Market Distortions in Higher Education

Higher education costs are too high and this is not a function of the market. According to the National Center for Education Statistics, in 2016-17 the average annual cost of tuition at a four year university was $26,593, up from $12,274 in 1985-86. Educationdata.org has reported based on publicly available wage and tuition information that the cost of college tuition has increased eight times faster than wages.

Due to a variety of factors, the cost of education continues to increase as the cost of many other goods have fallen. There are major market distortions in higher education, including the federal reserve, fafsa, and state subsidized universities.

The U.S. central bank known as the federal reserve disrupts the whole market. It’s reckless printing of money, and bailouts of major corporations create inflation or lower the value of the dollar. When the value of the dollar lowers, prices are bound to rise and few actually benefit. Sometimes market forces overcome the fed and prices still lower, but when additional government intervention is added this is unlikely.

The second market distortion that causes large tuition increases is fafsa (federal application for student aid). Based on a student’s supposed ability to pay for college, fafsa will provide grants and/or loans at an interest rate lower than the market rate. Ironically a 2015 report from the federal reserve bank of New York showed that an increase in student loans also causes an increase in college tuition or at least a decrease in financial aid provided by the universities themselves.

State (as in individual states) subsidized universities create a competitive disadvantage for private universities and cause taxpayers to bear the cost of education. The California 2020-2021 budget includes $19.4 billion dollars for the states universities and community colleges. California is just one of many states that has public universities with subsidised in-state tuition. In-state tuition dramatically decreases the cost of attending those universities (at least on paper) for residents of the state. It creates a competitive disadvantage for private universities who can no longer compete on price but might even have a difficult time competing on quality with large, heavily subsidized universities.

Government intervention in education has increased the costs substantially and created a major market distortion by artificially raising demand. It is time for the government to get out of education completely.

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