Thursday, April 25, 2013

Government Causing College Tuition Inflation

The main point of this post is that the government is primarily responsible for college tuition inflation over the past 14 years and has created a new bubble in college debt.  The reason?  The Federal government has explicitly backed and guaranteed a  flood of loans (easy money) from various institutions and has created a flood of money into for-profit educational businesses and both public and private schools pushing up prices.

Have a look at the following graph showing that college tuition has outpaced CPI inflation by a huge margin.

Figure 1
College Tuition and Fees Vs. Overall Inflation from 1985 thru 2011

What Has Caused This Surge In Tuition Cost?

Was there been a baby boom 18 to 20 years ago to create a demographic bulge of new college age people creating demand and cost pressure on this system?  The short answer is: a little bit but not enough to explain the surge in enrollment and tuition costs.  There has been a small baby boom of "millenials" or those babies born between 1980 to 2000 (also called Generation Y) who are the offspring of the original baby boomer who were born between 1945 and 1965.   You could call the millenial generation the "echo baby boom."

But this group of people, who are now of college age, is a small echo of the original baby boom. Have a look at the following graph of births per 1000 population from Wikipedia.  You can see that slight "bulge" in birthrates from 1980 to about 1992  is not enough to explain the tuition inflation "bubble."

Figure 2
Births per 1000 population from 1909 to 2009
So demographics doesn't explain it.  Does the recent recession and higher unemployment lead to more persons seeking a college degree?  I think the answer is yes but you can see from Figure 1 that the inflation rate of college tuition rocketed from 2001 and on, not after 2009.

The Real Reason For Tuition Inflation

From Inflation Data dot com, Gordon Wadsworth, who spent 19 years in college financial aid gives us the answer:
..the main reason tuition continues to rise is a dramatic change that took place regarding the Federal Stafford Loan more than a decade ago. When Uncle Sam opened the floodgates to government-backed student loans without parent income restrictions in 1992, colleges welcomed the news with open arms. The sudden injection of millions of additional aid dollars only furthered tuition increases. Add to that the government’s continued promotion of the Stafford Loan as a low-cost program, and you have the formula for hyper-inflationary costs.
When the government made it exceptionally easy for students to borrow massive amounts of money, the colleges followed the lead by increasing their tuition rates. This combination led to record-level borrowing. Today the average undergraduate student loan debt is nearing $20,000. Those who go on to graduate school often end up with an additional $30,000. Law and medical students report an average accumulated debt from all years (undergraduate and graduate study) of $91,700.

Student Loan Bubble and Upcoming Bailouts 

In my blog Student Loan Bubble and Bailout, I detail how the amount of college debt has risen dramatically since 2000 and now that debt has become unsustainable with rapidly rising default rates. This is a direct result of rising costs and a depletion of credit-worthy borrowers. There's no one credit-worthy left!

The amount of student debt outstanding is now $1 Trillion vs $250 billion just 10 years ago.  This flood of easy money is likely to end in another bubble bursting with more bad debt bailed-out by the Federal Government.

Remember, it was a flood of easy (under-priced) money caused the housing inflation and subsequent bubble with the government, including Fannie Mae and Freddie Mac and government tax incentive at the epicenter of that bubble. The collapse of that bubble created a huge crisis and surge in government deficit spending.

Expect More Crises

Expect more crises caused by clueless and/or disingenuous people in Congress.  It won't end until these people are voted out of office and the Federal Reserve is ended.  But that's another upcoming blog post.

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