How To Make Financial Aid Completely Unavailable
By Repair Man Jack Posted in Congress | Spotlight Blogs — Comments (20) / Email this page » / Leave a comment »
As a young child, I used to love those coyote and roadrunner cartoons from Warner Brothers where the coyote barreled off the edge of a cliff, took a few extra steps and then looked down. This was then followed by Wile E. Coyote, Super Genius getting his traffic ticket from the gravity cops. It’s a shame that Nancy Pelosi’s idea to cut student loan interest rates in half by legislative fiat won’t lead to a similarly amusing comeuppance.
Read on . . .
Actually, this law will most certainly lead to someone’s embarrassing pratfall, it’s just that no one that has contributed to the outrageous tuition rates of colleges and universities will land squarely on their cans; nor will the faux-populists in congress. This will happen because our government’s leaders are proceeding in willful ignorance of how exactly an interest rate gets established in the first place.
An interest rate is a price, a rent more accurately. It bows to the laws of economics, like the price of any other commodity on the market. In much the same way that an apartment landlord leases you the use of some of his building to live in, a financier allows you to put a portion of his funds to work on behalf of your interests. Interest rate controls will effect the availability of money the same way rent control has led to a glut of affordable apartments in Santa Monica.
The measure has been brought forth to help students afford the ever-spiraling costs of a college education. However, it does nothing to get after what actually serves as a graveman, lifting the prices of a four year degree.
Like health care subsidies and food stamps, controlled interest loans have a noble purpose that runs afoul the Law of Unintended Consequences. These government subsidies fail to account for the degraded decision making ability of a consumer that does not see and feel what a good or service actually costs. Our academic advisors and guidance counselors tell us to factor cost out of where we decide to attend college.
People who have comprehensive health insurance don’t shop for their medical care based on price. Prospective college students awash in available aid will do no better measuring and properly evaluating tuition costs. When consumers consider the money to be almost free, they value that money the way a user of a public toilet values the toilet paper: not very highly.
The law also fails to recognize that a high tuition actually becomes a mark of value and distinction amongst selective schools. As it becomes increasingly difficult to discriminate in equalitarian circles such as academia, price discrimination becomes a method by which self-selecting, wealthy elites can find their own. Barring a matching price control, Pelosi’s control on the rental rate of capital can only lead to further tuition escalation.
Raising the tuition is sub-rosa method by which Bull Conners now stands athwart the entry of poor, underprivileged children into our elite schools. Wishing interest rates wouldn’t effectively measure the value of renting money over time won’t alter this fundamental reality. Swarthmore College doesn’t want the children Pelosi tries to hand cheap money to on their pristine campus; amongst the status and the lucre. The elitist liberal scum, that squats on our prestige universities, would genuinely prefer to leave these children quietly behind.
When we cut down to the bone of this issue, the low interest loans are a way to dodge the sordid truth. No one in our nation’s leadership wants to face the fact that Harvard and Haverford don’t want James Meredith or anyone of his social class to add their brand of diversity to their campuses any more than The University of Mississippi wanted to invite Mr. Meredith over, to help them racially integrate. They just use more the more subtle means of outrageous pricing to keep out the great unwashed masses using non-violent means.
This interest rate scheme will not make college more affordable. The real price of a year at Old Ivy will not change. This means that as the money supply increases, so does the nominal price. College tuitions are like Northern Virginia real estate prices. Half the cost is determined by who the pricing is designed to keep out of the market.
One thing that is not being discussed here is that the reason that the interest rate on student loans is where it is (has been) is that congress set it there. Overall interest rates dropped and not banks are making a substantial return on student loans. So high student loan rates seem to be more a result of government action as opposed to the free market.
Assuming that students are price sensative (and I believe that they are) one could easily argue by freeing up the managment of student loans then Banks would give loans based on the liklihood of them being repaid (this of course raises questions of loan rates based on Socio-economic situation). Overall the Default rate in 2001 was 5.4 percent. I would guess that it varied greatly by institution (I bet there is a high correlation between the top party schools and top default rates) and by major (EE probably has a lower default rate than Ethnic studies).
Right now there is no one in the system with the informaiton and the motivation to match students to the institution/major where they are most liklihood to suceed. If lending institutions are given more leeway and fewer guarentees they will have the motivation to maxmize the return on their investment, which also correlates with maximizing the probability of students succeeding in higher education.
My freshman class was entirely engineers and scientists and at the end of the 1st year a third were gone. Don't know if they still make life so rough but I hope they do, it was a good experience to go through.
Veritas magna est et praevalet.
When you say "elitist liberal scum, that squats on our prestige universities, would genuinely prefer to leave these children quietly behind," on what basis do you say it?
According to your own links, Swarthmore already spends $32K per student to educate them on top of the tuition charged, and each student receives "on average, aid totaling more than $28,500, most of it from the college itself," adding that "Swarthmore limits its aid to students with financial need."
Moreover, as you must know, elite schools like Harvard and Princeton have been radically changing their financial aid packages over the past few years to encourage more poor students to attend, eliminating parental contribution as a factor and shifting to grants, not loans, and moving away from "early admission" programs that benefit the well-counseled over the working class.
Are you suggesting that an interest rate on student loans set by the free market, unsubsidized by the government in any way, would be best? Or why not open more slots for the poor for eliminating preference programs for legacy admissions?
The small percentage of under-privileged kids at Ivy League schools might be a problem, but blaming this on class warfare fueled by "liberal elites" seems a bit of a stretch. Perhaps a more reasonable answer is that poorer families are less likely to encourage their children to succeed or are too intimidated to apply to a school like Harvard. Or simply that fewer poor kids go to college at all.
Certainly, it does not appear as though Harvard is making an effort to keep poor kids out:
http://www.news.harvard.edu/gazette/2004/03.04/01-finaid.html
The plan completely eliminates the need for families making $40,000 or less annually to contribute toward their child's Harvard College education. The initiative also lowers the contribution expected from families making between $40,000 and $60,000.
Today, about 48 percent of Harvard undergraduates receive scholarships that average close to $24,000 annually, and two-thirds of Harvard College students receive some form of financial aid.
>>>Are you suggesting that an interest rate on student loans set by the free market, unsubsidized by the government in any way, would be best?
Absolutely. That way people would decide how much a college education was actually worth to them, rather than just considering it part of the overall entitlement package that comes with being an American.
>>>>Or why not open more slots for the poor for eliminating preference programs for legacy admissions?
No complaints here.
Harry Reid is to ethics reform what HIV was to free love!
Adults ages 25 to 64 who worked at any time during the study period earned an average of $34,700 per year. Average earnings ranged from $18,900 for high school dropouts to $25,900 for high school graduates, $45,400 for college graduates, and $99,300 for workers with professional degrees (M.D., J.D., D.D.S., or D.V.M.). As shown in Figure 1, with the exception of workers with professional degrees who have the highest average earnings, each successively higher education level is associated with an increase in earnings.
Link. That it's worth it down the road is unquestioned. That one's access to it should be based on the happenstance of one's upbringing seems cruel.
>>>>>That one's access to it should be based on the happenstance of one's upbringing seems cruel.
People have no control over their own circumstances? That's a slap in the face to anybody who has ever faced down adversity and made good. It's not just the cards you are dealt, it's how you play them.
Harry Reid is to ethics reform what HIV was to free love!
But we're talking about high school students, still living at home, trying to figure out if they can afford college or not, and whose ability to see long-term is constrained by the circumstances in which they live every day.
People do have control over their circumstances but you can't overlook social backgrounds and the types of schools that many people grow up under. It is not luck that the wealthy suburban high schools in our area has a 95%+ enrollment rate in college while the poor city schools barely hit 10%.
So while there are those who fight through the circumstances, there are sometimes only so much you can do with a 2-7 off suit.
reflects a number of trends, most notably the unwillingness of administrators to rein in costs. Administrative salaries have skyrocketed, the average college staff is overpaid and far too numerous, a great many programs (particularly liberal arts) lose money and schools have been diverting large sums of money to new and largely unnecessary construction. Colleges tend to abide by market principles, and so long as there are several thousand qualified freshmen willing to pay those costs or capable of securing that aid they will continue to increase. Only when admissions standards decline (and the reputation declines accordingly) will schools be compelled to revisit cost. Even if the alumni were as elitist as you think them to be they don't make the majority of the budgetary decisions at a given institution. You're right to say that the problem of financial aid is a drop in the bucket compared to rising college costs, but your reasons why are woefully insufficient.
I had to drag out this study which I did a year ago, comparing the growth in college tuition to other components of the consumer price index since 1981. (It's a five page pdf file.)
You'll find few components in the index that have grown by a factor of 5 since then. It's impossible to point to underlying inflation components that have caused that explosive growth; as you point out, bad management/lack of competition may to blame for part of it, but even that growth would be impossible if the consumers of their product were unwilling to pay the price.
RFYoung
This is one of the best ideas I have heard in a long time. I can hardly believe that this gift comes from a Democrat congress, but we should support it on its merits.
Don't subsidize the intrest rate, but control it to say 1%.
The author is exactly correct. Loans will dry up. Without the loans the crush of people at the gates of the institutions of higher learning will shrink, no longer overtaxing the facilities. In fact the facilities will eventually become under utilized and the universities will have to cut tuition prices and fire some leftist professors. Maybe even such beacons of light as Ward Curchill.
As the tuition prices come down they will reach a point where a return on the investment in tuition by a student becomes attractive to those who can make use of it. At this point it would still not be a productive investment to the remedial comnmunist.
The market would have struck a balance educating people who can make use of education and leaving remedial communists unencumbered by the crushing burden of todays tuition prices.
Victory!!
A better way to do this, is to let lendors have more power to give or deny the loans. This would eventually cause some smart OR Geek to tell his loan officers to start asking the students what they are currently majoring in and how they are doing academically.
This will mean that people that major in high demand majors and are pulling down 4.0 GPAs get low rates and pretty much garunteed approval. They are better actuarial bets to repay the loan than ethnic studies majors who finish sophomore year with a 1.96 gpa on academic probation.
Also, high-calibre, high-cost schools will draw lower intrest rate loans to compensate for the overall trend of their graduates earning more.
Harry Reid is to ethics reform what HIV was to free love!
Your last paragraph says that "high-calibre, high-cost schools will draw lower interest rate loans..."
This assumes that 1) the students are more likely to graduate, 2) more likely to make enough more to make up for the higher cost of the school.
One of the issues that came up a few years ago is that high performing minority students were being admitted to accademic institutions that were above their accademic preparation level and the drop out rate after 1 year was very high. So a kid in the top 10% of an inner city schools was more likely to suceed in the long run by going to a second tier school and graduating as opposed to a top tier school and dropping out after a year (and becoming dis-illusioned). Schools will not tell minority candidates that, lending institutions will have a motivation to make students aware of that.
Part of the reason the market is reviled is that it reveals essential information. Every man is your brother until the rent comes due; then if the baby is ugly, that is exactly what the market will tell you.
This implicit truth-telling function that comes with any price set, in a reasonably competitive market, can save people from a major fall. You just have to be humble enough to listen to reality sometimes.
Harry Reid is to ethics reform what HIV was to free love!
pegged at the base rate, at a minimum 1% or 2% over. I know it's been commented on but the student loan scam has contributed in a major way to college price inflation. If anything student loans should be reduced in availability not increased or made more attractive via rates.
Along with cheap loans we have arrived at the point where we have cheapened the meaning of a college education and it's worth. As always, government to the rescue and keep your fingers crossed.
"a man's admiration for absolute government is proportinate to the contempt he feels for those around him". Tocqueville
There’s nothing to stop lenders from adding restrictions, thus lessening the amount of loans to students!
There’s nothing to stop institutions from raising tuitions, thus putting these students out of reach anyway!
This bill maybe well-intentioned but doesn’t tackle the issue intelligently. Instead of a quick fix, which liberals always seem to favor over reason, we should be taking a real approach to reform and teaching parents and students to become better consumers of higher education!
My girlfriend isn't planning on paying off her student loans because they are locked in at 2.3% and we'd be better off investing the money we'd otherwise pay back.
I'm taking out private loans (because my university lost my paperwork and by that time was locked out of federal loans), and am paying between 10%-12% on them... and classmates of mine, when hearing that, said "you must have really good credit, Mike" (some are paying 15%+ on private loans... really!).
Since this year I file for financial aid as an independent (as I turned 23 during the 2006-7 school year), I should be able to get my application in in time to take advantage of the low loan rates this year, should they be approved... otherwise, it's off to take out another $15,000 or so in loans with credit card-like interest rates, which I probably have no hope of paying back anytime soon (last I checked, the market isn't too good for a triple major in Math, Political Science, and Economics).
"I could explain, but that would be very long, very convoluted, and make you look very stupid. Nobody wants that... except maybe me."
When discussing higher education, it is a huge mistake to generalize on the basis of what a small handful of elite private schools are doing. They really operate in their own world, and only a tiny fraction of students even consider attending such places. It's like basing an assessment of the auto industry on the basis of Maybachs and Bugattis.
There is some merit in considering what is happening at some of the elite public institutions, since a considerable percentage of students do go there.
But an overwhelming number of students are at places you've never heard of. These students are price sensitive.