The Student Loan fiasco.

Congress voted en mass to decrease the interest rates on student loans. Says SOH Pelosi,

"Our young people should be driven by their dreams, not weighed down by debt."

Great quote! Really. Inspiring, lofty, succinct. Oops, she carried on juuust a bit too far.

"At a time when college tuition continues to skyrocket, this crucial legislation will help remove some of the barriers to a higher education."

And that's the rub. What I still don't get is how throwing more money at the system, which is what lower interest rates do, ground the rocket? Decreasing loan rates will only lead to increased tuition. It's just moving numbers around. Less capital at a higher interest rate, or more capital at a lower interest rate. It's a wash.

The college system is flushed with cash. At the end of fiscal year 200f Harvard had an endowment of $26 billion. With tuition at $38k in 2003, and current undergrad enrollment of 6,700, that's $255,000 in undergrad expenses. If the Endowment makes 10% a year, that's $2.6 billion, more than enough to cover free tuition for all, for example (and Harvard does give free tuition to anyone accpeted from a family with combined income of less that $60k). None of this is to call out Harvard, good for them. Rather to illustrate that the "problem" isn't price. So a priced base solution (especially from the demand side) is going to fail. Period.

I assume the problem is tuition increase. At least I get that from bill sponsor, Rep. George Miller's (D-CA) spokesman,

"There has been a 41% increase in the cost of college after inflation in 2001, and we now have students graduating with record levels of debt."

Before I get too far, I have to make this point again, they still will (see above for the capital/interest example). Anyway, what it looks like to me is that college's can charge whatever they want. They keep raising prices and people keep paying them. When was the last time you heard of a college going bust? Something outside the market is propping them up. Endowments certainly. Maybe I'm not sentimental enough, but I paid my money, I received my education and diploma, I'm done. I don't send more money to Toyota every year just because I bought one of their cars. Federal and State Tax money also play their part. When money just flows in from the fire hose, colleges don't have to be at all careful about spending. And College's use the treat of having to raise tuition to scare people into giving them more money when they do make an economic mistake. The whole system is rigged against the student, including well meaning Democrats and loads of Republican's who stand on the corner and get them to take more money to pay higher tuitions.

If Congress wanted to really help students they should do more to promote Junior (Community) College and Vocational Schools. Create some competition for those student dollars. Also, as counterintuitive as it sounds, drop the subsidies. Getting rid of all the props that only help colleges (and this interest decrease does just that - wait for the "you'll pay less interest so you can borrow more language) will force them to act in a way's that bring them into line with free-market theory.

Again, throwing more money into the system is not the answer. When you get your money through a fire hose, you don't need more liquidity. Sometimes economics is simple. If you want more money in the system you lower interest rates. Does anyone in congress think that the students will capture any of this new money? Maybe the banks will if they can get tricky with the financing. All we know for sure is that colleges will capture the bulk of the new money. The same colleges that are floating along on massive endowments while raising tuition every year. I'm assuming that specifically wasn't the plan.

Nice job.