Students Put Into Debt by Government Aid

Judith Lynn Clayton reports in the NY Times piece Student Loan Debt: Who Are the 1%? on the state of student loans.

http://finance.yahoo.com/news/student-loan-debt-1-130033806.html

Along the way, she mentions a New Yorker article by James Surowiecki about student debt. Upon reading this, it struck me that some people ascribe too much credit to the "rational human" model of economics. The way Surowiecki puts it, you would think that students were making their own choices about how much tuition to pay:

"...the college wage premium—how much more a college graduate makes than someone without a degree—is at an all-time high. In fact, the spiralling cost of education has to some degree tracked the rising wage premium; as college has, in relative terms, become more valuable economically, people have become willing to pay more for it."

http://www.newyorker.com/talk/financial/2011/11/21/111121ta_talk_surowiecki

What Surowiecki is glossing over is that college tuition in this case isn't behaving like a commodity good. It is acting like a monopoly good. Colleges determine the advantages a degree will currently confer, then they carefully set their prices to capture most of that advantage. The student must take it or leave it. Loyalty and brand name count for more among universities than almost any product on the planet. If you have your heart set on getting into Princeton, you pay what they ask, and there are no discount holiday sales or outlet stores for a Princeton degree or a Princeton undergraduate experience.

The intent of Government aid is obvious: Make it easier to pay these onerous bills. But the net effect of Government aid is to cause an offset increase in tuition rates, since the universities will charge what the market will bear, and with Government aid in place the market is suddenly able to pay more, in total, than before.

The effect of Government aid for college is therefore to raise tuition and increase the number of students with outrageous student loans. There may be some studies that show that aid causes a shift of costs from less affluent to more affluent students, but along the way there will be some students who simply wind up paying more money overall.