Fraud U: NPR’s Window Into How the State Supports the Tuition Bubble

Try to remember back in the ancient history of 2006 and 2007 (which shouldn’t be that hard not only because it wasn’t that long ago but because we’re about to re-live it). The housing bubble was helped along by the work of the “rubber-stamp agencies” “ratings agencies.” Organizations like Standard & Poor’s and Moody’s were treated as neutral observers rather than as private companies trying to make profits in the market. They gave the housing bubble a layer of illusion that made it appear stable and credible.

But it was all a big scam. At best, they had no idea what they were doing. They probably didn’t care. At worst they knew they would profit from and never be prosecuted for fraud.

The government and the wealthy set up semi-private, semi-public institutions that look big and impressive. Just like the Titanic. They are designed to keep you dancing as the ship sinks.

This story from NPR about “deciphering” the student aid letter is quite revealing. The first thing I noticed was the subtle mention that “aid” was an amalgamation of grants and loans! I was quite impressed that I wasn’t left to my own devices to figure that out. The story acknowledged the problems though it seemed designed to make you take them for granted:

Chris Reeves, a guidance counselor at Beechwood High School in Fort Mitchell, Ky., tells NPR’s David Greene that he fields lots of questions from families trying to decipher their award letters. “They don’t always understand that part of the financial aid package includes loans,” he says.

But loans “don’t really reduce your costs,” explains Mark Kantrowitz, founder of the financial aid website and publisher of Edvisors Network. “They simply spread them out over time. … A loan is a loan. It has to be repaid, usually with interest — which increases your costs.

It doesn’t just increase your costs. The fact that the government “backs” these loans means that more money is available to loan to students. This creates greater demand which, in turn, allows colleges to raise their prices. That is why college prices are shooting upward at many times the rate of inflation. That is also why they are going to reach a point where they suddenly shoot back down.

In the meantime, if you listen to the audio, you will find that there is also a “bait and switch” going on. This is the second way in which the fraud is perpetuated. The colleges give freshmen entrants the most aid and then retract it for later years. Naturally, they claim this is because they have deep concern for freshmen who drop out that they not be too overburdened with debt. But such a rationalization is too convenient. The bottom line is that colleges are trying to make money and the best way to get customers hooked is to invite them to start the process at a lower rate without telling them all that it will cost to get a full degree.

I don’t know that I think this is strictly immoral in itself. But colleges don’t admit to being in sales. They pretend to be offering a public service out of the most altruistic of motives. Getting potential students to believe that the government-education complex is driven by altruism puts them in a position to be manipulated into bad decisions.

So buyer beware!

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