In response to a post on The Sanity of A Mad Woman, I decided to finally document on my blog what caused the college tuition explosion and why OWS has it wrong.
The answer is a resounding, yes. The reason for why tuition is as high as it is escapes most people, including the clueless OWS crowd. It’s not an accident most people don’t know why because we are asking the wrong question. The question is not how to make tuition more affordable, the question is why is tuition so unaffordable?
Stratospheric tuition is only a recent phenomenon. In fact college for most of our history was easily affordable and most students worked their way through school with no debt whatsoever. Obviously something must have changed, so what was it?
The reason tuition is so unaffordable is because it was made that way by our own Government, and I will explain how.
This is a long post, but the answer is not simplistic and to fully understand it, I must cover some related subject matter. If you read it in its entirety, you will understand exactly what happened.
PHASE I: WHEN A REPUBLIC COLLAPSES UNDER THE TYRANNY OF DEMOCRACY
I think most people accept that politicians are really only interested in getting votes. There is the occasional Patriot, but they are few. If we can accept that premise, then maybe we can accept that doing what it takes to get votes and doing what is right for the country are not always the same thing, and in fact are often in opposition. For example, and without getting too far down this road, the Founders did not want a Democracy, they wanted a Republic. A Democracy where the majority wins is simply mob rule.
If 10 of us are on an island, and 9 of us vote to make you do all the fishing and cleaning and cooking while we do nothing, we would consider that a successful Democracy. But how is that fair? It’s certainly not fair for you. In a Democracy, the first thing that dies is freedom, of either an individual or an entire class of citizens. Is that what we want? A Republic attempts to control this mob rule by protecting the freedom of the individual, to be free from being imposed upon by any other individual. In a Republic, 9 people voting in such a way would not constitute a new law of the land that you are subject to because you can simply say, “No” and since the right of the individual trumps the right of the majority…you are not subject to it.
In a Republic, and according to The Founders of the United States, the definition of freedom is that everyone is free to do anything they want, as long as they do not impose what they want on others. We are taught in school that freedom has something to do with not having other countries tell us what to do, but that is the “government” definition of freedom (which if you think about it, is simply an extension of the real definition). The government definition is much more focused than the real definition; and that is intentional. When you apply the true broader definition of freedom, and not the government’s narrow one, to how our government rules over us, you realize how often our freedom is abused by our own government. But why would we expect to be taught the true definition of freedom in a school run by a government, when the purpose of any government anywhere is to control and limit freedom at any opportunity. We should never be surprised by this, but we do need to wake up to this reality.
PHASE II: HOW AN AFFORDABLE TUITION WAS DESTROYED
Tuition is too high because politicians do whatever it takes to secure votes and to secure those votes they find out what people want, and they attempt to give it to them for free, or as close to free as they can get. Nobody can argue that this is not what politicians do. By definition, representative government is supposed to be an elected individual representing the wants of his constituency and attempting to secure those wants, and in many cases what constituencies want is something for nothing.
Tuition is one such something. To continue our previous example, suppose the 9 people on the island vote in democratic fashion that they want free education, and they want you to pay for it.
Not too long ago, student loans were provided by the private sector, which like a mortgage, car or other loan requires a certain amount of due diligence to be performed by the lender in order to approve the loan. Just like buying a house or a car, each person was reviewed to see if they would qualify for the loan which included determining if they could pay it back, what the interest rate would be based on the risks associated with the borrower, how long to make the loan for, etc… Each person either qualified or didn’t, just like car and home loans, and loan companies competed against each other for borrowers which kept the market competitive.
Naturally some people didn’t qualify. Politicians saw this as an opportunity to provide something for nothing to people who wanted that something and were denied it. Thus was born “government” student loans provided to those who did not qualify from a private lender on the politically popular and vote-securing premise that education is a “right” of every individual. In so doing, the politicians became very popular with certain classes of society and since nobody bothered to ask why these people were not qualifying for loans from private lenders (such as bad credit, no job, etc…) the outcome was predictable…the kinds of people who get these loans turn out to be the kinds of people who tend not to pay loans back.
But why would a politician care about that? For one thing, that problem happens long after he is out of office. Second, when these borrowers inevitably default he doesn’t have to pay for it, the taxpayers will have to clean up that mess. Third, he got his sound bites and snippets during his campaign that aired relentlessly on the major news networks in front of a college while he was surrounded by a multicultural crowd extolling the virtues of higher education and the benefits of such to society, humanity, the universe, hotdogs, donuts and peacocks, blah blah blah. And with the promise of guaranteed access to education for all, in flooded the votes and secured his or her political future.
Of course, they can’t make these loans available to just these people. Government spelled backward is expansion. So everyone gets a shot at these loans. So consider what is happening here…before these loans were made available to everyone, people had natural “caps” on how much money they would qualify for. Just like a car loan…if the average American asks for $30,000 to buy a Honda, they might be approved, but ask for $150,000 for a Lamborghini, probably not. The reason for this is obvious. Banks are in the business of staying in business, and they only have so much money, so they have to be selective about how many loans they give out, for how much money, to who, and for how long. This puts an organic cap on the availability of loans and the amounts. Everyone will only qualify for what the lender thinks you are honestly capable of paying back. These caps are what colleges must keep their tuition under in order to service prospective students.If most young Americans on average would only qualify for $5,000 a semester from a private lender, then it makes no sense for a college to charge $50,000 a semester, at least not if they expect to have any students. This free-market capitalism cap prevents tuition from rising out of the reach of average Americans.
But then the Government came in and removed all these caps, mandating that anyone can qualify for just about any amount because any loan a private lender makes can be guaranteed to be paid back by the government (which is to say to be paid back by us, the taxpayer). So the organic cap provided by free-market capitalism that kept tuition low was now removed and opened the floodgates for stratospheric tuition hikes. With this gold nugget of government free-market distortion in hand…what is the first thing every college did?
PHASE III: RAISE TUITION
A few things happened when Government stepped in and started providing guarantees on student loans.
The first thing that happened is that a whole class of Americans that would never have qualified for a private lender student loan, now qualified for a government guaranteed one. That means a flood of demand on schools as a certain percentage of the population that would normally not have gone to college was suddenly able to get a loan to do so, almost overnight. This wave of demand could not be quickly satisfied because to meet this demand, new buildings would have to be built, and classrooms expanded…all of which are multi-year capital construction projects. This overnight flood of demand increased the competition for limited space at colleges everywhere and made it harder for people who can qualify for the loans to find somewhere they want to go.
This should sound familiar. The same thing happened when government mandated that banks provide home loans to people who would not normally qualify through private lenders due to bad credit or a lack of income and in so doing, created a wave of home buyers, almost overnight, that previously would not have existed, driving up demand on homes which made fewer homes available (because it takes a long time to build the number of homes it would take to meet the sudden demand) which drove up prices for everyone which then required even more generous and “flexible” loan terms (think option ARMs) from the government just to keep the whole Ponzi scheme going. This of course led to the housing bubble and the economic collapse that followed when that bubble popped. Tuition is on the same exact trajectory from the exact same government interventions.
The second thing that government secured loans did by removing natural caps on student loans and allowing the rise of tuition was a rapid expansion of college expenses and capital projects. With so much more money flowing in, colleges began building jacuzzis, saunas, observatories, upscale college dorms and all sorts of ridiculous amenities with no educational value and creating an arms race between schools to entice students to come to their school over others. It became more important how many jacuzzis and hardwood floored dorm rooms were available than the quality of the curriculum and professors.
The third thing that happened, was that Professor and administrative salaries started rising rapidly as did their pension and healthcare benefits and other perks, spending on college sports teams rose dramatically, marketing expenses soared and professors who were experts in their field and that had been used as marketing tools to draw students in who wanted to be taught by only the best minds (and were willing to pay for it) spent more time and rivers of new money on pet research projects than actually teaching. So much money was being generated by ever increasing tuition fueled by ever increasing government guaranteed loans that colleges had to get creative on how to spend their windfall.
PHASE IV: THE FEDERAL RESERVE FUELS THE TUITION HIKING FIRE
And lastly, there was The Fed. We can’t forget the part The Fed played. In a true free-market economy of capitalism, interest rates naturally rise and fall depending on how much money is available in the system. When lots of money is available (when savings are high), interest rates drop to encourage borrowing and investment of that money. When there is not so much money available, interest rates rise to discourage borrowing and to make sure only investments that return more than the cost of borrowing the money are pursued. Do you see? In a free market, interest rates rise and fall like a natural gas pedal and brake on the economy to make sure surplus money is invested when we have it and money is saved and not spent when we don’t have it. But then we have The Fed. The Fed removed that natural balancing act and when interest rates tried to rise to restore our economy to equilibrium The Fed stepped on its neck and crushed it against the ground, keeping interest rates artificially low.
This sent a false message to the markets that there was plenty of money available and that people had lots of savings and were just waiting around for companies to build stuff that they could spend it on. In reality, the exact opposite was true but with The Fed unbalancing the natural equilibrium on purpose that interest rates provide, an enormous amount of debt spending and bad capital investment occurred to meet this demand that simply wasn’t there. The markets only thought the demand was there because interest rates were low, but they were only low because our Government was artificially holding them there. Thus was how the tech bubble, then the housing bubble, and yes…the tuition bubble were born…all via government distortion and manipulation of free-market capitalism.
If interest rates had been allowed to rise naturally, the cost of borrowing money would have gone up and tuition would have to drop to compensate for the increased costs of a student loan at higher interest rates. But when The Fed kept rates low, that natural equilibrium was removed and there was no end to how high tuition could go. The same is true for housing. When interest rates finally do rise, home prices will have to come down, which is exactly why The Fed is still keeping interest rates down, they are trying to prop up housing prices because they know they will drop when interest rates rise and they don’t want that to happen.
So just like what helped fuel the housing bubble, loans were manufactured in such a way to allow individuals to take on more debt than they ever should have taken on. And just like the housing bubble, The Fed under orders from the Government kept loan interest rates artificially low which when combined with unreasonably extended payback terms allowed students to qualify for exponentially increasing amounts of debt.
Colleges were more than happy to oblige with this new paradigm, and relieve students of their money.
PHASE V: KING OBAMA HEARS THE BUBBLE POPPING AND STOPS IT BY DESTROYING HIGHER EDUCATION FOREVER
Government is responsible for every distortion in the free market that led to the tech boom and bust, the housing boom and bust and the tuition boom and……wait a second…where is the bust?
If you listen closely, you can hear the popping sound of the tuition bubble…except for one problem. Obama saw the bubble pop coming and stepped in to stop it last week. Acting like the King of a land of Serfs rather than the President of a Republic, Obama unilaterally created a law to prop up the tuition bubble. With the stroke of a pen he made sure the colleges would continue to receive windfall tuitions, all on the broken backs of the unemployed American taxpayer.
The only way to stop the tuition bubble from bursting was for Obama to limit how much students had to pay back on their loans and then forgiving the loan after a certain number of years. Imagine if he had done the same thing but for homeowners during the bubble who were starting to get foreclosed on because their debt was too high? Obama could have used the same law with a little editing and would have simply forced banks to lower mortgages to a tiny percent of the home owners income, and after 10 years, whatever they still owed on the house would be forgiven and the tax payer would pay for it instead.
So why did Obama do it for tuition and not mortgages? Two reasons, first…because he could without Congressional approval, and second…because unlike mortgages that are owned by private banks, most tuition loans are already owned by the government so it’s easy to just make the taxpayer pay for it at the end of a gun. But let’s think about that for a second…since 90% of home loans are now owned by Fannie Mae and Freddie Mac, and both Fannie and Freddie are owned by the government…what else could Obama do now that is very similar to his plan with college tuition? That’s right…and don’t think for a second he wouldn’t do it.
This newly passed law will do several things…
First, it would punish anyone who already has a student loan since those are not subject to the King’s new forgiveness law.
Second, it will make tuition go even higher and at an even more accelerated rate because now there is no limit whatsoever. A college can now charge $100,000 or more a semester and neither the student nor the college will care because in the end, the student will only pay an infinitesimal amount of that tuition back while 99% of it will be forgiven, which means the American taxpayer will have to pay it back.
Third, it does not discourage kids to pursue degrees that don’t translate to anything in the real world so kids will continue to graduate with useless degrees, but instead of how it is now with a lot of debt and a useless degree, they will have a lot of debt they don’t have to pay back, a useless degree, and an American taxpayer to pay the debt.
Fourth, all the students who think this is such a great idea and sign up for the most expensive colleges and get a degree, however useless it might be will be in for a rude awakening after graduation. They will soon realize that on the other side of the free-college-tuition-ride is a seat waiting for them among the ranks of the American taxpayer, and along with that seat will be the bill from every student before and after them in the amount of trillions of dollars in debt forgiveness that our new, recently graduated taxpayer is now on the hook to pay back, right along with all the rest of us.
PHASE VI: THE REPUBLIC DIES – SLAVERY IS BORN
That is why we are a Democracy now, and not a Republic. Students, people who want houses, people who want free food, free medical care, free <enter what anyone wants here> can simply make politicians provide these things for free, in exchange for votes. When one class can vote that another class must pay for what it wants, it is not only the end of a Republic, it is the beginning of Slavery…where the producers are slaves to the consumers, providing whatever they ask for per governmental decree.
If this Republic is allowed to perish, so too will American greatness. China is the new Superpower. Our time is done.