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July 16, 2012

The Government Needs to Get Out of the Student Loan Business

Last week, I watched a debate on CNBC between Peter Schiff and an economist from the Progressive Policy Institute about student loan bubbles and bailouts. The video, uploaded to the Common Sense Capitalism YouTube channel, has garnered quite a following over the weekend. It illustrates the sensitivity and popularity on the topic of student loans.

One of the points that progressives fail to address in these situations is scarcity. The woman in the debate with Peter Schiff mentions that "investment in human capital is never a waste of money." Policymakers with that type of thinking are likely to continue to fuel this bubble at no matter the cost. We need to realie that A) we do not have unlimited resources and B) some people are not meant for college.

Additionally, bu subsidizing student loans, we are also creating a distortion in the labor market. Each year, we graduate roughly 2 to 2.5 million college graduates. These people go into a labor force that either demands a different set of skills or has one available job for every four graduates. As Peter Schiff mentioned in the video, this results in graduates waiting tables and working minimum wage jobs.

I've seen some comments about college being a waste of time and money. Again, this is not true either. Like any other commercial transaction or investment, people need to examine and understand the pros and cons of such a decision and then choose a course of action.

When the government subsidizes something, it not only creates market distortions, but distorts the individual's decision making process. This causes people to make decisions that they normally would not make under normal market conditions. Consider this, how many people do you know who went to college and had no business being in school? They didn't take school seriously and after graduation, they either have no job or a low wage, low skill position. Would these people have gone to college if they had to pay out of their own pocket?

These are the distortions that subsidies in college education create.

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