As in the housing bubble, cheap credit on easy terms increases the amount of money chasing the product (in this case a diploma) allowing schools to increase prices. This inflation makes it harder for middle-class families to afford paying their own tuitions, driving them into the government financing program, which, you guessed it, drives up costs further still.
Obama’s goals, aside from continuing to encourage young people to spurn the private sector in favor of service jobs, is to try to juice the economy. Those who participate in the program could see their monthly incomes rise by hundreds of dollars, thereby increasing the money they have to buy stuff and try to juice the economy.
Young people generally don’t save, so money no longer spent on tuition loan repayments will most likely go to dining out, food, room furnishings, iPods, and other consumer goods. This increased is good for the economy and necessary for recovery.
But the long-term effect will only be to further increase the costs of education. The best way to control those costs is for the government to get out of the business of providing loans. Universities have increased their costs at four times the rate of inflation over the past 30 years and are notorious for wasteful spending. Students pay for that waste, as do the taxpayers via subsidized student loans. Under this new plan, they will pay more in the name of loan forgiveness. If students have less to pay off, they will be tempted to borrow more. If they are more willing to borrow and spend, the schools will surely raise their prices, with those costs passed on to the taxpayer.
The president is also advertising that this program will pay for itself: without the yolk of such heavy student loans, the young graduates will be able to earn, spend, and invest, which will stimulate the economy and lead to more tax receipts than expenditures. Plausible, but every other economic forecast of his has been wrong. I’m slow to believe his economic predictions, and would like to actually see the analysis that determined, as the article states, that “the president’s student loan action will ‘almost certainly reduce’ deficit spending because of the savings the administration says will be achieved by a 2010 federal college lending takeover and what the administration believes will be a lower rate of default among student debtors due to lower lending rates.”