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.

  • Norman Rogers

    In my father's day (I love that phrase!) most formal (and free) education stopped at eighth grade. If your parents were sufficiently flush (and you didn't have to join the workforce at age fourteen), you got to attend high school. Very, very few went on to college (my dad went for a year — then his dad died and my father became the breadwinner for his mom and younger siblings).

    But, a "good eighth grade education" prepared you to go out into the world and make your way. You had good reading/writing/arithmetic skills — including basic algebra and geometry, a knowledge of history and civics, proper grammar, and an understanding that you needed to be respectful to others (and most importantly — to your bosses).

    Nowadays at least a majority of people who attended college don't even have that "good eighth grade education".

    How did we get here? Lots of ways.

    1. A college degree became a certificate of intelligence. The Supreme Court's 1971 Griggs v. Duke Power decision made it risky for employers to give written tests to applicants. If the test has a "disparate impact" on blacks, or other legally protected groups, the employer must demonstrate that the need for the test rises to the stringent level of a "business necessity." It thus became easier and less risky to simply make the degree a prerequisite for employment.

    2. The inmates have taken over the asylums. The "educrats" took over and foisted their wishful theories on students. Never mind what worked in the past. Schools became laboratories — but without any rigor or examination of results.

    3. Unions worked with politicians to reduce (or defer) youth participation in the workforce. You can no longer get a full time job at age fourteen — so you might as well stay in school.

    4. Unlimited financing of college costs — and debt bombs to hapless teenages — and the need to have that degree to get more desirable jobs kicked the can down the road (so to speak). Has youth ever known their mortality? Why worry about tomorrow, surely the loans will be easy to pay off when you're in the workforce, right?

    The reckoning isn't coming — it's already here. Something like half of all recent college graduates are un or under employed. It's only gonna get worse.

    • Brian Garst

      Very good points. Thanks for the insights.

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  • Alan

    The article – and Norman – are spot on. I have a BA (Journalism) and MBA and do financial aid for a technical college.

    First, not only have I never held a job that required a degree, I've never held a job that required a high school diploma. The last class I had in school that has everyday benefit was probably ninth grade civics. There are only four worthwhile college majors: Engineering, Accounting, Health Care, Computer Science. Most everything else are boondoggles to subsidize the expenses of the technical fields' lab equipment.

    Second, the college I work for now has almost doubled tuition in the seven years I've been there. Why? Because we can. Kids will sign the paperwork (no credit check of course) as long as the government money is there. Most of our students are working adults, low-income minorities and single mothers. Only a fraction actually graduate and obtain suitable employment.

    Third, I paid off my BA loans in six years, but will spend the rest of my life paying off my MBA loans. Because I can. 25-year option, 3.5% fixed, no questions asked. I used to enjoy what I do but I see now the whole thing is a sham.

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