With Rutgers approving a tuition hike and therefusal of the U.S. Senate to accept a measure that would keep interest rates artificially low on government-subsidized student loans, the cost of college is on everyone’s mind. Rutgers’ tuition and the Senate debate are inextricably linked.
The senators who voted against the measure, and those members of the House who said they will do the same if the bill makes it to them, understand that government intervention leads to unintended consequences. In this instance the unintended consequence of government intervention — in the form of manipulating interest rates — has been an increase in the cost of postsecondary education.
Money is a commodity. Interest rates reflect the price of that commodity. A borrower pays a price, in the form of interest, to the lender. The price of a commodity reflects what a borrower is willing to pay and what the lender is willing to accept. Numerous factors go into setting a price. But at the most basic level, supply and demand will set the appropriate price so that market equilibrium can be reached. As demand goes up, price will go up until the supply matches the demand. If there is an oversupply, demand decreases as too do prices.
However, when the government interferes with markets, signals are distorted and equilibrium cannot be achieved, as supply and demand will never be allowed to react to one another naturally. By keeping interest rates low, the government has created an artificial demand for higher education.