In the film LA Story, Steve Martin’s character attempts to make a reservation at a restaurant. It’s an exclusive establishment: They refuse to even consider his request until he passes through a comically excruciating examination of his personal finances. He fails.

When a seller won’t even let you in the door until he’s had a chance to snoop through your finances, it’s a sure sign there’s something fishy going on. Yet that’s exactly what colleges do these days. Most schools will reject your entrance application if it’s not accompanied by a FAFSA — the infamous Free Application for Federal Student Aid.

Let’s think about that for a moment. Colleges know their prices are so high that most of their own customers can’t afford them. In the real world, a business faced with this situation lowers its prices, finds a different class of customers or goes bankrupt. But in the altered world of higher education, the sellers have another option: Keep their prices high and all but force their customers either to borrow against their futures, or to pay for their education with someone else’s money. How can schools get away with this seemingly outrageous business practice? Good question.

To find the answer, we have to look back a few years. Back in the days when your parents were trying to fund their college education, governments expanded existing financial aid programs and created a bunch of new ones. In the U.S., these grants and loans were often named after the congressmen who sponsored them (e.g., Pell, Perkins, Stafford). That changed everything.

Suddenly, legions of high school graduates who could never have afforded a college education now had the chance to get a degree. It was a very good thing for students ... and a financial boon to the schools and banks who offered the most popular form of financial aid: the federally guaranteed loan. If the students defaulted on the loans, Uncle Sam was there to pick up the tab. Among the biggest winners in this new game were the colleges. More students meant more income. Now they could afford to build new facilities, hire more faculty, fund a football team and raise tuition.

Wait a minute. If they were getting more income through these new students and their loans, why would they raise their prices? In short, because they could. Back in the days when Mom and Pop paid for their kid’s education, colleges had to be very careful about setting prices: Set it too high and Mom and Pop sent Junior elsewhere. But when the money came from a government grant or a low-interest loan to be paid off at some date in the foggy future, the price didn’t matter as much. In short, the cost of education rose right along with the ability to afford it.

It’s no surprise that things worked out that way. The same thing is true with many big-ticket purchases. If people had to buy their $100,000 houses in cash, how many homeowners would we have? Car dealers certainly couldn’t charge $20,000 for that new car smell if the price of admission had to be paid in advance. As a general rule, when money is tight, prices stay low. When money is loose (read, easy to borrow), prices rise. The government financial aid programs loosen up money for education, which opens the door to many new customers ... and raises the price we all pay for admission.

You can see where this situation has led us. As college education became more affordable, it became more popular. More and more high school graduates wanted to join in all the scholarly fun ... which increased the demand for loans ... which in turn increased the number of loan programs, freeing up more money to cover the higher cost of education. (By the way, many of these government programs are also available to students of for-profit trade schools, which partly explains the boom in that industry and why you see all those ads on TV.)

Getting What You Pay For
A lot of good things have come in this age of Study Now, Pay Later. Many more people can now get a college education. And others who have their heart set on a prestigious school may not have to settle for something less. But there’s a price to pay too. It’s gotten extremely difficult to pay for college any other way. There aren’t enough of us stingy, price-sensitive, cash-only customers left to influence the marketplace. The school doesn’t care whose money pays the tuition — they just want to make sure it gets paid.

Who does pay the tuition? More than ever, the bill goes to Uncle Sam. The man we call Sam is really just you and me and every other taxpayer. Our money funds the government grants, subsidizes the low interest on federal loans, and pays back the lenders when deadbeat students skip town on their guaranteed loans.

Which brings up another economic principle: The greater the distance between customer and seller, the greater the difference between what’s ordered and what’s delivered. If I buy something directly from the seller, I can insist on decent service and the delivery of exactly what I ordered. I get what I pay for. But if you’re paying for me, I’m less picky because, after all, it’s not my money. And even if I were picky, I might not get what I ordered because the seller is trying to please you, the buyer, not me, the customer. When "the buyer" is a couple hundred million taxpayers who don’t have time to check up on all their purchases, the seller doesn’t have to lose sleep in the buyer-satisfaction department.

This principle is demonstrated daily in many government services that would be out of business if their income depended on their customers’ satisfaction. (Something to think about while you’re standing in line at the DMV.) It also comes to life in our university systems, which receive much of their money not from their student customers, but from distant taxpayers through government financial aid programs to students and research grants to professors. Hence, you get stuck with those professors who can’t teach and administrations that embrace agendas reflecting neither the values of their students nor of the taxpayers in general. You get what you pay for, and the less you pay out of your own pocket, the smaller your influence over what’s delivered.

As a consumer in the education market, your decisions affect not just your own education and finances, but the price and quality of higher education for all of us. And they influence the economy. A portion of our taxes pays for all this educational funding. As I get ready to pay the IRS over a third of my income from last year, I want to know that you’re getting the education I’m helping to pay for.

After this depressing view on the state of state-aided college education, you might think I’m about to tell you that school loans are awful and evil and not to be played with. But I’m not going to say that. In fact, I’m glad they’re available. When used wisely, they can open wide doors in your educational choices. They did in mine. But when everyone from the government to the admissions office to the bank down the street is shouting praises to this scheme, I feel it’s my sworn duty to heckle the performers. Questioning the system is a lonely occupation, but someone’s got to do it.

Investing in Your Future
Okay, I feel better. Now let’s look at the financial side of education loans and how they affect your future. A student loan is a form of investment debt: borrowing money to pay for something that is expected to increase in value. (As compared to consumer debt, where you borrow money to purchase something that depreciates, such as a car or vacation.) As such, a student loan makes good financial sense only if it passes the test of a wise investment debt. That means, first of all, that it will enable you to make back the principal (the original loan amount) plus the rental fee on that money (a.k.a. the interest).

In the past, you could pretty much count on that fact. A college education nearly always ensured that you could land a job paying far more than one requiring no degree. These fatter paychecks covered the principal and interest on the loan used to get you there. That’s still true in most cases, but there’s no guarantee. Plenty of college-educated job seekers wind up with jobs whose paychecks aren’t sufficient to justify the loan.

But even if the prospects are good on the other side of your graduation, there’s a second test to be applied to investment debt: opportunity cost. This is the value of an opportunity you miss out on when your money is tied up elsewhere. To figure opportunity cost, you have to make some comparisons. Let’s say you and I are classmates in similar financial circumstances: We need cash to cover our tuition. To make ends meet, I get a student loan and graduate within four years. Then I get a nice job and spend the next few years paying off my student loan. You, however, choose a different path: work part time, take a lighter course load, which means graduating a year later. You graduate debt free, get a job just like mine, and immediately start investing a portion of your paychecks.

Now fast forward a few years. My debt is now paid off, but I’ve got nothing saved up for the future. Your paycheck is smaller than mine because you started a year later, but with no loan payments to make, you’ve saved up a big stack of cash — enough for a down payment on a house (you must have made a killing in the stock market). Simply put, my opportunity cost is roughly equal to your down payment. Because that’s how much money I missed out on by choosing my investment strategy instead of yours. In this conveniently obvious example, you made the wiser decision, and will no doubt rub it in by inviting me to your new home. But with my slightly bigger paycheck, at least I’ll be able to bring a house-warming gift.

Predicting the future is an inexact science, so it’s pretty difficult to estimate opportunity cost for a student loan. But it’s worth considering, if only to remind you that there’s more to borrowing than interest rates.

Count the Real Cost
Sadly, not a lot of people will tell you that. Those who stand to benefit from your borrowing — the school, the bank, the army of people who work in the financial aid industry — gloss over these things in their race to get you signed up. Together, they’ve made student loans just too easy to get. Whereas once they were the exception, now they’re the rule. It used to be that you got one only if you really, really needed it. Nowadays, it seems everyone needs one, and if you think you don’t ... well, think again. Too many students who could make it through college without borrowing don’t even make the attempt. Why go through all the extra effort of a cash-fed education when you can get a low-interest loan, then pay it back after you graduate — when you’re making the big bucks?

The problem is, when those big bucks start pouring in, so too will the big bills. Most college students have lived their entire lives under a subsidy called "Parents" — a wonderful financial package that comes with meals, clothing, housing and a medical plan. The amount of the subsidy depends on your particular parental units, but in most cases the ride ends at your college graduation — or sooner if you don’t call them often enough. The switch from even a marginally subsidized economy to a completely self-sufficient one feels much like what happens when you’re in the shower and your kid brother flushes the toilet. Things get hot in a hurry. Don’t make it worse by spending those paychecks before you earn them. Unless you absolutely have to.

Consider your other options first. Lighten your course load and work part time. Check for a work study program at your school, which allows you to work one term and study the next. Sure, it takes longer to graduate this way, but a few years from now, you’ll care less about the year printed on your diploma and more about the one printed on the deed to your house.

There are more drastic alternatives. If attending your first-choice school is going to saddle you with debt for the next decade, rethink your choice. Attend community college as long as you can, then transfer to your favorite school. That worked for me. While my high school friends were burying themselves in debt at USC, UCLA and Stanford, I settled for my local junior college. I suppose that if I had joined them, I wouldn’t have been surrounded by as many "underachievers." Then again, I would have missed out on the best professors I ever had — instructors who had experience in the real world, who spent their time with students instead of on their latest book or research grant; professors who were as passionate about teaching as they were about the subject they taught. I met some of those types later when I transferred to the university (UC Irvine, by the way), but they were rarer. When it was over, I graduated with very little debt, yet with the same diploma, the same prospects — and an education as good as those who spent nearly twice as much.

Actually, it was better: I was among the few in my classes who were actually working real jobs during the school year. I was able to apply what I learned to what I was doing at work, and vice versa. And if a classroom-sequestered professor went off on a convincing yet fictional description of the way things worked in the "real" world, my real-world experiences often enabled me to spot the fiction. (Unfortunately, I had not yet developed the tact to point out this fact to the whole class in a gracious way.) When I finished school, my resume was as weighty as my diploma. The former still pays dividends and in the last decade, no one has asked about the latter.

Your educational goals and career plans may not allow you the choices I had, but if they do, and you’re really struggling to stay in school and out of debt, don’t let prestige or pride keep you from attaining your dreams. Regardless of your options, it pays to avoid student loans whenever possible. And if a student loan is unavoidable, borrow as little as you can get by on. Every dollar you borrow is a mortgage on your future. Go easy on it.

The discipline you practice now will pay off big in the very near future. You’ll have the opportunity to start your career debt free, or to attain that delicious state soon thereafter. Because God’s not done with you yet — He’s got bigger and better things planned — keep your financial calendar as clear as possible; be ready for His next big adventure.