Duping the Youth

In 2008, President Obama swept the youth vote. Overall winning over 66% of voters between 18 and 29, 15% being Republicans, 95% Democrats and 66% Independents. Riding a refreshing wave of optimism under the banner of ‘hope and change’, Obama sailed past John McCain into the White House. Given the state of the United States domestically and abroad, the infatuation with Barack Obama seemed natural. So natural that the media grossly overlooked his faults, his past, and most importantly his policies. Now four years later, the excitement has waned and our economy has not rebounded (no matter how many time the President says it has). Ask your parents, who are aged ~42 to 50, what the ‘Reagan Recovery’ was like.

Obama has sought to re-invigorate the youth base again by publicizing several issues including student loan interest rates, healthcare coverage, and availability of education for illegal immigrants. Each of these issues are a tailor made message for the present minded, short sighted young American. Without any interest in the back story and no time to investigate the President’s claims, young Americans are taking his words at face value.

President Obama has been championing the fight against the student loan interest rate increase. To feed the fire, the Democratic Congressional Campaign Committee singled out House Republicans as the drivers of the increase in the interest rates. The true guile of the Democrat Party comes in to view when the facts come to light. In 2007, the summer before an election year, House Democrats laid a trap to be sprung in 2012 right before an election year. Drafting legislature pertaining to student loan interest rates, the rates would be cut annually up to the 2011-2012 school year. Then for the 2012-2013 school year, the rates would return to the 2007-2008 rate of 6.8% up from 3.4% (which is precisely where the doubling figure comes from).

Speaker John Boehner explains, “the four-year phase down went from 6.8 percent to 6.0 percent for the 2008-09 school year, to 5.6 percent for 2009-10, to 4.5 percent for 2010-11, and finally to 3.4 percent for 2011-12.  Thus, in the middle of an election year – and even though the 3.4 percent rate has been in place for less than a year –the Democrats’ plan doubles rates back to 6.8 percent for the 2012-13 school year.

However, this fight over the interest rate does not speak to the true problem facing college students and graduates. The price of a college education has increased to historic levels, saddling graduates with unprecedented debt and no job to show for it. Why has the price of college increased so rapidly, with no end in sight? The short answer is that demand has increased. Whether the demand is being driven by social pressure or trumped up demand for college graduates, or both. The market for college responds to this increasing demand by increasing the price.

So now that we understand that the demand will continue to increase the price, what is the best way to cover the larger price? Based on your understanding of economics, the best thing to do is to increase the supply of education. The worst thing you could do is increase demand, because as we both can see, the price will simply continue to rise until that demand is satisfied.

Now on to the effect that holding down the student loan interest date has on the price of college. As a consumer, if you paid 10 cents (10% interest) on every dollar you borrowed how much money would you be inclined to borrow? With that imaginary number in mind, would you borrow more or less money if it only cost you 5 cents on every dollar? Exactly; you would borrow more money. Now let’s say you apply this money to your college tuition. An interest rate of 10% may have kept you out of school, but that 5% interest rate allows you to attend a state college. The lowering of the interest rate (below the rate established by the free market) increases the demand which increases the price.

So how does the price of college tuition go down? Increase the competition of education in the free market. When the Department of Education makes it easier to borrow money, the colleges are eager to meet the new demand with a higher price. I’ll leave you with a great clip from the esteemed presidential candidate Ron Paul made an excellent point in a Republican Primary debate just last year.

-Dean Jones