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Correct. A lot of free market distortions can be explained by bad government policy. In your example, when the government funds and backs student loans, college
by nayuki 2y ago
Correct. A lot of free market distortions can be explained by bad government policy. In your example, when the government funds and backs student loans, colleges can treat that as a free cash machine to extract as much money from students as possible. Also, note that student loans cannot be discharged in bankruptcy, so the lender can't lose! Whereas if student loans were made by for-profit banks without government backing, and with the possibility of discharging in personal bankruptcy, we would see way more prudence in how money is lent out. After all, you (the bank) are way more careful with your own money than with someone else's money (government insurance/guarantees).
And speaking of free market distortions, one of my favorite example is externalities, e.g. pollution. If the government doesn't charge a price on pollution (e.g. carbon dioxide), then obviously every business would pollute as much as they want because it's free. The polluters impose a cost onto other people - e.g. health, loss of human productivity, cleanup costs, loss of land value.
- viraptor 2y ago> student loans cannot be discharged in bankruptcy, so the lender can't lose! They can still lose - the borrowing party may never earn enough to repay fully. Or may just stop paying for many reasons.
- tzs 2y agoI'm not convinced on government backed student loans. I haven't been able to find much data on college costs going back well before government backed loans started, but for the couple of schools I found data for (Stanford and some midwest public university whose name I don't remember) that data showed tuition has been going up at a fairly steady rate for the last 100+ years. There was no significant change at those schools pre and post government backed student loans.
- Workaccount2 2y agoIt's also somewhat true that even at these insane education prices, the ROI on a degree still makes the math work out for most degrees. So even if you are 22 and $80k in the hole, but the time you are 50 you are likely to have hundreds of thousands more in net worth than those who forwent that early $80k debt to go right into high school diploma level labor.