The interest rate on government education loans is set to double, to 6.8 percent, on Monday. That makes it, for the lender, one of the best returns around. Not, however, for the consumer.
Here's a question: What's the return on investment in a college degree?
Pick a degree program: History, for example, along with teacher certification, qualifies you for a job in education.
Suppose, then, the new graduate lands a job teaching at a high school. Suppose, also, that the graduate has $50,000 in loans to pay off and the teaching job pays $25,000. But the interest rate on the borrowed money is doubling, to 6.8 percent.
Do the math. How much of the new teacher's salary will go to living expenses and how much will go to loan payments? Further, how long will it take to pay off the loan?
Every individual's situation is different, of course, but a quick look suggests that doubling the interest rate on student loans actively discourages many young folk from borrowing to go to college.
Is that the plan? To price them out of the market, leaving college slots open only to those who can pay cash?
That's free-market economics at work. As prices rise, some demand falls off, even as supply holds steady. In this case, price is the interest rate, demand is from the borrowers, and supply is the amount of money available.
The Law of Supply and Demand applies to money as much as it applies to any other commodity or service. If the price (interest rate) rises, demand lessens. Or if the supply -- the amount of money available -- declines, the price (interest rate) rises.
By raising the price, thereby reducing demand, government pushes some consumers out of the market. Here, fewer people apply for government loans, so government can reduce the demand and increase revenue as it doubles the price (interest rate).
Result: Fewer people go to college.
No comments:
Post a Comment