Why College is Expensive in America

Students drowning in their own student loan debt has caused massive amounts of public outcry because graduates have no way to pay off the cost of their education. Even though sometimes it is the student’s fault for pursuing and graduating with a worthless degree, the problem of the student debt cannot be ignored.

The true source of the problem is government intervention in (what should be) a free market education system. As it stands right now, the Federal government is guaranteeing student loans so it looks like Old Uncle Sam is trying to invest in American students and the future of the country. However, all the students are doing is bidding up the price of college tuition. Instead of letting demand for a college education fall when prices rise, the demand has remained the same because the government has guaranteed enough loans to compensate for the increase. By an economic point of view, when government guarantees college loans, they are making the demand relatively inelastic, meaning a price increase doesn’t effect the demand very much.

Let’s look at a practical example of this. In this fictional world, apples are worth $2 dollars. Now let’s say the government will subsidize your purchase of apples by giving you $1.50 towards each apple purchase in the name of helping feed you. The shopkeeper raises his prices because he notices a greater demand for apples (because now everyone can suddenly afford them). Now the price of an apple is increased to $4. But the government decides to subsidize your purchase of apples and gives you $2 per apple you buy (because they care about your well being). The shopkeeper becomes pleasantly surprised! Demand is still increasing despite the price being increased. The shopkeeper, destined to make a larger profit, raises his prices again to $6. Again, the government decides to help you out and subsidizes the cost, giving you $4 for every $6 apple you buy.

Take a second and look where we’ve come from. Has the apple become any better in terms of quality from paying $2 to $6? Of course not, in many cases the quality might have become worse because the shopkeeper didn’t see a need to improve their product because it was being bought as is, without question. Now everyone is stuck paying $6 for an apple that is worth $2. Now take all of this and apply it to college loans. The apples are college tuition, the shopkeeper is the colleges and universities, and the government is still the government.

What is the solution to this mess? The solution to bringing college costs down is this: get government out of higher education. If government stopped guaranteeing college loans, many or most students across America would not be able to afford a college education (temporarily). Even though this doesn’t seem like a good thing, it would be! Therefore, once student cannot afford to go to college, the demand would decrease and therefore, prices would decrease as well. Once the demand falls, schools will soon have to be in a price war with each other to attract new students to their school and thus, college education in America will once again become affordable.

The worst part about the whole situation is that virtually no one wins with the current system. The only true winners are the colleges and universities who are raising prices with virtually no consequences. However, I am not trying to vilify these institutions as they are not the problem. The federal government is to blame for enabling students to bid up college prices without knowing the consequences.

If you don’t believe me that government is to blame for the high prices, look at the markets that government has decided to be involved in compared to ones where free markets are used. Health care and education are probably a few of the biggest markets that the federal government has stepped into. What has happened? Prices have gone through the roof. Look at markets like technology or consumer goods. Are prices of digital cameras and flat screen televisions going up or down? They are going down because free markets and competition drive prices down.

To drive the price of college education down, we need free markets to take hold of the education system in America. Competition will drive prices down and make college more affordable. This cannot be achieved through federal government subsidizes. Even though I would like to say it will be easy for this to happen, I highly doubt it will. However, in 2012 there might some conservatives voted into the House, Senate, and White House that will take on this problem. We can only hope.