<p>Economics 101 - Any time you add money supply to a market without increasing the quantity of output of goods and services, the end result is an increase in price per unit of output known as inflation.</p>
<p>It doesn’t matter whether the money is lent or given to the student, the universities know that it is available for the taking and therefor will raise prices to extract every last dollar that is available.</p>
<p>Let’s look at another example of subsidized loans that has caused a market to behave in an unpredictable manner - home mortgages. Somebody comes up with a scheme to allow more money to be lent to homebuyers (0-down teaser rates). Homebuyers feel the “wealth effect” (well known economic term) and spend on that commodity (housing) and other things as well according to what they have as opposed to what they need. </p>
<p>Along the way the real cost of that money sets in (jacked up interest rates that outstrip salary increases) leading to increasing forclosures, leading to falling housing prices, leading to decreased money available, leading to less demand and suddenly you have a downward cycle that is self-reinforcing. The market for the commodity (housing in this case) collapses and demand goes down the tubes with the prices. The houses have the same intrinsic (shelter) value, but the market now correcting (eliminating unsound lending practices and cutting back the new building). Eventually, the cost of housing will stabilized when the risk level of the funding is believed to be in line with the buyer’s ability to pay without unsound subsidies.</p>
<p>In education, right now the increasing subsidized student loans seem to be managable by the greater majority of college students, once they leave college. However, there will come a point where the number of students defaulting on loans will outstrip the governments ability to guarantee payment to the lenders and a similar crisis will evolve. The government will eventually have to scale back how much loan money is available at that point and the resulting decrease in ability to pay will force schools to lower prices or have no students who can pay.</p>
<p>Unfortunately, I think we are a bit aways from the tipping point where government loans are defaulting, as the government has given a big hammer (cannot be forgiven in bankruptcy) to the lenders to continue behaving in an inrresponsible manner.</p>
<p>Now what the schools use this increasing revenue on is the matter for an entirely different debate which I think should be separate and I don’t want a part of.</p>