By Andrew Gillen
This is the fourth in a four part series that will explore the similarities between the housing bubble and rapidly increasing tuition. A study that explores these issues in greater detail will be available at the conclusion of the series.
Part 1 is available here.
Part 2 is available here.
Part 3 is available here.
A working paper that addresses this issue in greater detail is available from our website.
The previous post showed how because schools are prestige rather than profit maximizers, and because a lack of any measure of their output precludes normal price competition, widely available government subsidies will contribute to higher tuition rates.
Government guarantees for student loans contribute to artificially low interest rates and lax lending standards, which were two of the driving forces of the housing bubble. Of course, the bubbles themselves are driven by other causes (speculators in the housing market and market characteristics in higher education), but artificially low interest rates and lax lending standards enable these culprits to exert greater influence. Thus it should come as no surprise that we witness tuition increasing at an unsustainable rate, just as housing prices were until 2007. They are both driven, at least partially, by the same phenomena, artificially low interest rates and a lack of lending standards.
If it took a rise in interest rates to pop the housing bubble, do interest rates need to rise to pop the tuition bubble? If so, current policies like The College Cost Reduction Act of 2007, which is seeking to expand the availability of loans and to lower interest rates even more, will accomplish little other than allowing schools to raise their tuition.
Public policy should cease guaranteeing student loans for so many students. The characteristics of the market for higher education ensure that when the ability of the typical student to pay is increased, schools will simply raise tuition. Restricting loans to low income students would make it harder for schools to raise tuition. Besides, grants are a better method of funding the education of low income students because they do not lead to some of the other problems associated with loans.
The main lesson to draw from the housing bubble (when it comes to higher education at least) is that guarantees for student loans result in artificially low interest rates and lax lending standards. When these subsidies are too widely available, they increase the ability of the typical student to pay for schooling, which encourages schools to raise tuition more than they otherwise could.