The dramatic rise in college tuition might have you asking a lot of questions. Costs associated with obtaining a college degree have gone out of control.  Surprisingly, the trend of increased college tuition hasn’t decreased during the worst economic downturn in recent history. With the unemployment rate currently standing at 10.20% tuition has still managed an  increase of 6.50% in the fall of 2009. Worst of all, many of the reasons students have been given for rising tuition simply aren’t accurate.

In a free market college tuition prices are a product of supply and demand. Unfortunately, these free market forces aren’t allowed to play out because of government interference. All of the programs designed to help students pay for college have caused prices to skyrocket. Grants and guaranteed federal student loans are the main reasons for out of control tuition costs. That’s right, the very programs designed to help students are actually hurting our pocket books.

Guaranteed Student Loans

If students couldn’t borrow money through government guaranteed loan programs fewer students would have money for college. Private institutions would never loan this money out for fear of going broke from loans in default. When more students have access to guaranteed financing through government loan programs, demand for college placement increases. This results in a situation where students compete for a fixed amount of college positions with federal money.

Universities know this is taking place and can increase prices accordingly. They no longer have any incentive to control costs and reduce wasteful spending. Consequently, the gap between actual teaching faculty and administrators has shrunk. Along with the ever growing amount of Assistants, Directors, Deans and Heads comes supporting staff and office facilities. Throughout history the answer has always been increasing tuition prices, but never eliminating non-core expenses. This process starts a cycles of wasteful and unnecessary programs.

At public colleges, tuition has generally been driven up by rising spending on administrators, student support services, and the need to make up for reductions in government subsidies, according to a report issued by the Delta Cost Project, a nonprofit based in Washington, D.C. – Kim Clark

The chart above shows the ratio between average incomes and tuition at Stanford University at various points in history. The data shows a clear deterioration to just 1.53 in 2009. The average college student must work more than two thirds of a year (full time) to pay for just one year of tuition at Stanford. This is compared to just one-fifth of a year to pay for one  year of tuition in 1960. With increased government sponsored loan programs and other entitlements no reason exists for this trend to change in the future. Adding to that Ben Bernanke and the Federal Reserve sponsored inflation and you have rapidly rising costs.

Anytime our government interferes with free market systems costs go up and quality goes down. This is caused by moral hazard through guarantees and decreased competition. Colleges know they can charge higher tuition prices because of guaranteed loans. At the same time a greater amount of students are pursuing higher education so colleges don’t compete for enrollment as much as they use to. Instead prospective students fight for acceptance at universities. This is a recipe for skyrocketing tuition costs and a massive burden of debt for young academic Americans. The average college student is $20,000 in debt by graduation. Worst yet, many acquire consumer debt through credit cards and mortgages soon after. This certainly doesn’t sound like a good start to achieving financial security.

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Inflating Short Term Demand

The problem with stimulus is that you need more and more of it to keep the desired effects. Much like a drug addict needs increased amounts of drugs to achieve the same high. Eventually things come crashing down when the stimulus is taken away. Congress is doing precisely this in the automobile industry. Artificially increasing short term demand will hurt auto manufacturers even worse in the long term. Manufacturers will build up inventory to meet increased demand and suffer when stimulus is pulled away. It could also be argued that is practice “steals” automobile sales from the future.

Winners are Foreign

Everyone knows what car manufacturers are most energy conscious. We also know what car companies are based in the United States. Companies like Toyota and Honda are well known for elevated fuel efficiency. So if I told you Toyota was the leading auto manufacturer under the program would you really be that surprised. Toyota is based out of Japan, not the United States. Although Toyota employs many people here in the United States, companies like Ford Motor (NYSE: F, Free Report) and General Motors (NYSE: GM, Free Analysis) probably won’t gain market share.

Clunkers are Destroyed

Every clunker traded in through the program has to be destroyed. Removing products from the market that still possess viable economic value is wasteful. Borrowing money in order to destroy goods that still have life is counter-productive. Of course some of the vehicle’s components are salvaged, but still much waste exists. This doesn’t even account for people looking for used cars. If clunkers are destroyed many people will have trouble finding low cost transportation (cheap used cars).

Affordability

The worst aspect of the program is who is targeted. People who drive clunkers are generally low to middle class individuals. These people drive clunkers because they can’t afford a better car – or simply don’t want a luxury vehicle. By creating a program like this you entice low income individuals into taking on debt to buy a vehicle they likely cannot afford.

What people fail to realize is that having a vehicle is a luxury all together. It doesn’t matter what brand of vehicle you drive or how much it costs. In many countries people cannot afford a vehicle or don’t have roads to drive them on. The very efficiencies congress seeks to improve will actually be hurt over the long term. Congress should quit proposing stimulus programs that are based on the “broken window fallacy” of economics and simply let market forces play out.