Letter to the Editor

BY DI READERS | APRIL 25, 2012 6:30 AM

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Beware the student-loan bubble

Economists agree that creating false demand will eventually create a bubble and crush a market much faster than the natural economic cycle. We saw this phenomenon a few years ago with the rise of the housing market, in which cheap credit and weak underwriting standards distorted the market leading to a crash.

The current higher-education boom has also been fueled by credit. Student loans allow an 18-year-old to finance some or all of the next four years of her or his life, including living expenses.

Moreover, the government subsidizes many of these loans by lowering the interest rate, which provides the incentive to borrow at even greater levels. The numbers are mind-numbing. Last month, total student-loan debt hit the $1 trillion level, which is higher than total credit-card debt outstanding.

Student loans are not necessarily a bad thing, but when the amount of money flooding the industry drives up the demand to the point of the former becoming a market essential, markets fail to work properly.

Cheap third-party funding drives prices up because consumer decision is weakened in the economic equation. As such, college is now unaffordable for the average student. Because of the importance of gaining a postsecondary education, students are left with no choice but to borrow money to pay for college.

Knowing this, the postsecondary-education industry can raise tuition at a faster rate. There lies no risk for a college or university. As long as credit continues to be extended, schools have little incentive to lower tuition costs.

President Obama has the political upper hand in advocating for lower interest rates on student loans. Who can say no to increased financing for education? However, in the long-run, the education bubble will burst unless market mechanisms are allowed to exist in tuition pricing.

Zach Halstead
UI junior

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