There’s No Such Thing as a Free Education

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The refusal of the Senate to accept a measure that would keep interest rates artificially low on government-subsidized student loans should be an encouraging sign. The senators who voted against the measure, and those in the House who said they will do the same if the bill makes it to them, understand that government intervention leads to unintended consequences. In this instance the unintended consequence of government intervention — in the form of manipulating interest rates — has been an increase in the cost of post-secondary education.

Money is a commodity. Interest rates reflect the price of that commodity. A borrower pays a price, in the form of interest, to the lender. The price of a commodity reflects what a borrower is willing to pay and what the lender is willing to accept. Numerous factors go into setting a price. But at the most basic level, supply and demand will set the appropriate price so that market equilibrium can be reached. As demand goes up, price will go up until the supply matches the demand. If there is an oversupply, demand decreases as too do prices.

Education and training are necessary for a productive workforce — but the right kind of education and training, not a generic form.

However, when the government interferes with markets, signals are distorted and equilibrium cannot be achieved, as supply and demand are not allowed to react to one another naturally. By keeping interest rates low the government has created an artificial demand for higher education. In this particular instance the cost of borrowing money in the form of a Stafford loan is cheaper than it ought to be, which means that more students will borrow money. In a free market these people may have found their way into the workforce or a technical college, but now they are pursuing four-year degrees which may or may not help them in the long run — just because the money is cheap. The result is that colleges now have more customers, i.e. students, demanding their services. In response they raise their tuition, because as demand goes up price goes up as a result.

The effect of government’s making college more affordable by keeping interest rates artificially low is a higher cost of education. This not only makes for a greater debt load for graduates who take government subsidized loans but also prices middle-class students out of education. This means that they too will have to resort to taking out loans and unavoidably piling on debt. It is a vicious circle that can only be avoided if interest rates are allowed to follow market principles. In that event, the accurate price will be charged for borrowing money and for the cost of education.

The nation’s single minded pushing of four-year degrees on our youth has had deleterious effects on the development of our workforce. Students who would flourish with training in the industrial arts are being pushed to a four-year degree that may or may not land them a job or match their natural aptitudes. There is a lack of economic sophistication and a sense of humanity in our pursuit of making sure that students move through our higher education system as if on a conveyor belt.

Education and training are necessary for a productive workforce — but the right kind of education and training, not a generic form. Only the market can determine what the right kind of education and training is, and only a system that allows flexibility will encourage students to match their aptitude with their financial aspirations.

Those who support keeping interest rates artificially low for government subsidized student loans do so because they think that keeping rates low will make college more affordable. They therefore castigate opponents for being against the expansion of higher education. This is a cheap argument that ignores market fundamentals and sidesteps a substantive debate. The time for that debate is now.




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