Peter Schiff on Abolishing Student Loans to Make Colleges Affordable(schiffforsenate.com)
schiffforsenate.com
Peter Schiff on Abolishing Student Loans to Make Colleges Affordable
http://schiffforsenate.com/?q=media/how-government-programs-drive-college-tuitions
45 comments
This is where good voice recognition would come in handy. I'm interested in the topic but I'm not the least bit interested in watching a 10 minute video; I'd much rather have the text.
I agree. All video/audio clips on the web should have transcripts with them. I usually skip it if they don't.
if your interest is more than passing you may want to delve into the more general principle of supply/demand distortion.
http://en.wikipedia.org/wiki/Subsidy
http://en.wikipedia.org/wiki/Subsidy
Come on, there is more to federal college loans than supply/demand distortion. Easily accessible student loans have much further reaching societal and economic implications than "inflating tuition costs", and those should play into the calculus of whether government-sponsored student loans are worthwhile.
This guy's example of Yale's 42 year stint of $33 tuition and so forth is pretty poor, too.
"What has changed? Back in the 1800's there was no Department of Education, no government guaranteed student loans..."
Gee, mainly that there were only a few sons of aristocrats going to the few universities in the country, and all they did there was read Great Books. Today universities are centers for research and have much broader educational missions.
Guess what? Tuition isn't the primary source of income for universities (at least not mine, a Tier I research university). It's /research grants/. Tuition allows you to pay for high-caliber faculty that can bring in huge grants. Schiff misses this point /entirely/. We keep raising tuition so we can offer salaries competitive with our peer institutions and keep getting top-notch faculty (as an out-of-state student at a public university, I'm quite cognizant of these increases).
"If the government didn't guarantee student loans, no one would give them, it'd be too risky."
Completely false. Student loans are some of the least-risky loans to give: the expected income of future doctors, engineers, etc easily justifies the risk of a loan. That's why there is a thriving private market for non-government guaranteed student loans.
This guy's example of Yale's 42 year stint of $33 tuition and so forth is pretty poor, too.
"What has changed? Back in the 1800's there was no Department of Education, no government guaranteed student loans..."
Gee, mainly that there were only a few sons of aristocrats going to the few universities in the country, and all they did there was read Great Books. Today universities are centers for research and have much broader educational missions.
Guess what? Tuition isn't the primary source of income for universities (at least not mine, a Tier I research university). It's /research grants/. Tuition allows you to pay for high-caliber faculty that can bring in huge grants. Schiff misses this point /entirely/. We keep raising tuition so we can offer salaries competitive with our peer institutions and keep getting top-notch faculty (as an out-of-state student at a public university, I'm quite cognizant of these increases).
"If the government didn't guarantee student loans, no one would give them, it'd be too risky."
Completely false. Student loans are some of the least-risky loans to give: the expected income of future doctors, engineers, etc easily justifies the risk of a loan. That's why there is a thriving private market for non-government guaranteed student loans.
Agreed. Comparing the $160 early 1900s Yale tuition that that of today's Yale is a little ridiculous. Yale and the like were the only real universities in the country. It would be better to compare to a public University (assuming we're still talking about someone trying to pay their way through college, that seems to be the place they would be going to). You're not looking at $40k a year, you're looking at ~$7000 (http://www.collegeboard.com/student/pay/add-it-up/4494.html).
And going by his math to pay for it, at 12 hours a day, for 32 days, you're looking at 384 total hours of work to pay for a year's tuition. To pay for a public school in the same number of hours worked, you would have to be making roughly $18 an hour, or a yearly salary of ~$38k (pre-tax, but that's a different issue entirely). Turns out college education is going to be roughly the same cost as it was then, if you're going to a public school.
And going by his math to pay for it, at 12 hours a day, for 32 days, you're looking at 384 total hours of work to pay for a year's tuition. To pay for a public school in the same number of hours worked, you would have to be making roughly $18 an hour, or a yearly salary of ~$38k (pre-tax, but that's a different issue entirely). Turns out college education is going to be roughly the same cost as it was then, if you're going to a public school.
Yeah, except public schools are subsidized by the government.
> Yale and the like were the only real universities in the country
That is not true. The many colleges originally founded on agricultural science curricula were started from the 1860s onward. Students were middle class. They were very cheap.
That is not true. The many colleges originally founded on agricultural science curricula were started from the 1860s onward. Students were middle class. They were very cheap.
We keep raising tuition so we can offer salaries competitive with our peer institutions
And in the meantime, those peer institutions are raising their tuitions to be competitive with you. It's an arms race, and the tuition increases are funding it. And those increases are only possible due to student loans (and tuition grants).
So your argument is circular: if these loans were curtailed to all institutions, then they wouldn't be able to escalate, and you wouldn't be forced to follow suit.
And in the meantime, those peer institutions are raising their tuitions to be competitive with you. It's an arms race, and the tuition increases are funding it. And those increases are only possible due to student loans (and tuition grants).
So your argument is circular: if these loans were curtailed to all institutions, then they wouldn't be able to escalate, and you wouldn't be forced to follow suit.
Then maybe universities and research centers should be separated. My tuition should be applied towards the professors who will be teaching me. I'm going there for my own personal progress. If I want to go to a university that's doing the research then I would be willing to pay the extra tuition to go there.
Fortunately for you, these already exist. Just avoid any university that calls itself a "research university". All community colleges and many other schools (notably liberal arts colleges) fall into this non-research category.
Turns out, however, that research and teaching are complementary, so the best faculty and the most gung ho students will often be at the research universities, and that you can often learn more in a research setting than in a classroom.
Turns out, however, that research and teaching are complementary, so the best faculty and the most gung ho students will often be at the research universities, and that you can often learn more in a research setting than in a classroom.
That would be very hard to separate. There are very few professors who (in my experience) are professors simply because they want to teach students. The vast majority of them see teaching as simply a requirement to do research.
One of the key factors in combining the two is that you are not learning from someone who kind of studied the subject a decade or two previous like you would in high school, you're being taught by someone who is actively research the subject (or a similar subject).
One of the key factors in combining the two is that you are not learning from someone who kind of studied the subject a decade or two previous like you would in high school, you're being taught by someone who is actively research the subject (or a similar subject).
University of Phoenix is open 24 hours a day, go for it.
You're probably being facetious, but I suspect that University of Phoenix and similar programs are, as an idea, higher education done right. My bet is the for-profit colleges will give establishment education a serious run for their money in coming years.
Indeed--private student loans are even available at comparable interest rates to federal loans. The main benefit to the student seems to be in grants, and in subsidized loans where the government subsidizes tuition while you are in school.
> Student loans are some of the least-risky loans to give
You can't shed student loans through bankruptcy, which is another big problem in the same vein driving up costs.
> there is a thriving private market for non-government guaranteed student loans
To my understanding this is not the case. The market is dominated by government backed loans. Correct me if I'm wrong. I'm pretty sure "peripheral" is a better choice of word than "thriving".
> Today universities are centers for research and have much broader educational missions.
This really doesn't address the issue. It should cost the same in real dollars to graduate an English major as it did 60 years ago. Realistically, it should cost less due to economies of scale and technology. Instead it's many times as expensive.
You can't shed student loans through bankruptcy, which is another big problem in the same vein driving up costs.
> there is a thriving private market for non-government guaranteed student loans
To my understanding this is not the case. The market is dominated by government backed loans. Correct me if I'm wrong. I'm pretty sure "peripheral" is a better choice of word than "thriving".
> Today universities are centers for research and have much broader educational missions.
This really doesn't address the issue. It should cost the same in real dollars to graduate an English major as it did 60 years ago. Realistically, it should cost less due to economies of scale and technology. Instead it's many times as expensive.
Gee, mainly that there were only a few sons of aristocrats going to the few universities in the country, and all they did there was read Great Books. Today universities are centers for research and have much broader educational missions.
um....history would like a word with you.
I do however agree that Sciff's assertions on this matter are grossly oversimplified.
um....history would like a word with you.
I do however agree that Sciff's assertions on this matter are grossly oversimplified.
this is annoying. there's a bug where i often don't get "reply" buttons on replies to my own comments.
anyway, yes the problem with this topic is that it is a synthesis of so many things that you could literally write several books on the subject. the modern college system is a leviathan in its own right.
anyway, yes the problem with this topic is that it is a synthesis of so many things that you could literally write several books on the subject. the modern college system is a leviathan in its own right.
Is it just your comments, or were you trying to reply too quickly? In April, PG added a delay on the "reply" links for deeply nested comments in order to prevent flame wars.
Announcement: http://ycombinator.com/newsnews.html#29apr09
Discussion: http://news.ycombinator.com/item?id=585507
Announcement: http://ycombinator.com/newsnews.html#29apr09
Discussion: http://news.ycombinator.com/item?id=585507
FWIW, if you click on "link" you can reply directly to the item. Definitely annoying though...
I realize I oversimplified my point there, but I think it's hard to argue that the Yale of 1810 has the same educational and social mission of the Yale of 2010.
While not a transcript, this article from 2008 contains the same arguments as the linked video:
http://thebivouac.wordpress.com/2008/04/27/economist-peter-s...
http://thebivouac.wordpress.com/2008/04/27/economist-peter-s...
Reading people comments a lot of people says this man has no backing information, but I got a similar experience in Spain.
What happened in USA with education is what happened in Spain with homes:
Here home prices exploded, and remain high today, a 30m^2 flat(322square feet)in Madrid sells by 180keuros.
Normal flats cost no less than 300keuros, the interesting thing is that the prices started rising just when Aznar(he wanted to help as the USA gob) removed the limitations in loans years, and backing money you need for making a loan.
Normal loans went from 8 years to 10->20->30->40 years. Prices went up because someone with less money you have will pay more with virtual money from a 40 years loan he got from the bank without putting a cent.
When people could not pay the loan, they refinanced the loans with more years. That worked until now, things are not going well.
In Spain it costs over 1.000 euros/year to get a quality degree in Medicine or Engineering from a public university, this is 10% of the real cost of your education (over 10.000euros/year) for the state.
I regularly see MIT and Stanford lectures on Internet. They are not better that the education I received, but is way way more expensive.
What happened in USA with education is what happened in Spain with homes:
Here home prices exploded, and remain high today, a 30m^2 flat(322square feet)in Madrid sells by 180keuros.
Normal flats cost no less than 300keuros, the interesting thing is that the prices started rising just when Aznar(he wanted to help as the USA gob) removed the limitations in loans years, and backing money you need for making a loan.
Normal loans went from 8 years to 10->20->30->40 years. Prices went up because someone with less money you have will pay more with virtual money from a 40 years loan he got from the bank without putting a cent.
When people could not pay the loan, they refinanced the loans with more years. That worked until now, things are not going well.
In Spain it costs over 1.000 euros/year to get a quality degree in Medicine or Engineering from a public university, this is 10% of the real cost of your education (over 10.000euros/year) for the state.
I regularly see MIT and Stanford lectures on Internet. They are not better that the education I received, but is way way more expensive.
His main premise, that government student loans are co-signed by the government and students resulting in the distortion of demand, is spot on. Demand = Need + Purchasing Power. With the Purchasing Power of the government at students' backs, schools would see that they needed to raise prices to keep supply at the same level.
there are other issues at play too though. schools don't currently maintain a supply and demand equilibrium. they under price and then use rationing. private schools could simply raise prices until number of applicants is approximately the number of positions available. but of course there is a prestige economy in place that interacts with the money economy.
Great comment - the prestige economy does seem to have more of an effect on college price than any traditional supply/demand curves. We'd all be wise to recognize that.
it's fairly depressing to me how no one seems to grasp the concept of price. money isn't magical, it's a way of accounting for different people's preferences WRT the resources they have available to them. trying to fix a price by decree is a fundamentally stupid notion.
On the other hand, college is an industry, like healthcare, where demand is highly inelastic due to incentives involving third-party payments. It is also an industry, like healthcare, where price inflation has far outstripped inflation in general.
Is there an example of an industry where government-created demand accounts for a major portion of consumer spending and there is not rampant price inflation? I am open to the possibility that there could be other causal factors here, but the a priori logic is pretty compelling.
Is there an example of an industry where government-created demand accounts for a major portion of consumer spending and there is not rampant price inflation? I am open to the possibility that there could be other causal factors here, but the a priori logic is pretty compelling.
I'm sort of confused by your use of the term "on the other hand". I'm in complete agreement with Schiff (and economists in general) when talking about the effects of price distortions from tax/subsidy (two sides of the same coin).
Baumol's disease is a major component -- education is currently measured in hours, so professors tend not to become more productive over time while the rest of society tends to.
So the argument is that if they eliminated student loans, colleges would have to cut prices in order to maintain demand, right?
Isn't that a little risky, with the chance of pricing out the lower 1/2 of income earners in the US?
What if, as a compromise, they just eliminated college loans for those with family incomes over a certain level? Then you could get the economic effects without consigning a third of a generation to "sorry you were born in the wrong place kid, no college for you".
If we want to eliminate economic distortions, we should go after the farm subsidies, of course. But those are even more of a political minefield than this idea.
Isn't that a little risky, with the chance of pricing out the lower 1/2 of income earners in the US?
What if, as a compromise, they just eliminated college loans for those with family incomes over a certain level? Then you could get the economic effects without consigning a third of a generation to "sorry you were born in the wrong place kid, no college for you".
If we want to eliminate economic distortions, we should go after the farm subsidies, of course. But those are even more of a political minefield than this idea.
Cutting student aid would lead to lower tuition prices. More importantly, it would probably lead to completely different kinds of educational institutions. If students and their families had to more directly bear the costs of their educations, they would be more motivated to seek the best values.
By making college education artifically cheap, government discourages competition and innovation.
The best example are primary and secondary public schools which typically are completely free to a student. A private school, even if it delivers a much better educational value, has a hard time competing because if it charges anything, it's already more than what the student has to pay to attend public school.
The only way for private schools to compete in such an environment is to offer something the public school doesn't offer. A private school cannot compete by offering the same thing the public school offers but just at a lower price.
By making college education artifically cheap, government discourages competition and innovation.
The best example are primary and secondary public schools which typically are completely free to a student. A private school, even if it delivers a much better educational value, has a hard time competing because if it charges anything, it's already more than what the student has to pay to attend public school.
The only way for private schools to compete in such an environment is to offer something the public school doesn't offer. A private school cannot compete by offering the same thing the public school offers but just at a lower price.
RE: private schools, assuming you're referring to primary/secondary school as opposed to universities (where private schools thrive).. do you know how Charter Schools work? Ever seen some of the state laws regarding those? In many states, charter schools actually get to operate with a financial advantage over the public schools. I used to be in public office and watched a Charter school take advantage of the laws to siphon a ton of resources from our public school (which was already cutting teacher headcount year over year because of healthcare costs), and then to add insult to injury we had to pay to bus the kids there.
Anyways, back to the larger point.. I put a very high value on the idea that anyone in America, if they have a little talent and put in some work, can get a college education and make their own destiny.
That particular dynamic has way bigger implications for American competitiveness than moderate price distortions in university tuition -- I mean, if we can fix those, great, but let's not throw out the baby with the bathwater, and burn our house down afterwards for good measure.
Anyways, back to the larger point.. I put a very high value on the idea that anyone in America, if they have a little talent and put in some work, can get a college education and make their own destiny.
That particular dynamic has way bigger implications for American competitiveness than moderate price distortions in university tuition -- I mean, if we can fix those, great, but let's not throw out the baby with the bathwater, and burn our house down afterwards for good measure.
What's worse is the way for-profit colleges are abusing the system and taking federal loan dollars for subpar educations.
Their default rates are appalling, but that's to be expected when you charge $40k for a two year degree in Fashion Design. This should have been reigned in years ago.
http://www.usatoday.com/news/education/2009-12-14-student-lo...
http://federalstudentaid.ed.gov/datacenter/cohort.html
Their default rates are appalling, but that's to be expected when you charge $40k for a two year degree in Fashion Design. This should have been reigned in years ago.
http://www.usatoday.com/news/education/2009-12-14-student-lo...
http://federalstudentaid.ed.gov/datacenter/cohort.html
More regulation isn't a panacea for regulation. The heart of the problem is that it's now a common belief that everyone must attend college, even for things that don't require a college education like communications or Fashion Design. The increased demand inflates the prices. Because of this, the government has made it easy to get loans for college, which acts to further inflate the prices. A better solution would be encouraging people that do not need a college education to not get one.
A financial advisor I know wrote a really good article about the value of a college education. It's available at http://financialtales.com/financial-tales/young-at-heart/a-t....
A financial advisor I know wrote a really good article about the value of a college education. It's available at http://financialtales.com/financial-tales/young-at-heart/a-t....
Plenty of "non-profit" colleges also take federal money and provide subpar educations.
The only real difference is that the non-profit colleges funnel money to employees rather than to shareholders.
The only real difference is that the non-profit colleges funnel money to employees rather than to shareholders.
Yet non-profit colleges have a repayment rate of 95.3% while for-profit colleges sink to 83.3%. So it's not the 'only real difference'. But I'll give you that non-profits are not entirely blame free.
The better colleges are non-profit, which makes the non-profit group look better than the for-profit one. The higher quality students only go to non-profit colleges, and thereby lower the default rate of non-profits.
If a Devry student would not be accepted by Princeton (but would be accepted by Bumfuck U), it's unfair to compare Devry to the average of Princeton and Bumfuck. One should simply compare default rates of Devry and Bumfuck.
If a Devry student would not be accepted by Princeton (but would be accepted by Bumfuck U), it's unfair to compare Devry to the average of Princeton and Bumfuck. One should simply compare default rates of Devry and Bumfuck.
Interesting idea.
Related: If the government announced that in 10 years the minimum deductible for health insurance would be locked at no less than $20,000, what would that do for health care costs? In other words, if the only legal health insurance was catastrophic, would the health care industry be forced to become affordable?
Related: If the government announced that in 10 years the minimum deductible for health insurance would be locked at no less than $20,000, what would that do for health care costs? In other words, if the only legal health insurance was catastrophic, would the health care industry be forced to become affordable?
You can't simultaneously believe that the free market tends towards a stable and optimal equilibrium, and also believe that a government subsidy will wildly and erratically impact the market. These two beliefs are mathematically incompatible.
Well obviously you can believe that because there are people who do believe it.
As for your mathematically incompatible assertion, the way that the free market tends towards an equilibrium is because of feedback mechanisms that cause behavior change. However in the presence of a government subsidy the price signal of increased tuition does not necessarily cause decreased consumption. This breaks the feedback loop that is supposed to result in equilibrium.
This is a fundamental change in the mathematics of the situation, and can justify the belief that the market behaves in radically different ways in the presence of a government subsidy.
As for your mathematically incompatible assertion, the way that the free market tends towards an equilibrium is because of feedback mechanisms that cause behavior change. However in the presence of a government subsidy the price signal of increased tuition does not necessarily cause decreased consumption. This breaks the feedback loop that is supposed to result in equilibrium.
This is a fundamental change in the mathematics of the situation, and can justify the belief that the market behaves in radically different ways in the presence of a government subsidy.
If that were the nature of the subsidy, then yes, that would break the tendency to return to equilibrium in the face of altered data. However, only a fraction of tuition is paid by the government, so there is still a significant price signal to the consumer.
Your statement doesn't make any sense. If the government gives anyone $30,000 to buy a car then this will wildly distort the car industry. Government subsidies have absolutely nothing to do with a free market.
Here is my modest proposal.
1. Fix student loans to give sane amounts of support to students. (Cost of living has gone up in the last few decades, but the estimated cost of living for your parents they use in the formulas haven't been adjusted. That's ridiculous.)
2. Only offer government supported student loans to students whose university tuition levels are in the bottom 70% of accredited universities.
The first change fixes the problem where a lot of people who need support don't get it. The second change gives universities an incentive to not just automatically bump tuition 10%/year "because everyone else is doing it".
1. Fix student loans to give sane amounts of support to students. (Cost of living has gone up in the last few decades, but the estimated cost of living for your parents they use in the formulas haven't been adjusted. That's ridiculous.)
2. Only offer government supported student loans to students whose university tuition levels are in the bottom 70% of accredited universities.
The first change fixes the problem where a lot of people who need support don't get it. The second change gives universities an incentive to not just automatically bump tuition 10%/year "because everyone else is doing it".
He makes a valid point and personally I think he is probably at least partly correct, and it's something that needs to be debated. However his argument is flawed because he focuses on the correlation between the government programs and tuition rates without giving any evidence of causation. His entire argument is based on "This then That, so This caused That" which is rarely the case. I can't think of any good examples of this so if someone else understands what I'm saying please help me out.
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