Tuition Intuition

by Elaine Schwartz    •    Jan 22, 2012    •    599 Views

With tuition and student loans skyrocketing, the Obama Administration has urged colleges to charge less and Congress to lower the cap on monthly payments.

Maybe though, they are targeting the wrong solution.

One Bloomberg View columnist suggests that government subsidies are distorting the market. At an all time high, soaring enrollment rates represent an increase in demand that elevates price.  Typically though, markets work through higher prices. In corn markets, for example, when price soared, more farmers planted cropland and prices dipped. For education, it just doesn’t work that way. By subsidizing student loans through grants, tuition tax credits, default funding, state school support…we could go on and on…government is fueling the increases they are trying to prevent. When tuition rises, so too does the subsidy.

You can see that this takes us to some unintended consequences. By increasing what students could pay, government enabled colleges to charge more. Just as crop subsidies can elevate the price of farmland, might tuition subsidies lift the price of higher education?

The Economic Lesson

This Federal Reserve report on credit is fascinating. Looking at their graphs, you can see that student loans, in many states, are second in size to mortgage credit and currently total close to $850 billion. The report also shows which states have the greater proportion of student loans.

An Economic Question: On a supply and demand graph, how might you illustrate the impact of government tuition subsidies?

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