Do student loans raise the cost of college for everyone?

by Nick on February 28, 2012

Before we get too far into the post, let me emphasize that this blog is not about politics (mostly because I know even less about politics than everything else I babble about here…).  But this topic is arguably political in nature.  So I’ll try and focus on money and college issues here… feel free to get political in the comments, but make sure you’re nice to each other… or else!

I’ve been preaching a lot lately (and getting some nice hate mail) about avoiding student loans if at all possible.  Most of the reasons I beg people to avoid student loans are that people rarely think before borrowing, a bunch of people never graduate and get stuck with loans, people’s interests and majors change along with their expected salaries and, to a certain extent, it teaches the “buy now, pay later” mentality. 

But two recent studies suggest that something I’ve claimed for years might just be true:  that student loans actually make college more expensive

I know, I know…I’ve trashed “studies” a bunch lately, so I should probably trash these too because I’m sure they’re not perfect.  But these support something I’ve suspected for years, so they’ll get a pass, haha!  It’s my blog after all…  Seriously though, the point of the post has little to do with the study (even though it supports my theory…).  I just want to throw the question out there for you and see what we all think.  So here you go:

Do student loans make college more expensive for everyone?

The studies highlighted in the article suggest a couple of things.  First, some colleges reduce their own aid in response to increased federal aid.  Second, increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuition.  Hmmm… sounds a lot like the housing market fueled by easy borrowing doesn’t it…

So is this the next bubble as some experts suggest?  I’m not sure, but I think there is definitely something to the theory.  To elaborate more on the housing bubble comparison, most people agree that the low interest rates (including “creative” financing like aggressive sub-prime adjustable rate and negative amortizing loans) and “relaxed lending standards” caused demand and prices for housing to go … ahem … through the roof (pun intended).  Why couldn’t the same thing be happening with college and student loans? 

If you were running a business and the government gave or lent people more and more money to encourage them to buy your product, wouldn’t you at least stop discounting your price as much?  And as demand increased wouldn’t you raise your prices to the point where the price minus the government aid results in reaching capacity at the highest price possible?  It’s natural. 

To continue the theory, the more government money available, the higher the prices will go.  And they will only stop when the net out of pocket cost is so high that people stop showing up.  (I use net out of pocket cost instead of net cost because the loans are a “cost” but they don’t require payments during school… you know… the entire point of my rants…)

So what do you think?  Do student loans cause college costs to be raised across the board?  And if you’re feeling especially daring, what could or should be done about it?

Until next time, put your credit card down and slowly step away from the mall!

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