Would the colleges and universities keep raising tuition so much if the loans weren't guaranteed? There's no risk to the schools if the loans are guaranteed, and so they jack up tuition rates to such an extent that the typical family can't afford it without a loan.
It's amazing how expensive things become once they're declared a right. (See healthcare, too.)
Subsidizing interest rates always leads to high prices. Nobody wants to believe this, so thus the the various bubbles we've had for centuries. Nobody likes hearing how credit markets actually work. It makes them upset.
Personally, I don't think that the government should be making money on interest by loaning money to people for schooling, so I'm 100% on making people pay back the principal loan amount only, and doing so through some negotiated garnishment possibly.
If you think college is expensive now, wait until the interest rate on student loans is 0%.
What people refuse to hear is that
prices are driven by the monthly payment borrowers can afford. Let's say the typical payment a borrower can afford on some random, unidentified good, is $250/month for 36 months. If demand & supply are fixed:
If the interest rate is 0%, the market clearing price of the good is $9,000 (36 payments of $250 at 0% interest)
If the interest rate is 5%, the market clearing price of the good is $8,350 (36 payment of $250 at 5% interest)
If the interest rate is 20%, the market clearing price of the good is $6,730 (36 payments of $250 at 20% interest)
Low interest makes goods
expensive.
High interest makes goods
cheap.
Of course, demand isn't fixed. What happens is that as interest goes up, more people say, "Paying $9000 over three years sounds like a bum deal. This good isn't worth it." Compared to other things that $250 gets you, it's not so great. So demand drops.
This causes fewer people to buy the good at all, and depresses the price further.
The reason we have subsidized interest for college is Americans don't like the idea that not everybody goes to college. If college were unsubsidized, college tuition might drop by half, but perhaps half as many people would go. Americans just won't stand for that. Education is a right. Education makes you smarter. It opens doors. It's good for women. It's good for black people. It's good for fairness. It's good for equality.
Since Americans want everyone to go to college, we have subsidized interest and retardedly expensive college.
