Bloomington - Most expensive city? (Part 1)

I stumbled across this in the Star today.

For those who aren't going to click through, the article is about how Bloomington is the most expensive city in the state. While I suppose this isn't terribly surprising, it got me thinking about Bloomington now vs. Bloomington in the 1990s, when I was a student there.

In the '90s, my tuition at IU was rougly $1,500/semester. My mother worked for IU Health, and that got us a 50% tuition reduction. I suspect that my cost of living at the time was sub-$1,000, so an entire year of school could be financed on approximately $13,000, give or take. While this is more than a kid could make over the summer, it minimized the financial strain on my parents (who thankfully "put me on scholarship" for four years of undergrad studies).

If memory serves, when I moved back to Ft. Wayne after college, I found things to be more expensive in Ft. Wayne. I kind of figured that as the city got larger, the prices did too. This made sense, when I thought about the jump in cost of living from Ft. Wayne to Indianapolis (and there was one when I moved in 2003, but that may have been due in part to a bit of a neighborhood upgrade as well). I always knew Chicago was more expensive than Indy, and NY more expensive than either. Of course, that it made sense to me didn't mean that I liked it, but that was how I understood the world to be.

Now, of course, developments like Bloomington being the most expensive city invariably have me asking why that is. Shooting from the hip, I have a theory:

It used to be (back in the mythical, halcyon days) that college was hard to get into and relatively easy to afford. If people had student loans, they were generally minimal (sub $10,000) and they would generally pay them off within 5 years or so of graduation. This arrangement necessarily involved many people in Indiana paying taxes for a college they could not attend. One can see both the virtue and the vice in this arrangement.

Now, it seems as though the worm has turned, and college (somewhere, not necessarily at the flagship state university) is now relatively easy to get into and difficult to afford. People routinely graduate from college with debilitating debt the size of a mortgage. To compound the issue, there are so many people now going to college that it no longer makes a job candidate stand out, and there is less of a financial premium, to be a college graduate. These are of course aggregate, macro observations.

My belief is that two major policies have contributed to this situation:

First, the state has by and large withdrawn support for public institutions of higher learning. This is likely a combination of a few things:

1. It likely reflects an increasingly libertarian bent in our society that believes that each individual should pay his/her own way and not depend on the public to underwrite their desires. This goes hand in hand with a belief that one values something more if he personally pays for it. . . the whole idea that nobody washes a rental car or mows the grass at a public park.
2. It also likely reflects a conservative view that institutions of higher learning are liberal bastions of proto-socialist thinking.

I make no real comment on the veracity of either of these views, but I do believe that a combination of the two has resulted in less-generous funding of post-secondary educational institutions.

As the state has withdrawn support for public colleges, tuition has gone up as students have been expected to shoulder more of the burden. This is to be expected, in line with the libertarian bent noted above. To fill in this void has stepped the second major policy:

Public/private funding of student loans.

With most loans, if the borrower defaults, the lender winds up eating some of the cost (ask Donald Trump's creditors). This idea is built into the process of acceptance/rejection of loan applications and underwriting of interest rates. The greater the risk that the borrower will default, the higher the interest to pay for that risk in the long run.

When you get a student loan, though, you're generally a terrible credit risk. After all, you're only 18, have no education, no assets, and probably few if any skills.

So, the government steps in and more or less insures your loan. The public pays for this insurance.

Now, we have a situation where the lender is not bearing the risk but gets to reap the profits. Add to this that bankruptcy laws were changed in the mid 00s rendering student loan debt non-discharge-able, and you have a situation designed to put an albatross around the neck of the borrower.

In such a situation, if you were the lender, why wouldn't you extend as much credit as possible? You're going to get paid one way or another, either by the borrower (who can never discharge the debt, no matter how unlikely it is that it will ever get paid) or by the government (if the borrower dies before paying, or defaults). Your profits are a percentage of your loan portfolio.

Add into this situation that, as mentioned above, if you're an 18-year-old kid, you stand very little chance at prosperity in your 40s if you don't go to college.

So, the student has little choice but to take out debt, yet is too young to fully reckon with the consequences of racking up such a debt.

The lending institutions have very little incentive to minimize borrowers' debt obligations or to underwrite their portfolios.

The colleges have very little incentive to control costs, other than avoiding negative publicity.

Nice system we've created here.