Paying on both ends.
Click here to listen to the broadcast of You Tell Me on KTBB AM & FM, Friday, Nov. 4, 2011.
On October 26th, President Obama gave a speech in Denver. He was speaking to college students and in that speech, he promised to advance a plan to reduce student loan payments and to forgive outstanding student debt after 20 years.
On the very same day, in the very same city, the University of Colorado announced a nine percent increase in tuition. The irony is almost too much to take.
The government has now guaranteed more than a trillion dollars in outstanding student debt. The average tuition at a four-year public university has more than doubled in the past ten years. That’s no mere coincidence. It is a cause and effect relationship.
For the vast majority of Americans, there are now two stages of life in which the amount of money required to meet a basic need is far in excess of the resources of all but the wealthiest households.
The first is college. After World War II, the tuition at a typical private university cost about a month’s pay for a middle class family. Today, the tuition for that same university can consume more than a year’s pay.
In order to afford a college education, most students are borrowing money. A lot of money. As a result, the typical college graduate leaves school owing about $27,000. That debt is on the shoulders of young men and women just as they enter adulthood and just when they are the most financially vulnerable.
As the classes of 2008, 2009 and 2010 are learning, there aren’t a lot of jobs out there to provide the income to pay those loans back. The higher earnings that are implicit and explicit in the justifications for getting a college degree just aren’t there right now. Unless the economy improves very dramatically, very soon, expect to hear news stories in the not-too-distant future talking about the economic impact of rising student loan defaults.
The second stage in life in which costs can vastly outstrip resources is after retirement when the need for health care rises dramatically. Most Americans don’t have the resources to pay for a major health event such as a heart attack, a heart bypass, a hip replacement or a serious disease such as cancer. Most older Americans don’t have the monthly cash flow to pay for their prescription medicines.
Health care delivery now costs so much that even routine visits to the doctor can be prohibitive. One of the greatest fears of people in their 50s and early 60s is losing a job – not just for the loss of income, but for the loss of health insurance.
With the exceptions of college and health care, the cost for just about every other service we buy has come down. So why are college and health care the exceptions?
Simple. The government distorts the market for college education and health care by removing price sensitivity at the point of purchase.
Federally guaranteed student loans have served to make every enrolling freshman rich from the perspective of a college admissions officer. Enrolling students happily follow the advice of college financial assistance counselors in applying for federally-guaranteed loans, figuring that they won’t have to the loans back for a long time. The price sensitivity that governs most purchases is numbed by the easy availability of debt, a fact made possible by the government’s student loan program.
The same is true for health care. Between employer health plans, a legacy of government wage controls in World War II, and government programs like Medicare, the actual consumers of health care services are insulated from direct financial impact and thus offer little resistance to rising prices.
With the best of intentions, the government has become the driving economic force in both higher education and in health care. In both cases, costs are out of control.
LCD TVs, cell phones and personal computers, however, are not financed by the government. All have come down in price.
The lesson is unavoidable.