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>Why would the fact that the loans are now from the government mean that universities no longer had to compete on costs? I think an economist would say that th

by bumby 4y ago

>Why would the fact that the loans are now from the government mean that universities no longer had to compete on costs? I think an economist would say that the loans increase the number of "customers" who could now afford to go to college. Accordingly, when the demand increases faster than the supply, an economist would say increases prices are the result. There's an old op-ed by former Education Secretary William Bennett that gave rise to the "Bennett Hypothesis", where he said, "If anything, increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase … Federal student aid policies do not cause college price inflation, but there is little doubt that they help make it possible." However, I've casually seen a bit of research that refutes this claim and instead states the primary driver of tuition increases is reduced public funding.

AbrahamParangi 4y ago
Cheap capital raises prices everywhere- for homes, for equities, for land, and certainly for education. Student loans are cheaper than cheap, they are government subsidized and not even close to their appropriate cost.
- GlenTheMachine 4y ago
  ...and always have been. So what changed?
  - bumby 4y ago
    One theory is that competing priorities have shifted public funds towards entitlements, especially healthcare, and away from public university. Tuition is then raised to compensate for the budget reduction. It's interesting to hear some cite that healthcare costs are the only sector that is outpacing college costs, which would explain why budgets are shifted towards it. As with any complex system, I doubt we can point to a single, simple cause.
- wahern 4y ago
  > Student loans are cheaper than cheap, they are government subsidized and not even close to their appropriate cost. Interest rates on government-subsidized college loans aren't that cheap. Undergraduate loans are the cheapest. They were particularly cheap in the early 2010s and during the COVID pandemic. But over the past 20 years the rate has been ~4-5%, and generally greater than mortgage rates.[1][2][3] Subsidized graduate loans are in 6-7% territory (even 8+%), and always have been. Unsurprisingly, AFAIU the latter constitute a substantially disproportionate share of student debt--including, especially, debt that people are unable to climb out of due to compounding--relative to the number of students. [1] https://studentaid.gov/understand-aid/types/loans/interest-rates https://studentaid.gov/understand-aid/types/loans/interest-r... [2] https://educationdata.org/average-student-loan-interest-rate https://educationdata.org/average-student-loan-interest-rate [3] https://fred.stlouisfed.org/series/MORTGAGE30US https://fred.stlouisfed.org/series/MORTGAGE30US
  - AbrahamParangi 4y ago
    They're really cheap relative to what the market rate for that sort of loan would be in a free market. That the loans cannot be defaulted on is another form of subsidy.
  - credit_guy 4y ago
    > and generally greater than mortgage rates Mortgages are secured by a real asset. You stop paying the mortgage, the bank gets the house. Student loans are unsecured.
- imtringued 4y ago
  From a macroeconomic theory perspective that is completely incorrect. There is zero empirical evidence for this. Interest rates have been zero in Japan for decades and the biggest effect they had was keep inflation near 0%. Cheap capital lowers the prices of all non-monopoly goods. Monthly payments on your mortgage are lower which reduces the cost of housing, it becomes cheaper to produce food or anything that can be produced in arbitrary quantities. It is only the monopolies that go up in price because they offer rent seeking revenue which is a direct result of their monopoly nature and actually distorts the market. Higher stock prices mean it becomes advantageous to start your own company.
  - bumby 4y ago
    >Monthly payments on your mortgage are lower which reduces the cost of housing Just trying to understand your perspective, but this is based on an existing mortgage, correct? What does it do for the price of a new mortgage? I was under the impression that cheap capital tends to inflate home prices.
  - AbrahamParangi 4y ago
    This is conflating prices consumers see with broader financial access to capital. We may trivially see that when consumers can access cheap capital too, prices for consumer goods rise (housing loans, auto loans, college loans, credit cards, BNPL).
imtringued 4y ago
It doesn't make sense because competition is supposed to lower prices regardless of how the money was obtained. If competition is driving prices down then you would expect that people are falling for the veblen goods trap which has nothing to do with loans.
- bumby 4y ago
  If the government gave out guaranteed subsidized car loans of $70k to anyone and everyone, do you think average car prices would go down? The theory is that anytime you subsidize anything, you tend to increase consumption of it. Increased consumption tends to increase price. It's unclear to me that is always the case in practice, but that's my layman's understanding.

by bumby 4y ago

AbrahamParangi 4y ago

Cheap capital raises prices everywhere- for homes, for equities, for land, and certainly for education. Student loans are cheaper than cheap, they are government subsidized and not even close to their appropriate cost.

GlenTheMachine 4y ago
...and always have been. So what changed?
- bumby 4y ago
  One theory is that competing priorities have shifted public funds towards entitlements, especially healthcare, and away from public university. Tuition is then raised to compensate for the budget reduction. It's interesting to hear some cite that healthcare costs are the only sector that is outpacing college costs, which would explain why budgets are shifted towards it. As with any complex system, I doubt we can point to a single, simple cause.
wahern 4y ago
> Student loans are cheaper than cheap, they are government subsidized and not even close to their appropriate cost. Interest rates on government-subsidized college loans aren't that cheap. Undergraduate loans are the cheapest. They were particularly cheap in the early 2010s and during the COVID pandemic. But over the past 20 years the rate has been ~4-5%, and generally greater than mortgage rates.[1][2][3] Subsidized graduate loans are in 6-7% territory (even 8+%), and always have been. Unsurprisingly, AFAIU the latter constitute a substantially disproportionate share of student debt--including, especially, debt that people are unable to climb out of due to compounding--relative to the number of students. [1] https://studentaid.gov/understand-aid/types/loans/interest-rates https://studentaid.gov/understand-aid/types/loans/interest-r... [2] https://educationdata.org/average-student-loan-interest-rate https://educationdata.org/average-student-loan-interest-rate [3] https://fred.stlouisfed.org/series/MORTGAGE30US https://fred.stlouisfed.org/series/MORTGAGE30US
- AbrahamParangi 4y ago
  They're really cheap relative to what the market rate for that sort of loan would be in a free market. That the loans cannot be defaulted on is another form of subsidy.
- credit_guy 4y ago
  > and generally greater than mortgage rates Mortgages are secured by a real asset. You stop paying the mortgage, the bank gets the house. Student loans are unsecured.
imtringued 4y ago
From a macroeconomic theory perspective that is completely incorrect. There is zero empirical evidence for this. Interest rates have been zero in Japan for decades and the biggest effect they had was keep inflation near 0%. Cheap capital lowers the prices of all non-monopoly goods. Monthly payments on your mortgage are lower which reduces the cost of housing, it becomes cheaper to produce food or anything that can be produced in arbitrary quantities. It is only the monopolies that go up in price because they offer rent seeking revenue which is a direct result of their monopoly nature and actually distorts the market. Higher stock prices mean it becomes advantageous to start your own company.
- bumby 4y ago
  >Monthly payments on your mortgage are lower which reduces the cost of housing Just trying to understand your perspective, but this is based on an existing mortgage, correct? What does it do for the price of a new mortgage? I was under the impression that cheap capital tends to inflate home prices.
- AbrahamParangi 4y ago
  This is conflating prices consumers see with broader financial access to capital. We may trivially see that when consumers can access cheap capital too, prices for consumer goods rise (housing loans, auto loans, college loans, credit cards, BNPL).

imtringued 4y ago

It doesn't make sense because competition is supposed to lower prices regardless of how the money was obtained. If competition is driving prices down then you would expect that people are falling for the veblen goods trap which has nothing to do with loans.

bumby 4y ago
If the government gave out guaranteed subsidized car loans of $70k to anyone and everyone, do you think average car prices would go down? The theory is that anytime you subsidize anything, you tend to increase consumption of it. Increased consumption tends to increase price. It's unclear to me that is always the case in practice, but that's my layman's understanding.