The College Education Bubble


A recent article in the Wall Street Journal by the expert on the economics of higher education, Richard Vedder, “The Real Reason College Costs So Much”, points out the similarities between the government’s higher education and housing policies.  “In housing we had artificially low interest rates.  The government encouraged people with low qualifications to buy a house.  Today we have low interest rates on student loans.  The government is encouraging kids to go to college who are unqualified just as it encouraged people to buy a house who are unqualified.”
The federal government is now spending $105 billion on student loans each year.  The average student loan debt is $26,000 but goes much higher for millions of students.  The maximum annual Pell Grant (intended for low income students) is now $5350 and 20% of the recipients come from families making over $60,000 per year.
President Obama suggests capping monthly loan repayments at 10% of discretionary income and forgiving outstanding balances after 20 years.  This creates a moral hazard.  It signals to current and future loan borrowers that they don’t have to take loan repayment very seriously.  It encourages students to major in “soft” academic areas which have poorer job prospects rather than “hard” areas like engineering and technology which have good job prospects.
Innovation in higher education is not coming from government programs but from private initiatives such as massively open online courses (MOOCs).  These have the potential to greatly reduce college costs.  Community colleges have rapidly growing enrollments and prepare students for skilled jobs in high demand areas such as truck driving, machine technology and health careers.
The cost of higher education is going up much faster than the rate of inflation and the infusion of federal money is making the situation worse by encouraging students to take on excessive amounts of debt.  A cap should be placed on the amount of government money which can be borrowed by an individual student.  There are plenty of low cost options available for obtaining postsecondary education and government policy should support, rather than subvert, such common sense options.

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