Economists Confirm Financial Aid Is Inflating Student Loan Bubble

Tyler Durden's picture

Submitted by Samuel Bryan via SchiffGold.com,

A paper recently published by the National Bureau of Economic Research confirms that a large percentage of the increase in college tuition can be explained by increases in the amount of available financial aid.

student loan

Peter Schiff was saying this as far back as 2012. That summer, Peter appeared on CNBC and debated an economist with the Progressive Policy Institute. Peter insisted that colleges are “basing their prices on the fact that students can borrow money with government guarantees.”

Economists Grey Gordon and Aaron Hedlund wrote their paper for the NBER after creating a sophisticated model of the college market. When they crunched the numbers, it confirmed exactly what Peter said in 2012. The demand shock of ever-increasing financial aid accounted for almost all of the tuition increase:

Specifically, with demand shocks alone, equilibrium tuition rises by 102%, almost fully matching the 106% from the benchmark. By contrast, with all factors present except the demand shocks, net tuition only rises by 16%. These results accord strongly with the Bennett hypothesis, which asserts that colleges respond to expansions of financial aid by increasing tuition.”

George Mason University economist Alex Tabarrok pointed out that Gordon and Hedlund revealed the inevitable outcome of government financial aid policy in his analysis of their paper for the Foundation for Economic Education:

"Remarkably, so much of the subsidy is translated into higher tuition that enrollment doesn’t increase! What does happen is that students take on more debt, which many of them can’t pay.”

According to Gordon and Hedlund, the spike in tuition driven by increased financial aid actually crowds out additional enrollment. But students who do enroll end up taking out $6,876 in loans compared to $4,663 absent the increased availability of financial aid. The end-result, a surging loan default rate from 17% to 32%:

"Essentially, demand shocks lead to higher college costs and more debt, and in the absence of higher labor market returns, more loan default inevitably occurs.”

The NBER paper coincides with a study released this summer by the Federal Reserve Bank of New York. Its major conclusion:

We find that institutions more exposed to changes in the subsidized federal loan program increased their tuition disproportionately around these policy changes, with a sizable pass-through effect on tuition of about 65%.”

This is not just a bunch of economic theory. These studies reflect the realities we see in America today. A White House study released in September revealed that about 73% of student loans are being repaid. That means 27% are not. And that number will likely grow in the years ahead.

A case currently working its way through the federal court system could pave the way for student loan debtors to discharge their obligations through bankruptcy. The federal student loan bill currently stands at more than $1.3 trillion, and it’s increasing at a rate of about $2726.27 per second. Some 7.5 million student debtors are now severely behind in paying their student loans.

In a nutshell, the federal government is destroying the value of a college degree. Peter summed up the problem during an interview with Tom Woods:

"Government wanted to make college more affordable. They made it more expensive. And at the same time, they destroyed the value of the degree. It costs more to get a degree, and the degree is worth less, because everyone now has one.”

Meanwhile, the American taxpayer is on the hook for all of this student loan debt.

To learn more about the student loan debt crisis and how it may impact you directly, get Peter’s exclusive white paper The Student Loan Bubble: Gambling with America’s Future. You can download it free HERE.

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Secret Weapon's picture

Same thing with health care. 

MissCellany's picture

Except that not everyone has it.

nuubee's picture

How are you feeling today?

That'll be $500, plus $200 cadillac tax plan.
Don't you feel covered now?

Pairadimes's picture

In other news, the Sun is hot.

SuperVinci's picture

The economist known as Captain Obvious.

nmewn's picture

Walk into the ER, it's "the law."

You're welcome and fuck you very much.

Normalcy Bias's picture

Toss your wallet before you enter the ER, and only say "No Habla Ingles!"

Let's beat these cunts at their own game...

tmosley's picture

I think it's time we correct the wrongs of the world using right wing death squads.

These fucks need to understand that their lives ARE NOW AT STAKE. Make decisions accordingly.

overmedicatedundersexed's picture

higher ed is 90% hobby subjects, educated in areas of no worth to any business with the bonus of massive debt.

the real problem of education is we are producing millions of people with no job skills.  university study for teaching, or in fields the ultra wealthy would persue for enjoyment. do not help the ave student without a trust fund.

much like government, education is a crime in progress ..you pay them they give you a piece of paper s and the lie is it has value in society ..the hobby subjects are worth 0 ..and tuition should be the same.

robots and AI will replace most of these hobby subject degreed people,even at the minimum wage jobs they are educated for.

Ness.'s picture

Can we start to include the true cost of a vote in the next CPI please?  We might hit our 2% 'target'.

MrNosey's picture
MrNosey (not verified) Secret Weapon Dec 22, 2015 11:11 PM

This is just the beginning, all bubbles will burst and there will be a breakout of global civil unrest as we embark on a clash of civilizations and a fight for survival in the new year, as it has just been reported that German Chancellor Angela Merkel is allegedly ‘Hitler’s Daughter’ and the Fourth Reich is about to become a reality......

http://beforeitsnews.com/conspiracy-theories/2015/12/the-fix-is-in-franc...

TuPhat's picture

I paid for my own worthless college education without gov. help.  It was cheaper back then.

ebworthen's picture

Of course it is, a form of QE for all the State Colleges and Universities.

Trust me, anyone below tenured Faculty and Administration is churned like McDonald's employees. 

Your kids will attend lectures given by Chinese and Indian Graduate students working for peanuts.

Not to mention the Athletic Departments, which are like the banks/corporations/insurers; bailed out at any cost.  Never mind what the players or coaches do, it's "all good".

GhostOfDiogenes's picture
GhostOfDiogenes (not verified) ebworthen Dec 22, 2015 11:04 PM

'Your kids will attend lectures given by Chinese and Indian Graduate students working for peanuts.
'

Because they don't grow peanuts in China and India?

ebworthen's picture

Because China and India don't hand out paid scholarships in favor of U.S. Citizens so they can come here and spy on us then stay here to steal jobs or go back home with the "prestige" of a worthless U.S. sheepskin (foreskin).

If you don't know what hives of iniquity, indoctrination, and pondering bureaucratic mendacity and tripe baked in a crock of bullshit the modern campus is you should investigate.

NoPension's picture

And all the current Republican presidential polls are now qualified by stating who did or did not attend college.
I suppose only knuckle dragging white guys, who barely made it through high school are Trump's only supporters.

I'll put my 1980 Parochial High School Diploma against ANY and ALL challengers from any supposed " top notch" college in the country.
I'll eat their lunch. I'll rip new assholes in most of the teachers.
Learning is a process. Once you learn how to learn, it need not ever stop.
You do not need to be lectured.

As an aside; to a man or woman....the most successful and wealthy people I know, never went to college. It's freaky. None of them. The richest, barely made it out of high school, or dropped out.

I have a math textbook from 1900. I'm good at math. Not Einstein, but above average. That book strains my skills. The context of the text ( farming and savings accounts) are archaic, but the required calcs are unbelievably intense.

creeko's picture

I fixed your grammar and punctuation mistakes.  Corrections have been capitalized for your review.  I also have a parochial high-school diploma (not capitalized, hyphen between 'high' and 'school').  :D

 

And ALL OF the current Republican presidential polls are now qualified by stating who did or did not attend college.
I suppose only KNUCKLE-DRAGGING white GUYS who barely made it through high school are Trump's only supporters.

I'll put my 1980 Parochial High School Diploma against ANY and ALL challengers from any supposed "TOP-NOTCH" college in the country.
I'll eat their lunch. I'll rip new assholes in most of the teachers.
Learning is a process. Once you learn how to learn, it need not ever stop.
You do not need to be lectured.

As an ASIDE to a man or WOMAN, the most successful and WEALTHIEST people I KNOW never went to college. It's freaky. None of them. The RICHEST barely made it out of high school, or THEY dropped out.

I have a math textbook from 1900. I'm good at math. I AM not AN 'Einstein', but I AM above average. That book strains my skills. The context of the text (farming and savings accounts) IS archaic, but the required calcs are unbelievably intense. 

Normalcy Bias's picture

In tomorrow's news, Economists confirm that the Sun heats the Earth, and that Lindsey Graham, is indeed, a fag.

nmewn's picture

No! Say it ain't so! If you subsidize something you get moar of it and if you tax it you get less?! What the hell?!!!

Why...

This-Changes-Everything-We-Thought-We-Knew-About-Economics!

"If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it." - some old dead oriental guy with Alzheimer's ;-)

Jeffersonian Liberal's picture

Next thing they'll discover is that rent control leads to housing shortages and that increasing the minimum wage results in a spike in unemployment.

RiverRoad's picture

Of course the banksters and private and higher educational institutions are in bed together:  the higher the tuitions, the bigger the loans.  Disgusting.

hibou-Owl's picture

We have been assigned a techncal expert from EDF to sort out are power quality problems. When the guy doesn't know or want to know basic electrical safety issues then what the fuck has the education system done???? Nothing!

NoPension's picture

High chance he's a dedicated liberal.

So there's that.

itstippy's picture

The National Bureau Of Economic Research's findings are at odds with the Progressive Policy Institute's conclusions?  That warrants further study - more government grant money for both.  They'll get to the bottom of this eventually.

Janet Shalom Bernanke's picture

Since the BLS uses chain and hedonic pricing to miraculously make inflation disappear in the things you eat, consume, and inhabitate, we at the Fraudural Reserve have recommended that they include the cost of tuition in their hedonic (i.e. value based) based inflation scheme.  Here is how it works: since the poor bastard student won't be able to get a job after college anyway, and won't repay the student loans anyway, the effective hedonic value price of that education is near zero, and comparing that to previous years where education was worth something, the cost now is actually lower

 

 

loub215's picture

No shit, really?! I am stunned! Shocked! Why would artificial subsidies raise the cost??? Good gosh, how could we have missed that?!?!? Morons...

loub215's picture

No shit, really?! I am stunned! Shocked! Why would artificial subsidies raise the cost??? Good gosh, how could we have missed that?!?!? Assholes...

https://www.youtube.com/watch?v=sen8Tn8CBA4