COLLEGE FINANCIAL AID IS KILLING US – TODAY’S OUTRAGE

APRIL 2012

I’ve often found counterintuitive notions offer solutions. One of the first, and important of these notions was made by Christopher Columbus. Because he knew the earth was round, he came up with the radical notion of sailing west to reach the east. Then there’s the thinking behind vaccinations — a little disease can fuel the body’s own defenses. And of course the good old Laffer Curve, which says as tax rates rise beyond a certain point, tax receipts will fall.

I’d like to throw another into the mix: Student loans are making college prohibitively expensive. (Corollary: Student loans are like an albatross around the neck of our economy.)

What’s brought this on, at least for me, was the revelation last year that student loans totaled some $1 trillion. That’s a thousand billions, and a staggering amount of money.

My contention is it’s the existence of student loans that is driving the cost of college through the roof. For evidence, look no further than venerable Harvard University, with an endowment estimated to be $32 billion. Let’s do the numbers, back of the envelope style:

If Harvard could manage a 3.5% return on their endowment, that would be about $1.1 billion annually. Using the university’s figure of 21,000 students, and applying the $40,866 undergraduate tuition and feesacross the board totals about $858 million. OK, kick in $10,000 more per student to account for the higher graduate tuition rates, and the figure is about $1.06 billion. So, it turns out with a different set of policies, every student at Harvard University could go there tuition-free, assuming a return of 3.5%. This argument is even more compelling when taking into account Harvard’s actual return on its endowment over the last 20 years of 12.9%.

So why are undergraduate tuition and fees $40,866 at Harvard? One reason is because with existence of abundant aid, many students can come up with the money.

At the very least Harvard, as well as other colleges and universities, should consider lending money directly to students themselves. If they had faith in their product, what would be the issue?

But consider for a moment, what would happen if there was no financial aid available? Colleges and universities would have to price their product based on market realities rather than the amount of aid that was available. Students who did borrow would have to do so privately and might avoid Russian literature as a major and consider a more practical one in the sciences, engineering, or even vocational trades, that would make a more certain and rapid payoff. Schools with smaller endowments and or higher costs structures would go out of business. Sorry.