Malo periculosam, libertatem quam quietam servitutem.



May 2012

Everyone is Wrong on Student Loans

Written by , Posted in Big Government, Education, Free Markets

In an otherwise decent speech where he called out the Democrats’ political gamesmanship, Speaker Boehner said that, “Nobody wants to see student loan interest rates go up.” It’s certainly true that the entire political class is united on continuing to subsidize borrowing for higher education, but last time I checked there are more people in existence than just politicians. I, for one, want to see student loan interest rates go up.

I have nothing against student loans, the students who borrow them, or the general idea of borrowing money to receive an education that is expected to provide greater future value than the costs. But the reality is that many today are borrowing more than they can afford and which isn’t justified by the value added.

The federal government is the biggest supplier of student loans, accounting for 90% of all borrowing in the 2010-2011 academic year. Because they are heavily subsidized, student loan interest rates are lower than would otherwise be offered by the market, which means students are taking out more and bigger loans than they otherwise would. This is the intended effect of the policy, but is it a good one?

One result has been skyrocketing tuition costs, as colleges simply raise tuition rates to capture any increases in government financial aid. As the below chart from Dr. Mark J. Perry shows, college tuition growth has considerably outpaced medical care and home prices over the last 30 years.

While the costs of obtaining a degree have ballooned, their value has plummeted. As degrees become increasingly common, their usefulness in signaling diminishes. Degree-holders just aren’t as special anymore, and having a degree no longer conveys the same kind of information to potential employers as it used to.

Meanwhile, the actual educational benefit of obtaining a degree are also decreasing. Colleges are increasingly failing to teach the most basic knowledge and skills, opting instead for obscure courses focusing on identity politics and which have little to no practical value in the real world.

All the trends point toward a massive higher-ed bubble, and with an ever growing number not paying off their loans it’s likely to blow up in taxpayers’ faces.

What exactly the necessary steps are to reverse these trends, I do not know. Part of it is political, and involves removing federal distortions from the lending market. But part of it is cultural. Many see college attendance not as a time to take in as much knowledge as possible, but a rite of social passage that requires doing in excess all manner of social activities. It would be a good start if society – whether it be parents, teachers, politicians or popular culture – stops mindlessly repeating the trope that everyone must go to college. Universities were not designed for everyone, and not everyone will benefit meaningfully from the experience. Some would be better off in trade school, others in the work force gaining an extra 4 years of experience on their peers, while some are simply ready to strike out on their own. But whatever it takes to resolve the issue, this is a major problem that is only going to become increasingly salient for both society and the political class.