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The Voice of Young Conservatives
THE WEEK OF APRIL 5, 2010
The Outrage
Used and forgotten. In 2008, young people gave Democrats their vote and in 2009
Democrats showed young people the door. Well it’s time to tell the Democrats to
stop and listen up. From health care to student loan reform, Democratic policies
have consistently ignored the needs of our generation. If we want change, 2010
must be different.
What You Can Do About It
Speak up! As a conservative we must begin to win hearts and minds before we can
win elections. The process starts by educating people about what we truly believe. It
starts with you in the classroom.
We’ll arm you with the facts you need to win the argument. It’s your job to carry the
message on to your campus. It’s your job to speak up! By engaging ourselves in the
debate, we’ll spread the message of conservatism – the message of small
government, Xiscal responsibility, and individual rights – to one campus, one
classroom, and one student at a time.
Over the next Xive weeks the CRNC will be looking into the growing entitlements that
left unreformed will doom this country’s Xiscal future. We must realize that
government is not the solution to the problem…it IS the problem.
This Week’s Theme: Student Loan Reform’s Hidden Cost
The Promise: “To make sure our students don’t go broke just because they chose to
go to college, we’re making it easier for graduates to afford their student loan
payments.” ‐ Barack Obama
The Reality: He’s right...but only for student borrowers and only in the short term.
The new student loan reform lowers monthly caps on student loan payments ‐ down
to 10% of discretionary income. It also shortens the loan forgiveness period to 20
years after which the balance may be forgiven. But...
The typical government subsidy comes in the form of Pell Grants. The recently
passed reform bill also acts as a subsidy by artiXicially lowering monthly payments
and capping the life of loans. As subsidies work to make tuition more affordable they
also inXluence the supply and demand curve. The market for an education has an
equilibrium point at which the number of people willing to pay to attend equals the
amount of spots available. As subsidies are introduced, more students can afford a
higher education and the demand curve is shifted upwards. But the market always
adjusts to back to equilibrium. In essence
As more students can afford college the demand for higher education goes up. But
the market always adjusts. The end result will be that despite tuition becoming more
affordable in the short term, colleges will inevitably increase their tuition as demand
rises. As a result, the impact government subsidies (such as Pell Grants and
government guaranteed loans) will gradually be reduced to equilibrium. On the
other hand, those students (or their parents) who pay their own way will be forced
to bear the increased tuition caused by a market distortion of which they took no
part in.
Fact 2: Creating More Money For the Taking
Colleges are rational economic actors. They factor any additional federal assistance
into their tuition decisions. As the Boston Globe reported,
“Every dollar that Washington generates in student aid is another
dollar that colleges and universities have an incentive to harvest,
either by raising their ticket price or reducing the Xinancial aid they
offer from their own funds.”
Former secretary of education William Bennett felt much the same way when he
wrote,
“increases in Xinancial aid have enabled colleges and universities to
blithely raise their tuitions, conXident that Federal loan subsidies will
help cushion the increase.”
The new student loan reform will only create more money for the taking. In essence
the bill creates a cap on the price a student will have to pay that exists independent
of the price of tuition. Consider the following example: College X has a tuition of
$20,000 this year. which you pay for entirely through student loans. You graduate
and Xind a job paying $40,000 a year. The new reform legislation mandates that you
will pay no more than 10% of your discretionary income and only for 20 years. Now
say College X raises its tuition to $50,000 a year. The amount you pay in student
loans still cannot be raised above the 10% threshold and still may be forgiven after
But as colleges increase tuition to capture the newfound money, someone must foot
the bill. That someone is of course the federal government as funded by the
taxpayers. So while low student loan payments may look enticing, a larger chunk of
federal taxes taken out of your paycheck does not.
Fact 3: Creating the Problem We’re Trying to Solve
One of the major goals of the health care reform bill was to bend the cost curve to
make health care more affordable. One of the main drivers of soaring prices has
been its removal from a transparent free market. For instance, on average patients
pay only 23 cents for every dollar of medical expense incurred. The rest of the cost is
hidden by government subsidies like Medicaid or insurance plans. But if consumers
are shielded from the true costs of care there is less market pressure and incentive
for (1) them to control the consumption of health care and (2) providers to keep
costs affordable.
While we are desperately trying to solve the ever‐increasing cost of health care the
government is creating a similar debacle in the cost of higher education. By
mandating payment caps students wallets’ will begin to be separated from the costs
of an education. But as they spend more freely, divorced from the worry of price,
colleges will feel less constrained by market pressures to present a competitive cost.
As Ezra Klein wrote about the cost of health care,
“Imagine if people who touched a hot stove felt only a small fraction of
the pain from the burn . . . It hurts enough that we would prefer it to
stop, but the urgency is lost.”
As reform is instituted and costs are artiXicially held down students and parents will
begin to lose their urgency for tuition control. Eventually we will be facing the same
cost problems as in health care. It will be a problem of our own creation.
Bottom Line: Enjoy the extra beer money while you can...you’ll likely be paying it
back in higher taxes for the rest of your life.