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Illinois is doing its part to grow the student debt bubble | FAFSA now required to leave High School

Updated: Aug 14, 2019

Illinois doesn't get a lot of things right. Their population is rapidly decreasing, their taxes are rapidly increasing. Their pension is severely underfunded, and they're slowly but surely filling up federal prisons with former governors.

Of all the mistakes they routinely make, it's clear they always execute one thing properly: really terrible economic decisions. The new law that takes effect for the 2020-2021 school year fits right in with what seems to be an ongoing theme in Illinois- make prices artificially high.

Illinois Gov. J.B. Pritzker signed a new law requiring high school seniors to fill out a FAFSA application before being allowed to graduate high school. That is, they are no required to apply for college financial aid to be able to graduate. Proponents of the law say that this is a great way to encourage students to pursue higher education after high school. My own opinion is that it's a way to encourage students to go into debt, and a great way to keep prices high on college tuition.

The basic economic incentives created by the law are pretty cut and dry. State officials know that if you are shown an amount of money that will be freely given to you to pursue something, you are more likely to pursue that thing.

Why is this a bad thing?

The other basic economic incentives this creates are also pretty cut and dry. The more money you make artificially available for a product, they higher price that product will have. Laws like this artificially increase demand, and they make use of money that would not otherwise be available in a free market. In addition, financial aid is not guaranteed to cover the entire cost of college. Therefore, many people who can least afford it, are likely to be going into debt when they otherwise would not have.

The Bubble

I'm sure you remember the housing bubble that finally reached its peak, and burst in 2008. At that time, the government had nearly created an entirely artificial market for housing. Through the Community Reinvestment Act, the government made money available for lower income families in previously "red lined" districts. Those "risky loans" that are to blame for the world market collapse were a product of greed, and government intervention. The main culprit was the federal government increasing the supply of money that would not have otherwise been available to borrowers.

Making a supply of money artificially available resulted in an artificial increase in demand for houses. That demand for houses resulted in an increase in prices for houses. Basic supply and demand. When the curtain was pulled on this scheme, and the real truth was made widely available, the bubble popped. Suddenly people said, "Wait, houses aren't worth this much in a free market.."

The same scheme, nearly exactly, has been perpetrated on the American people. This time, it's being perpetrated on unsuspecting teenagers.

The government took over the lending process for student loans in 2010, citing restrictions and high interest rates as the need for government intervention. The FAFSA program, is an aim at helping those who cannot afford college tuition obtain the education they need. The problem is, they have been working in tandem to drastically cause an increase in tuition pricing for everyone, FAFSA qualified, or not.

The red circle is when the fed took over all student loans

Stop me if you've heard this one before. The government is making money available that would not otherwise be available for a product or service. This artificial increase in the supply of money available for that product has caused an artificial increase in the demand for that product. This artificially created demand for said product is causing an increase in the prices for the product. Basic supply and demand.

Last time, it was the "big banks" that were too big to fail. Their greed, fueled by strict Community Reinvestment Act standards, led to their downfall, but they always knew the government was there to bail them out. Who will it be that fails this time? When college students finally say, "Wait, a college education isn't worth $200,000..." who will it be that fails? It will be the colleges.

The colleges are the next to get a bailout.

The colleges have built their model based on the artificial supply of taxpayer money flowing into their bank accounts for years on end. When you make available a nearly unlimited supply of money, their is no incentive for efficiency or price reduction. On the contrary, there is only incentive to continue increasing the prices.

If the colleges ever see a day where the artificial supply of money is no longer available, they will be faced with the need to make massive, sweeping changes to their business model. They will be forced to focus a little more on schooling, and a little less on creating a "cool college experience." Many of them will be stuck with expenses they have no idea how to fund, simply because they've never needed to be efficient to make a profit.

The $1.6 trillion dollar student loan bailout pushed by those like Bernie Sanders is a bailout of the colleges, and the students, funded by the taxpayers, to fix a problem created by government intervention in a market.

Back to Illinois

The other issue stemming from the new Illinois law is the likelihood that this will leave young people with debt that they might not have otherwise had. The FAFSA program is financial aid for those that can't afford college, but it makes no promise to fully cover the cost of college. It's like Old Navy giving you that $15 Off coupon. You're more than likely going to spend more than $15 when you go to the store. Sure, they gave you a deal, but you probably just spent money that you weren't going to spend in the first place.

That's the somewhat evil nature of the Illinois law. I'd say the same about a coupon sent to you in the mail by a store, but you probably freely opted into that coupon, whereas the state government of Illinois is forcing 17-18 kids to fill out financial aid applications that they freely admit will make them more likely to go to college. Which in turn is more likely to get kids who qualify for financial aid, people that are in tough life situations, to get themselves into eventual government debt that they were not going to get in in the first place.

Maybe in the end this is a good thing for our society, but that's not as sure of a thing as it was 30 years ago. 30 years ago, it would separate you from the pack if you held a bachelor's degree. These days, a college degree means almost nothing, since almost everyone has one. Basic Supply and Demand.