Why do politicians think that they can make policy that somehow overrides economics?
With an executive order, the Obama administration just created a new policy that says that student loan payments are going to be capped to 10% of a person’s income. Now I do sympathize with graduates who can’t find a good enough job to pay back their loans. Money problems are horrible problems to have. You can make an argument that students took on this debt willingly so should have to live up to their obligations. Actually that isn’t just an argument, it’s legally true. Our society seems to be moving away from the rule of law though so this latest act doesn’t surprise me.
Ok so let’s forecast what happens next.
- Once you cap the payments required to 10% of your salary, the actual amount borrowed doesn’t matter anymore. If I am making $3,000 a month, my payments would be $300, regardless if I borrowed $10,000 or $100,000. You can bet that colleges are going to start marketing on that immediately.
- Because the total amount borrowed no longer matters, tuition costs will go up rapidly as many colleges are struggling to make budgets work with lower enrollments. They will also roll more of their fees into their tuition rates. They will say they are slashing fees or some kind of b.s. phrase.
- Because the Federal Government is the one providing the money (via taxation), they have no incentive to make sure this makes economic sense. We are already borrowing 40 cents of every dollar we spend. The idea of balanced budgets went out the window in the 1970s.
- The irony is these same students are the ones who will inherit a country that is the brokest in the history of the world. 17+ trillion in debt so far and adding to it over a trillion a year. (and this is at record low interest rates on that debt).
- This will lead to a situation where people can keep going to school and never actually pay for any but a tiny fraction of their total costs.
There is no such thing are a free lunch. There is no such thing as a free education. Government has no money, it all comes from the citizens. Eventually you run out of other people’s money.
Unfortunately, our country tends not to look very far into the future. Well I am. I’m not starting a college fund for my son because I can’t possibly save enough money to make even a dent in the cost of college in 18 years time. Instead I’m going to spend that money now on experiences for him as he grows up. I predict though that alternatives will emerge to traditional college.
Economics dictates that too.