying our future

As long as the federal government makes more cash available for student loans, college tuition will increase.

A.J. Feather

Published July 10, 2012

The 2008 recession can teach us a lot, but many Americans refuse to take the time to learn. It’s not rocket science.

If you’ve turned on the news in the last three years or heard someone rant about the 2008 fiscal crisis, you probably heard some very abstract anger toward “big banks” or greed. These arguments are similar in some ways to saying water is wet. Yes, these things exist. That doesn’t explain why they’re so horrible, though.

Normally, greed creates incentive for big banks to make good loans — that is, banks make loans to people who can afford to pay them back. As a result, big greedy banks get their money back with interest.

So why did banks make bad loans that resulted in the housing collapse? There were countless factors at play, but when you boil it down to the core, you find the implicit guarantee the government would bail out failing banks, especially Fannie Mae and Freddie Mac, was the driving force, which altered incentive.

The precedent was set several years ago under the Greenspan era of the Federal Reserve in an attempt to limit losses. The intentions were good, but this opened up the floodgates for more recklessness, as most well-meaning government policies do. That is, no rational person would give someone with an astoundingly low credit rating a mortgage that jumps from 3 percent to 8 percent after two years. Regardless, when banks were given the ability to package these mortgages and sell them to larger banks, why wouldn’t they? It’s a win-win situation, except for the people bailing the banks out.

The implicit guarantees on these banks appeared to work at first. The housing market looked great, and the price of houses did as well. Unfortunately, though, as with all other artificial stimulants, the high doesn’t last forever.

Since you’re reading this, you’re probably going to be at MU this August. Congratulations! That means you’re a part of (the latest and greatest financial bubble)[ http://blogs.wsj.com/economics/2012/05/19/number-of-the-week-student-loan-bubble/?KEYWORDS=student+loan+bubble]!

College is a great excuse to move out on your own, learn a lot (or a little), have a lot of fun and generate mountains of student debt. When you leave, your finances will look like you just recovered from a gambling addiction. However, unlike a gambling addiction, the school will give you a piece of paper that some employers might or might not care you have. It’s fun, right?

The student loan bubble, not unlike the housing bubble, is the result of a large misallocation of resources. College tuition hasn’t just increased at the same rate as other prices — it has taken off like a rocket. In fact, the cost of tuition and fees at an average four-year public school has risen by 150 percent to an average of $8,244 per student since 1990, according to the (Wall Street Journal)[http://online.wsj.com/article/SB10001424052702303296604577454862437127618.html?KEYWORDS=college+tuition+jump)].

Why is this explosion of tuition occurring? You guessed it — the government altered the incentive! By giving out student loans to everyone and his cousin, Uncle Sam made cash for tuition a lot easier to obtain. Who cares if my tuition is $35,000 a year if my Pell Grant covers $15,000 of it and my student loans get another chunk (for now, anyway)?

Now that students can access ridiculous amounts of money and justify the expense of college because it’s going to “help” them get a job, what would any rational institution do in reaction to this artificial increase in demand? That’s right, raise prices!

Greed isn’t the problem. Educational institutions aren’t the problem. Misplaced incentives are the problem. As long as the federal government makes more cash available for student loans, college tuition will increase and more semi-useless institutions will spring up.

The housing bubble was dangerous. Millions of retirement plans hung in the balance. But the student loan bubble might be even more dangerous. If the bank making the loans collapses this time, the government won’t be able to bail it out. That’s because this time, the government is the bank. Ah well, what’s another trillion dollars in debt? We’re already at $16 trillion.

This insanity won’t continue forever. It will blow up like the mortgage loan debacle did. Let’s pray the fallout doesn’t destroy higher education the way the housing bubble decimated the housing market.

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