Peter Schiff Was Right: Federal Aid Inflates College Tuition (Video)

Here’s another story for the “Peter Schiff was right” archive and another testament to just how clueless mainstream economists can be.

Three years ago, it was already becoming clear that ballooning student debt defaults were becoming a major problem. CNBC reported that the loan “industry underestimated defaults by a whopping $225 billion.” We wrote earlier this week about the latest White House data revealing just how much worse the defaults have become.

In the summer of 2012, Peter appeared on CNBC to debate why the federal government should get out of the student loan business. Diana Carew, an economist with the Progressive Policy Institute (PPI), appeared alongside Peter to defend the need for federal college funding.

You can watch the video below, in which Carew counters Peter’s economic arguments with straw men, suggesting that Peter wants to “get to decide who goes to college.” Carew used the same emotional rhetoric employed by politicians:

Investment in human capital is never a waste of money. Of everything the government can spend its money on – entitlement programs, subsidizing the housing sector – human capital should never be sacrificed.”

They both agreed that college degrees are no longer worth as much as they cost, but they disagreed on the root cause. Peter adamantly insisted that colleges are “basing their prices on the fact that students can borrow money with government guarantees.”

Carew literally rolled her eyes. “I don’t think colleges are setting prices based on how much students can take out of the bank… I’m well aware of basic economics. Thank you.”

Fast forward exactly three years. The Federal Reserve Bank of New York published a research paper this July entitled, “Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs”. 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 percent.”

Last month, Carew published an article for PPI directly acknowledging this finding. Of course, she gives no indication that Peter Schiff had said the exact same thing directly to her three years ago. Instead, she calls the finding “groundbreaking,” while arguing that flat out federal subsidization of college tuition is no longer the solution for young people who don’t fit within the “standard college mold.” She concludes her article:

Still, until Democrats move past the “debt-free college” approach, and the notion that college degrees are the only answer, 2016-themed rhetoric on college affordability will be little more than that.”

Quite the reversal from her position three years ago, when she seemed adamant that sending absolutely everybody to college was the economic panacea to the United States’ troubled economy.

The student debt crisis has only grown in the last three years. Don’t assume that just because you don’t have any student debt that you will be unaffected. Just as the subprime mortgage crisis rattled the entire US economy, the student debt bubble will reverberate throughout the country. Enjoy the video below, then learn how to prepare with our free white paper on the topic:

Highlights from the interview:

“Just like the government inflated the housing bubble, the reason tuitions are so high is because government guarantees the loans. Now students take these guarantees and bid tuitions through the roof. Take the government out of the equation, and the colleges and universities have to lower tuitions so students can afford to go. But the beneficiaries of these high tuitions are not the students. They get stuck with debt. It’s the colleges and universities that can sell overpriced degrees. Unfortunately, right now we’ve got a lot of people with college degrees waiting tables, cleaning toilets, driving taxis. They have enormous government debt to pay back out of these small salaries that they earn…

“Wasting money, overpaying for worthless degrees is not going to help the economy… A lot of the curriculum, a lot of the courses do very little to improve human capital. Plenty of people went to college before the government got involved. It just didn’t cost nearly as much…

“If the government got out of the market, students couldn’t borrow money so cheaply. Interest rates would rise, and students wouldn’t be able to bid up prices…

“Today, a college degree is not worth the price that you pay for it. Not only in the cost, but the five or six years that you’re not in the labor force. If we simply got the government out of education, college tuitions would plunge…”

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