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Economists Confirm Financial Aid Is Inflating Student Loan Bubble

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A paper recently published by the National Bureau of Economic Research found 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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5 thoughts on “Economists Confirm Financial Aid Is Inflating Student Loan Bubble

  1. Druid says:

    A few things.

    1) These people actually get paid for this stuff? It was obvious a decade ago what was going to happen. A decade ago is also when bankruptcy protection was taken away, which is the other major factor for why the loans spiked up so high.

    2) The government does this for everything it touches. Student loans, sure. Also healthcare, home loans and that’s not even mentioning all the corporate welfare it gives out but refuses to advertise.

    3) The people most at risk always get the least help. Federal government employees have the best repayment help—10 year loan forgiveness, capped at a small part of their AGI–which they further lower through retirement plan contributions. Government employees also make 78% more than private sector. THESE are the people the government is worried about helping out.

    Not the legion of unemployed or underemployed unconnected schmucks who struggle to get any type of consistent salary every year. Have a bad year? Struggle with paperwork to get that loan payment reduced, paperwork they’ll “lose” and fail to process.

    Have a good year? Get killed on taxes and get the loan payments ratcheted up. Heads you lose, tails they win.

    The entire system is broken because we have a plutocracy in place, and since the plutocracy also happens to own all media platforms and is thoroughly entrenched, it can dictate reality.

    So if you were born to the wrong family, or have the wrong gender, or the wrong skin color, too bad. This is your problem. You will be attacked, shamed and blamed for everything. That is the American way.

    Honestly I don’t know why anyone even wants to come to the US anymore. Most younger Americans are probably better off claiming they are Syrian refugees to try and gain entrance to a EU country.

    • DAVID says:

      This guy and the article make excellent sense. Yes, we saw this coming and of course if kids are “given” money for college and that amount is growing, the voracious hunger for $$ from the university will quickly eat up that money. And why not, they are not even at risk, the federal govt is –read you and me. And the universities have the audacity to claim that these loans are “student aid”.

  2. jrj90620 says:

    Everything is for the short term.No one cares about long term consequences.Eventually the long term will arrive and will take down the common denominator,the Dollar.Got money?Got Gold?

  3. Jake says:

    The criminal, low life piliticians will always be around ready to rip us off. The core of the problem is a lazy, ill-educated, detached American voter that insists on electing and
    re-electing liars and theives as their representatives. Proof; Today Republicans are finding it “difficult” to pull ahead of Hillary Clinton, an established liar and theif, in national polls. I rest my case.

  4. Abe says:

    Peter got me interested into researching this topic. Believe it or not this screwed up student loans can be traced back to Jimmy Carter. The fact is a lot of stupid people go to collage that shouldn’t because of low IQ’s. Collage isn’t going to raise it one iota!
    I took an IQ test in 1970, and scored a 138. In 2005 my GF talked me into testing for MENSA. I scored a 139 (one point short, need 140 to join). So 35 years of life experience increase one lousy point. Your either born smart, and capable of higher learning, or your not.
    To many stupid people go to collage, and are in debt for the rest of there lives. WHAT A RACKET!!!

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