
Peter Schiff on Abolishing Student Loans to Make Colleges Affordable  - vlad
http://schiffforsenate.com/?q=media/how-government-programs-drive-college-tuitions
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smokinn
This is where good voice recognition would come in handy. I'm interested in
the topic but I'm not the least bit interested in watching a 10 minute video;
I'd much rather have the text.

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nazgulnarsil
if your interest is more than passing you may want to delve into the more
general principle of supply/demand distortion.

<http://en.wikipedia.org/wiki/Subsidy>

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shaddi
Come on, there is more to federal college loans than supply/demand distortion.
Easily accessible student loans have much further reaching societal and
economic implications than "inflating tuition costs", and those should play
into the calculus of whether government-sponsored student loans are
worthwhile.

This guy's example of Yale's 42 year stint of $33 tuition and so forth is
pretty poor, too.

"What has changed? Back in the 1800's there was no Department of Education, no
government guaranteed student loans..."

Gee, mainly that there were only a few sons of aristocrats going to the few
universities in the country, and all they did there was read Great Books.
Today universities are centers for research and have much broader educational
missions.

Guess what? Tuition isn't the primary source of income for universities (at
least not mine, a Tier I research university). It's /research grants/. Tuition
allows you to pay for high-caliber faculty that can bring in huge grants.
Schiff misses this point /entirely/. We keep raising tuition so we can offer
salaries competitive with our peer institutions and keep getting top-notch
faculty (as an out-of-state student at a public university, I'm quite
cognizant of these increases).

"If the government didn't guarantee student loans, no one would give them,
it'd be too risky."

Completely false. Student loans are some of the least-risky loans to give: the
expected income of future doctors, engineers, etc easily justifies the risk of
a loan. That's why there is a thriving private market for non-government
guaranteed student loans.

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noelchurchill
Then maybe universities and research centers should be separated. My tuition
should be applied towards the professors who will be teaching me. I'm going
there for my own personal progress. If I want to go to a university that's
doing the research then I would be willing to pay the extra tuition to go
there.

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jbooth
University of Phoenix is open 24 hours a day, go for it.

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kingkongreveng_
You're probably being facetious, but I suspect that University of Phoenix and
similar programs are, as an idea, higher education done right. My bet is the
for-profit colleges will give establishment education a serious run for their
money in coming years.

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xcombinator
Reading people comments a lot of people says this man has no backing
information, but I got a similar experience in Spain.

What happened in USA with education is what happened in Spain with homes:

Here home prices exploded, and remain high today, a 30m^2 flat(322square
feet)in Madrid sells by 180keuros.

Normal flats cost no less than 300keuros, the interesting thing is that the
prices started rising just when Aznar(he wanted to help as the USA gob)
removed the limitations in loans years, and backing money you need for making
a loan.

Normal loans went from 8 years to 10->20->30->40 years. Prices went up because
someone with less money you have will pay more with virtual money from a 40
years loan he got from the bank without putting a cent.

When people could not pay the loan, they refinanced the loans with more years.
That worked until now, things are not going well.

In Spain it costs over 1.000 euros/year to get a quality degree in Medicine or
Engineering from a public university, this is 10% of the real cost of your
education (over 10.000euros/year) for the state.

I regularly see MIT and Stanford lectures on Internet. They are not better
that the education I received, but is way way more expensive.

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josh33
His main premise, that government student loans are co-signed by the
government and students resulting in the distortion of demand, is spot on.
Demand = Need + Purchasing Power. With the Purchasing Power of the government
at students' backs, schools would see that they needed to raise prices to keep
supply at the same level.

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nazgulnarsil
there are other issues at play too though. schools don't currently maintain a
supply and demand equilibrium. they under price and then use rationing.
private schools _could_ simply raise prices until number of applicants is
approximately the number of positions available. but of course there is a
prestige economy in place that interacts with the money economy.

~~~
jbooth
Great comment - the prestige economy does seem to have more of an effect on
college price than any traditional supply/demand curves. We'd all be wise to
recognize that.

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nazgulnarsil
it's fairly depressing to me how no one seems to grasp the concept of _price_.
money isn't magical, it's a way of accounting for different people's
preferences WRT the resources they have available to them. trying to fix a
price by decree is a fundamentally stupid notion.

~~~
jacoblyles
On the other hand, college is an industry, like healthcare, where demand is
highly inelastic due to incentives involving third-party payments. It is also
an industry, like healthcare, where price inflation has far outstripped
inflation in general.

Is there an example of an industry where government-created demand accounts
for a major portion of consumer spending and there is not rampant price
inflation? I am open to the possibility that there could be other causal
factors here, but the a priori logic is pretty compelling.

~~~
nazgulnarsil
I'm sort of confused by your use of the term "on the other hand". I'm in
complete agreement with Schiff (and economists in general) when talking about
the effects of price distortions from tax/subsidy (two sides of the same
coin).

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jbooth
So the argument is that if they eliminated student loans, colleges would have
to cut prices in order to maintain demand, right?

Isn't that a little risky, with the chance of pricing out the lower 1/2 of
income earners in the US?

What if, as a compromise, they just eliminated college loans for those with
family incomes over a certain level? Then you could get the economic effects
without consigning a third of a generation to "sorry you were born in the
wrong place kid, no college for you".

If we want to eliminate economic distortions, we should go after the farm
subsidies, of course. But those are even more of a political minefield than
this idea.

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dpatru
Cutting student aid would lead to lower tuition prices. More importantly, it
would probably lead to completely different kinds of educational institutions.
If students and their families had to more directly bear the costs of their
educations, they would be more motivated to seek the best values.

By making college education artifically cheap, government discourages
competition and innovation.

The best example are primary and secondary public schools which typically are
completely free to a student. A private school, even if it delivers a much
better educational value, has a hard time competing because if it charges
anything, it's already more than what the student has to pay to attend public
school.

The only way for private schools to compete in such an environment is to offer
something the public school doesn't offer. A private school cannot compete by
offering the same thing the public school offers but just at a lower price.

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jbooth
RE: private schools, assuming you're referring to primary/secondary school as
opposed to universities (where private schools thrive).. do you know how
Charter Schools work? Ever seen some of the state laws regarding those? In
many states, charter schools actually get to operate with a financial
advantage over the public schools. I used to be in public office and watched a
Charter school take advantage of the laws to siphon a ton of resources from
our public school (which was already cutting teacher headcount year over year
because of healthcare costs), and then to add insult to injury we had to pay
to _bus_ the kids there.

Anyways, back to the larger point.. I put a very high value on the idea that
anyone in America, if they have a little talent and put in some work, can get
a college education and make their own destiny.

That particular dynamic has _way_ bigger implications for American
competitiveness than moderate price distortions in university tuition -- I
mean, if we can fix those, great, but let's not throw out the baby with the
bathwater, and burn our house down afterwards for good measure.

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markpercival
What's worse is the way for-profit colleges are abusing the system and taking
federal loan dollars for subpar educations.

Their default rates are appalling, but that's to be expected when you charge
$40k for a two year degree in Fashion Design. This should have been reigned in
years ago.

[http://www.usatoday.com/news/education/2009-12-14-student-
lo...](http://www.usatoday.com/news/education/2009-12-14-student-loan-
default_N.htm)

<http://federalstudentaid.ed.gov/datacenter/cohort.html>

~~~
yummyfajitas
Plenty of "non-profit" colleges also take federal money and provide subpar
educations.

The only real difference is that the non-profit colleges funnel money to
employees rather than to shareholders.

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markpercival
Yet non-profit colleges have a repayment rate of 95.3% while for-profit
colleges sink to 83.3%. So it's not the 'only real difference'. But I'll give
you that non-profits are not entirely blame free.

~~~
yummyfajitas
The better colleges are non-profit, which makes the non-profit group look
better than the for-profit one. The higher quality students only go to non-
profit colleges, and thereby lower the default rate of non-profits.

If a Devry student would not be accepted by Princeton (but would be accepted
by Bumfuck U), it's unfair to compare Devry to the average of Princeton and
Bumfuck. One should simply compare default rates of Devry and Bumfuck.

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webwright
Interesting idea.

Related: If the government announced that in 10 years the minimum deductible
for health insurance would be locked at no less than $20,000, what would that
do for health care costs? In other words, if the only legal health insurance
was catastrophic, would the health care industry be forced to become
affordable?

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cia_plant
You can't simultaneously believe that the free market tends towards a stable
and optimal equilibrium, and also believe that a government subsidy will
wildly and erratically impact the market. These two beliefs are mathematically
incompatible.

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btilly
Well obviously you _can_ believe that because there are people who _do_
believe it.

As for your mathematically incompatible assertion, the way that the free
market tends towards an equilibrium is because of feedback mechanisms that
cause behavior change. However in the presence of a government subsidy the
price signal of increased tuition does not necessarily cause decreased
consumption. This breaks the feedback loop that is supposed to result in
equilibrium.

This is a fundamental change in the mathematics of the situation, and can
justify the belief that the market behaves in radically different ways in the
presence of a government subsidy.

~~~
cia_plant
If that were the nature of the subsidy, then yes, that would break the
tendency to return to equilibrium in the face of altered data. However, only a
fraction of tuition is paid by the government, so there is still a significant
price signal to the consumer.

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btilly
Here is my modest proposal.

1\. Fix student loans to give sane amounts of support to students. (Cost of
living has gone up in the last few decades, but the estimated cost of living
for your parents they use in the formulas haven't been adjusted. That's
ridiculous.)

2\. Only offer government supported student loans to students whose university
tuition levels are in the bottom 70% of accredited universities.

The first change fixes the problem where a lot of people who need support
don't get it. The second change gives universities an incentive to not just
automatically bump tuition 10%/year "because everyone else is doing it".

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kgermino
He makes a valid point and personally I think he is probably at least partly
correct, and it's something that needs to be debated. However his argument is
flawed because he focuses on the correlation between the government programs
and tuition rates without giving any evidence of causation. His entire
argument is based on "This then That, so This caused That" which is rarely the
case. I can't think of any good examples of this so if someone else
understands what I'm saying please help me out.

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antidaily
"Well, the world needs ditch diggers, too."

