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How Loose Monetary Policies by Central Banks Create Asset Bubbles and Lead to Inflation
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How Internet of Things (IoT) Will Impact Our Daily Lives?
Internet of Things (IoT) is often thought of as being a high-tech concept. It is a common belief that such high tech concepts are only used by mega-corporations and that they have no place in the life of a common person. This is not the case as far as the Internet of Things (IoT) is […]
Costs in Project Management – Costs associated with the Projects
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Lack of Regulation as a Cause for the Global Financial Crisis
The previous article had touched upon the lack of regulation as a cause for the global financial crisis. This article looks at this aspect in detail. To understand why the lack of regulation was one of the contributory factors for the crisis, one has to view the issue starting with the repeal of the Glass […]
The Green New Deal proposal announced by Alexandria Ocasio-Cortez suddenly became a talking point in American politics. The United States was visibly split into two camps, one was of people who are supporting the socialistic ideas being purported by the Democrat leader whereas others who oppose her plan.
In a rather surprising development, large swathes of young people seem to be highly impressed by Ocasio-Cortez’s proposal. Experts are of the opinion that this change of opinion is because a large number of American students face crippling student loan debt. Politicians have now become aware of the fact that if they were to somehow waive off the student loan debt, young people would vote for them in large numbers.
This is the reason why major politicians have now made student loans a central issue in their campaigns. For instance, Senator Bernie Sanders proposed a mega $75 billion per annum plan to fund the student loans. Hillary Clinton did not really have a position on this subject. However, she too decided to follow Bernie Sanders’ plan. The Democrats are well aware that “free college tuition” is an emotional subject which could get them back into the White House even though it does not make much financial sense.
In this article, we will have a closer look at some of the problems that may arise if free tuition is implemented.
Firstly, it needs to be understood that tuition expenses are a very small proportion of the overall college expenses. Boarding, lodging and such other personal expenses form the bulk of any student’s debt. However, providing free boarding and lodging is not included in government schemes. Hence, it would be incorrect to say that if “free college tuition” is implemented, it would solve the student loan crisis.
The reality is that the student loan crisis is not really related to tuition expenses only. Instead, of subsidizing the entire program, the government must limit the amount of money that students can borrow for a particular course. This limit needs to be linked to their course fee. At the present moment, students keep borrowing and end up with gigantic amounts of debt by the time they graduate.
Plans suggested by most politicians suggest that the tuition fee should be waived off at community colleges. However, doing so would further jeopardize an already bad situation. This is because as per the latest data, less than 27% of the students that enrol in a community college actually graduate. This is after the fact that they have invested their own money, i.e. have their own skin in the game. If there was no monetary downside to dropping out of college, more number of students would do so, and this would exacerbate an already bad situation.
The bigger problem is that many of these dropouts also end up having significant student loans even if they have not acquired any skills in college. Many times, they are simply not able to make the payments on these loans, and their burden also ends up falling on the taxpayer.
A major problem with funding community college is the fact that the government would end up funding the most mediocre students. It is a known fact that students who are truly gifted or brilliant prefer to go to a regular four-year college course. It is the mediocre students that select community colleges. In the long run, this may turn out to be a money-losing proposition for the government. This is because the government may have to spend more upfront than they ever hope to recover from these students via tax revenues.
The problem with a free college education would be that it would also lead to a lower number of admissions in private colleges. It is estimated that about 10% of the seats in private colleges will not be filled because of this program.
For an average college, this means that the expenses will grow by over $10 million for every five year period. The institutes will be forced to raise the fees in order to make up for the lost revenue. Hence, free tuition in community colleges will actually be paid for by raising tuition prices in private colleges. The bottom line is that the best and brightest would have to pay more money to learn whereas the state will pay the bill for mediocre students who are statistically unlikely to graduate.
Lastly, Bernie Sanders, Alexandria Ocasio-Cortez or any other politician ultimately plans to fund this free tuition by increasing taxes on the rich. This causes mass migration and leaves states worse off.
It is a known fact that nine states with lower tax rates have been outperforming the other forty one who have higher tax rates. Flight of corporations and jobs from the state makes it further difficult to implement free tuition since the state’s revenue streams also decline drastically.
The bottom line is that free college tuition is not really a proposal which has strong economic backing. Instead, it is being used by politicians to garner more votes. If implemented, this so-called “solution” may prove to be very expensive and may end up exacerbating the very problem it was meant to solve.
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What the Current Wave of Protectionism and Populism mean for the Future of Globalization and Free Trade
February 12, 2025
