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The Cost of Education

by James Spurgeon, published

Will It Be The Next Bubble To Burst?

It's basic economics.  The economy is like a rollercoaster.  There are periods when the market goes up and periods when the market goes down.  This is something that anyone that understands only the very simplest part of economics knows.  We've watched this several times happen in the past couple of decades even.  The economy was growing by leaps and bounds during the 1990s as a result of start-up internet companies.  But the "dot-com" bubble got too big and burst around 2000-2002 leaving only the strongest (and those with a good business model) to survive.  From 2002-2008, the economy began a slow rebounding process.  During the "dot-com" recession, the housing market had stayed in good shape and it helped fuel part of the recovery.  But in 2008, the housing market, which had seen prices rise at a faster rate than inflation, finally burst.  And with it, the banks went as well.  This started what we know as The Great Recession.  Though economists will tell you that The Great Recession is now behind us as the economy is improving and the stock market is getting higher, unemployment still remains at an all time high.  And though the economy might be improving, that doesn't mean there isn't something that is already in the works to derail it once again.  As things grow too big, there has to be an adjustment.  Airlines will probably face this at some point as airfare continues to increase, and they will soon overprice themselves.  However, the bigger threat to the economy will be the education bubble.

College tuition is rising at a faster rate than inflation much the same way the housing market did before its crash.  Cash-strapped states cannot afford to pay public universities the money they are owed.  The federal government isn't in any better situation.  It has a huge debt and most Republicans on Capitol Hill are against any budget increases without their being an offset somewhere else.  Combine that with the sequestration cuts, which affected every department of government, and there is again no money for public universities.  So what is a university to do?  They turn to those who want to attend their institutions and increase their tuition.  Some might only raise out-of-state tuition.  Some might only raise in-state tuition.  And some might raise both.  It all depends on who that particular university is attempting to attract and where there current tuition rates stand.

Through Q1 2012

Source: Bloomberg, Federal Reserve Bank of New York Through Q1 2012 Source: Bloomberg, Federal Reserve Bank of New York

But that basic problem still persists.  In order to attend a college or university, students are having to take out more and more loans, and when they finally graduate they are in debt thousands of dollars (if not tens-of-thousands of dollars).  The economy has been slow in adding good-paying jobs, so they either have to settle for less-paying jobs at which they can't afford to live and pay back their loans, or continue to go to school and collecting more college debt in the hope that by the time they get that degree that things will be better.  Regardless, this is a major problem for our economy.  Since we base our economy on how much the consumer spends, one must assume that someone with a mountain of college debt won't be spending a lot of money on things since they have to repay their massive loans instead.  And that's even if they can afford to pay back those loans to begin with.  It gets harder for an economy, based as ours is, to grow when so many people are kept out from the very beginning because of the debt over their heads.  Currently, the overall student debt stands at $1.2-trillion and is increasing.

Some could argue that students should just get jobs to help pay for their college tuition, and many do just that.  However, there is a fine line between working and over-working to help make ends meet.  It's one thing to have a job when in college to help pay for things... school supplies, etc.  It's another though to be working so many hours between several jobs to the point that one wouldn't have time to study and grades slip as a result.  What is the point of being in college at that point?  We value education.  Education is important for any country to succeed.  And yet, we have watched the US be passed up by any other industrialized nations over the past several decades.  And instead of making the big decisions and making the big changes to bring us up to par, we seem to half-ass the entire thing and move our education system continually in the opposite direction.

100-dollars7427Recently, we watched Congress come up with a bipartisan solution to college loan interest loan rates (H.R. 1911).  This was after they let the low interest rates expire at the beginning of July.  It sounds like a fairly good thing that they were actually able to work together to lower the interest rates again.  But it's nothing more than a scam that kicks the can farther down the road.  It looks good on paper, but in the real world where the rest of us live, it can actually do more harm.  The legislation tied the interest rates on federal student loans to the yields of the 10-year Treasuries.  So while that will work in favor of the students taking out loans now, as the economy improves and the market goes up, the interest rates will also increase.  Thus putting us back in our original problem in just a couple of years (minus a complete economic meltdown again).  And with the increase, the federal government stands to make a profit.  You read that correctly.  The federal government will cause students to go into more debt  just so they can make a profit... a profit of approximately $184.7-billion according to the Department of Education, Congressional Budget Office, White House Office of Management and Budget, etc.

Still sound like it was a good deal?  Senator Elizabeth Warren (D-MA) didn't think so.  She actually voted against the legislation (Senate Roll Call) because she saw it for the scam that it really is and how it would not help the growing student loan debt (Sen. Warren's Official Statement).  Senator Warren often spoke about the student loan debt both leading up to the July 1st deadline and after.  Businesses currently get super low interest rates on loans from the government (Federal Reserve).  Students actually pay a higher interest rate on their loans than businesses.  With the new legislation, interest rates on student loans will drop to 3.9% (Federal Student Aid).  Senator Warren proposed that the interest rates on student loans be as low as the interest rates that businesses receive from the federal government.

Some would even argue that since education is the foundation of all that student loans should have a 0% interest rate, but even banks wouldn't give out loans at 0%.  Like anything else, it's a business and there needs to be some profit involved... even if it's smaller.  I haven't written this column to come up with some big solution.  It's mostly been to bring the attention to the larger situation that is taking place.  By kicking the can down the road yet again, we will only continue to face this problem in the next several years.  And if we continue to ignore it altogether, it does have the possibility to collapsing our economy and sending us into another recession when the bubble finally bursts.  In a letter to George Wythe on August 13, 1786, Thomas Jefferson wrote, "I think by far the most important bill in our whole code is that for the diffusion of knowledge among the people. No other sure foundation can be devised, for the preservation of freedom and happiness...Preach, my dear Sir, a crusade against ignorance; establish & improve the law for educating the common people. Let our countrymen know that the people alone can protect us against these evils and that the tax which will be paid for this purpose is not more than the thousandth part of what will be paid to kings, priests and nobles who will rise up among us if we leave the people in ignorance."


At the time of this writing, the Federal Student Aid website still had the interest rate for Direct Subsidized Loans at 6.8%.  This is because the President has not yet signed H.R. 1911 though he has indicated he will be signing it.

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