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The Education Bubble

There’s an axiom in politics that says if you want less of something, tax it; if you want more of something, subsidize it. That sounds simple enough. Unfortunately, reality is never simple. Alas, tinkering with the market by injecting subsidies only distorts supply and demand mechanisms, wreaking havoc behind the scenes. The infamous market “bubble” is a prime example. While they can happen naturally, bubbles are frequently the biproduct of government subsidies. By channeling money and other incentives into an industry, an illusion of demand is created that eventually corrects itself, and anyone invested in said industry watches money disappear before their eyes. Such was the case in the housing crisis. Sure, private firms did their fair share of creating the mess, but the environment for reckless and risky behavior was precipitated and sustained by reckless government policies. Insisting that every person deserves homeownership, the government pumped tens of billions of dollars a year into housing aid and used federally run enterprises to lower standards on home loans. These actions put pressure on the entire housing industry to follow suit, and when prices finally peaked, the house of cards came down. Now we are well into another bubble, and it’s the same story. The government insists that every person deserves a four-year college degree and federal spending on higher education is approaching $30 billion a year. But the real sign of danger was buried deep in the “Obamacare” legislation, in which Sallie Mae, the largest private issuer of student loans in America, had its primary business hijacked. I happened to be a customer of Sallie Mae during this transition, and was notified that the federal government had purchased my loans and I would thereafter be dealing directly with Washington. What will be the outcome of removing private incentives from the student loan market? What will keep prices and expenditures stable and responsible if college becomes yet another political entitlement? Welcome to the Higher Education Bubble. Waste vs. Investment Subsidies have one true purpose: closing the gap between what consumers are willing to pay and what it actually costs to bring a product to market. That is, subsidies are additional payments, without which a product, company or industry could not viably compete for business. Whether a particular subsidy is a “waste” or an “investment” depends on the issue and perspective—though one could argue that if private companies are not doing the investing, that’s a reliable indicator of waste. In this instance, the government has been providing financial aid to inflate the higher education market. Like the subprime mortgage fiasco, the government does not discriminate on the basis of ability to pay back loans, or on potential investment return. The cost-benefit analysis here is based on an assumption that any student at any university studying any subject is well worth any investment. So, is this a waste or an investment? If students, universities and subjects were all identical, perhaps this logic would make sense. But they are not. Only the free market is capable of working out all of the variables involved in such a complex situation. Federal policies do exactly the opposite, and the current approach is to dump as much as possible into higher education. The bubble—if it hasn’t already—will eventually burst, so what will that mean? First, millions of people will graduate from college, having learned very little because colleges have relaxed standards to accommodate a more “average” performance.Second, employers will stop paying high premiums for a bachelor’s degree when the difference appears minimal. Third, people in their late twenties and thirties will find themselves financially lagging. Not only were they set back by tuition payments, but they have failed to “sell” their training to a high enough bidder to make the expense pay off. And lastly, colleges will undergo major cutbacks as prices come down, and some of the lower quality and less innovative institutions will close their doors. Taxpayers who have been footing the bill for low-interest and subsidized loans, grants and other programs, have already spent trillions of dollars on bogus investments in education. The net result is that a generation of parents will face losses on taxes and tuition, a generation of college grads will be overspent, and the next generation will continue paying down an increased national debt. Are we at the tipping point? While it is hard to determine what a four year degree is worth, it is likely that we are close to the tipping point, if we haven’t crossed it already. In fact, I believe the Occupy Wall Street movement was the proverbial canary in the coalmine.The millennial generation was repeatedly told that college leads to a lucrative career, regardless of what a person studies, where they attend, or how well they perform. But here is the crux of the problem: even if we openly acknowledge that college is more expensive than it’s worth, there is no good reason to say “no” as long as the government is subsidizing the expense. Thus, while rising financial aid softens the burden, it simultaneously raises tuition prices by inflating demand. Furthermore, middle class familieswho are actually trying to pay for college on their own are getting hit twice through the taxes and national debt that fund aid for other students. There are simply no winners in this game. We have to put responsibility for student loan decisions back into the hands of those who bear the risks—students, parents and private lenders.