Federal Student Loans: Are We Getting Free Money?! | EconThought #6

Federal Student Loans: Are We Getting Free Money?! | EconThought #6


Hello and welcome to EconThought, the show
where I use a blue hardwood floor as a backdrop to distract you from the reflection in my
glasses. I’m your friendly neighbourhood economist,
and after watching this video you might begin to question your life choices. And the choices of your government. Or my government, if wherever you live doesn’t
offer these services. Student debt is an inevitability for most
of us who plan to attend post secondary educational institutions such as colleges and universities. The average person doesn’t have an extra
$25,000 lying around every year which they can use towards their education so they have
to take out student loans in order to finance their education. If I had an extra $25,000 lying around every
year, a huge portion would definitely not be going towards my education. Interesting claim, coming from someone who
goes to university despite not having that kind of money. Let me explain. Here in Canada the government offers its own
student loan service. And get this, you don’t pay any interest
on the loan while you study. In this sense, the government is literally
paying you to study. But wait, don’t you need to use that money
to study? How is the government paying you? When I say that the government is paying us
to study, I’m referring to the fact that they are giving me an interest free loan. The average rate of inflation here in Canada
is around 3% a year. If I take a total loan of $100,000 over the
course of my education, I will pay $100,000 at the end of my term because there is no
interest. However, inflation will cause this money to
be worth less in the future. After doing some long and complicated calculations,
the original $100,000 that I borrowed at the very beginning is now worth around $88,000. The government has paid me $12,000 to go out
and study for four years, which is the length of most common programs over here. Now comes the part where you ask me about
the rest of the $88,000, don’t you have to pay that back? Yes you do, but with the education you have
just gained from attending school, you will be able to make that money back much quicker
than if you had not decided to go back to school. This sounds familiar, doesn’t it? It sounds a little bit like that concept that
you learned in your first economics class. I’m talking about opportunity cost. Opportunity cost refers to the next best alternative
that you have to give up to get something else. The best alternative to going to school is
working a full time job. The income that you would have earned from
that job is the opportunity cost of attending school. It works both ways. If you worked that full time job, the opportunity
cost would be an education and a lack of tens of thousands of dollars in student debt.This
then begs the question: why do people even bother going to university? There’s another opportunity cost to working
full time that we didn’t consider before. And that opportunity cost is future income. If I choose to work now instead of going to
school, my income will most likely be lower than if I were to go to school and develop
some form of expertise. I go to university because the prospect of
a higher income in the future as opposed to a lower income is worth the money I am losing
out on right now and the debt that I am incurring. I hope you learned something. And as always, thanks for watching.

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