“A billion here, a billion there, sooner or later it adds up to real money.” — attributed to U.S. Senator Everett Dirksen
Recently I wrote about some reactions from the higher education marketplace to the incredibly high cost of a college education, specifically the inexpensive courses offered by a company called Straighter Line that are accepted by a number of colleges as transfer credit, and low cost DETC-accredited schools like Penn Foster College and Andrew Jackson University.
An important question, though, is why college costs so much? And even more, why do distance learning programs cost so much when classrooms, furniture, faculty offices, whiteboards, student lounges, dorms, parking lots, and the like aren't necessary to produce and run online courses?
Some people who study economics and finance argue that the way the federal financial aid system is set up is partly to blame. By making it almost guaranteed that most applicants will have access to large loans that cover even a high tuition rate, the system sets a sort of price floor, where schools that are out to maximize profit can charge much higher rates than necessary without losing customers like they would in a free market. It's made even easier for students to rack up student loan debt since none of it has to be repaid until the student is altogether out of school. That sort of setup is one where it's very easy for students to lose track of how much borrowing they're doing. (Pop quiz: How much do you owe in student loans right now?)
Of course, the answer isn't as simple as saying, "Oh, well then just end student loans." I know this from personal experience, in that I have a lot of bills to pay, and if it weren't for student loans I don't see how I could have gotten as far in my education as I have. At the same time, I can't help but think that the system might be better if students borrowed the money from banks and credit unions without Uncle Sam as a middleman. Without the federal government guaranteeing that loans would be paid, lenders would have more incentive to consider how well a student might be able to repay later, and accordingly cap how much is available. That may sound bad, but if that's the way lenders are doing business, colleges will have little choice but to cut costs and keep tuition reasonable, or else all their students would have to transfer to more affordable institutions.
But needless to say, this is not an era in which lenders are on people's good side, and the U.S. federal financial aid system is actually going in the opposite direction. This article in today's Washington Post announces that the Obama administration is going in the opposite direction. Rather than borrow money from private lenders with the feds guaranteeing the banks that the money will be paid back, now students will be borrowing money directly from their seemingly inexhaustible Uncle Sam.
So in this case it's the banks who are the middlemen being cut out, not the government. Very well, but it's an interesting time (yes, in the Chinese sense, as we'll see) for the federal government to be adding to its list of spending. The annual deficit is at a record level, it should be a trillion dollars this year. That's money that the federal government is spending that it has to borrow. It borrows the money from a number of places, the UK, Japan, Venezuela, Saudi Arabia, and so forth, but the largest creditor is China, which is all flush with dollars thanks to Americans' insatiable appetite for inexpensive Chinese goods. The end result is that from now on, when you borrow money as a federal student loan, you're indirectly borrowing it from OPEC or the Chinese government.
So my friend CWE suggests that as long as we're cutting out middlemen, why not get rid of one more? Rather than get a student loan from the federal government, why not skip them and just borrow the money directly from the Chinese? To make things easier, the feds could sell them one or two of the banks that they've been bailing out lately so that people who need a student loan would have a convenient local branch of a Chinese-owned bank where they could get the cash they need.
When I put it that way it sounds crazy, right? Just consider, though, how close it is to the truth!
Happy borrowing, America!
Next up, are we in an education tuition bubble?