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May 07, 2017

Why Government Subsidies Never Make Anything More Affordable

And why we can never get rid of them.

The chart from American Enterprise Institute could almost be this whole post. Costs

As you can see college costs have increased almost four times as fast as general inflation over the last twenty years. Four-year college has gone from being a stretch for middle income families to being affordable (at list price) by only the very rich. How can a product get priced out of reach of its customers? It takes government help.

Now It’s a laudable goal to make sure that everyone who wants to do the work can get a college education and prepare for better paying jobs than he or she would be able to get without a degree. So the US government provides grants and subsidized loans, both with a means test, and “unsubsidized” loans without a means test. I put “unsubsidized” in quotes because the interest payments on these loans don’t begin to cover the default rates and because no commercial lender would make these loans at these rates.

If this aid were available only to the most needy, it would not have had this distorting effect. But it’s hard to get votes for a program just for the needy, so aid for the middle class was added as well. Student debt has gone up about 400% after accounting for inflation in roughly same period according to Pew Research Center. To the young, loans on which they don’t have to make payments until after graduation are close to being grants. Colleges have no need to be frugal since parents no longer have to come up with the payments. In fact, in order to attract the students and the federal money that comes with them, college are in an arms race building fancier and more elegant dorms and rec centers as fast as they can. College costs have soared. Graduates are burdened with onerous debt. The extra money has made college LESS afforfable

How do we break this cycle of increasing subsidies pushing costs higher? Socialists say “make college free”. Of course that doesn’t reduce the cost, it only shifts it. And recipients of free tuition have even less reason to care about the actual cost of their education than those who must pay for it someday.

We will have to cut back on loans to the middle class; there will be not only cries of anguish but also real pain since college costs have ratcheted up to unaffordable.  College costs will come down in response to customer pressure; but this will also be painful. Colleges bonded to fund their luxury offers to students; a decrease in revenue will put some out of business.

It’s a lot easier to start an entitlement than to stop it. Does that sound like health care whose cost increase are also much above inflation? Stay tuned.

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