There’s No Such Thing as a Free Education

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The refusal of the Senate to accept a measure that would keep interest rates artificially low on government-subsidized student loans should be an encouraging sign. The senators who voted against the measure, and those in the House who said they will do the same if the bill makes it to them, understand that government intervention leads to unintended consequences. In this instance the unintended consequence of government intervention — in the form of manipulating interest rates — has been an increase in the cost of post-secondary education.

Money is a commodity. Interest rates reflect the price of that commodity. A borrower pays a price, in the form of interest, to the lender. The price of a commodity reflects what a borrower is willing to pay and what the lender is willing to accept. Numerous factors go into setting a price. But at the most basic level, supply and demand will set the appropriate price so that market equilibrium can be reached. As demand goes up, price will go up until the supply matches the demand. If there is an oversupply, demand decreases as too do prices.

Education and training are necessary for a productive workforce — but the right kind of education and training, not a generic form.

However, when the government interferes with markets, signals are distorted and equilibrium cannot be achieved, as supply and demand are not allowed to react to one another naturally. By keeping interest rates low the government has created an artificial demand for higher education. In this particular instance the cost of borrowing money in the form of a Stafford loan is cheaper than it ought to be, which means that more students will borrow money. In a free market these people may have found their way into the workforce or a technical college, but now they are pursuing four-year degrees which may or may not help them in the long run — just because the money is cheap. The result is that colleges now have more customers, i.e. students, demanding their services. In response they raise their tuition, because as demand goes up price goes up as a result.

The effect of government’s making college more affordable by keeping interest rates artificially low is a higher cost of education. This not only makes for a greater debt load for graduates who take government subsidized loans but also prices middle-class students out of education. This means that they too will have to resort to taking out loans and unavoidably piling on debt. It is a vicious circle that can only be avoided if interest rates are allowed to follow market principles. In that event, the accurate price will be charged for borrowing money and for the cost of education.

The nation’s single minded pushing of four-year degrees on our youth has had deleterious effects on the development of our workforce. Students who would flourish with training in the industrial arts are being pushed to a four-year degree that may or may not land them a job or match their natural aptitudes. There is a lack of economic sophistication and a sense of humanity in our pursuit of making sure that students move through our higher education system as if on a conveyor belt.

Education and training are necessary for a productive workforce — but the right kind of education and training, not a generic form. Only the market can determine what the right kind of education and training is, and only a system that allows flexibility will encourage students to match their aptitude with their financial aspirations.

Those who support keeping interest rates artificially low for government subsidized student loans do so because they think that keeping rates low will make college more affordable. They therefore castigate opponents for being against the expansion of higher education. This is a cheap argument that ignores market fundamentals and sidesteps a substantive debate. The time for that debate is now.




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Comments

Visitor

Does Dr. Scott actually think a 2% difference in interest rates really makes that much of a difference? Or is it actual receiving loans in the first place?

If he were to argue that the government shouldn't be providing loans, I could agree with him. But, to say a mere 2% difference in those loan rates causes all the student loan crisis is just dishonest.

Eddie Williams

I like the mention of the humanity aspect. So much we get caught up with the money aspect. There is a more fundamental concern than money and humanity is one of them.

Jon Harrison

There's no question that college costs have been rising rapidly and for years because the education "market" is warped by 1) government grants, guarantees, and subsidies that allow anyone who wants to attend college to do so, and 2) the perception that a four-year degree is something everyone needs to have. Colleges have an almost unlimited, captive market for their "product," and government ensures that everybody can "afford" to buy it. So of course prices just keep rising. This is not news. CATO has put out God knows how many studies on the subject.

As for interest rates, when was the last time they responded to market forces? The Fed has kept interest rates artificially low for most of this century. And the private sector is no better — remember the Libor scandal? The idea that a true free market exists anywhere under the big government/corporate capitalism duopoly is nonsense.

The funny thing about Liberty is that it publishes numerous essays claiming a libertarian bent, but written by professors at public universities — that is, employees of the state. Some of these people have never held a job in the private sector. After spending thirty plus years working strictly in the private sector, why should I pay serious attention to the ruminations of a state worker?

Kyle Scott

Thanks for your comments. In addition to being an elected official and a faculty member at a public university I also own and operate a car dealership--the largest privately owned in Houston. As to your question about interest rates I think you have missed the point of the article, I do not dispute the 'is'--which I think we are on the same page--rather, I suggest the 'ought.'

Jon Harrison

Now that's an interesting combination -- prof and car salesman! I'm sorry, I couldn't resist the urge to tweak you. I do admire the equanimity you maintain in the face of my little barbs. Clearly, you're a gentleman.

My question was merely a rhetorical one. My point was that the "ought" is unachievable, given the domination over the economy exercised by the big government/corporate capitalism duopoly (my apologies for the neologism).

Houston is such a dreadful place. Why do you live there, if I may ask?

Fred Mora

Your article is absolutely correct. It's sad that such obvious points are alien thoughts to a majority of our elites.

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