What We're Buying With $1 Trillion in Student Loans
College is expensive, and getting more so every year. Since most families don’t have tens of thousands of dollars lying around, the government has responded with ever-more-generous student loan programs.
First there were the loans themselves, with interest subsidized while you’re in school. Then, when that proved inadequate, we instituted income-based repayment, allowing students to cap their payments at a percentage of their discretionary income (stretching out the loan, and getting forgiveness on any balance remaining after 25 years). Then, since that wasn’t quite enough, we made the terms more generous. Now the Obama administration has announced that it’s making 5 million more people eligible for the program.
You know what they say about doing the same thing over and over again and expecting a different result. This is certifiable. College is too expensive, so have the government make it easier to finance -- then keep shifting more and more of the cost burden to the government, without doing anything about the underlying cost inflation that is making it necessary for government to get into the finance business.
Obviously, this can’t go on indefinitely. The income-based-repayment programs are relatively new, so the government hasn’t yet been handed the bill for the loan forgiveness that will be necessary as we give people payment rates that are often less than the interest on the loan. But when the government gets that bill, people are going to notice that this is a costly business.
Over decades, the government has restructured the educational system to make it look more like the health-care system, with the costs paid by third parties while the service is consumed by individuals who have no incentive to think about price. The effects are predictable for both.
There is actually some economic logic to encouraging people to borrow money for school. Education is an investment in human capital, and expensive capital goods are often financed. Doing so makes everyone better off: The lender gets a tidy return, and because the borrowers increase their ability to make money, they can make their interest payments and still be richer than they would have been if they’d painstakingly saved up the money for 10 or 20 years before making the investment.
But this logic gets shakier when you look at our nation’s system of education. If I invest in an advanced piece of industrial equipment to make, say, delicious fried apple pies, I am actually more productive than I would be if I tried to make them with a pot on the stove. This surplus generates the additional income with which to repay the loan. Along the way, the whole economy gets a little bit more productive -- a lot more productive, when you repeat this experience millions of times. That is essentially the history of the last 200 years.
Does college actually make people much more economically productive? Yes, yes, I know: People who go to college earn substantially more than people who don’t, and that earnings premium has been increasing in recent decades. But what, exactly, do they learn in college that makes them so much more productive? In certain technical professions, the answer is obvious; engineers and nurses do need to master the rudiments of their trade before they are unleashed on an unsuspecting public.
But that doesn’t describe the whole higher educational system. It doesn’t even seem to describe the majority of college degrees. Administrators defending the value of degrees in “business” or liberal arts rely on nebulous claims that they are teaching students “how to think.” However, they provide little objective evidence that these programs impart thinking skills worth tens of thousands of dollars.
There’s at least some evidence that a lot of the benefit of a college degree comes not from what you learn in college, but from signaling to employers that you are the kind of conscientious, hardworking student who can get into college and stick with it long enough to get a degree. In other words, much of what we do in school is not learn anything in particular, but obtain a credential that certifies us as good potential employees.
As an individual, it’s still perfectly rational to borrow money to invest in that credential, considering the sizeable income bonuses it confers. But public policy has to look at the system, not just what might benefit a particular individual. And at a system level, helping people borrow money to obtain a credential is crazy. A credential doesn’t increase anyone’s productivity; it just determines the distribution of better-paying jobs. The net economic benefit is zero.
Now, ideally a degree is not just a credential, so the productivity benefits of a diploma are probably greater than zero. But if we could see that much of the economic benefit of college is the credential, rather than the education, would we still pour vast sums of money into higher education?
The payoff from college is not just economic, of course. Regardless of whether the experience or the diploma makes you more productive or raises your income, you ideally left college a better citizen, leading a richer mental life. But let's get back to that public policy question. If someone proposed a program to help people be better citizens leading richer mental lives, you probably wouldn’t be prepared to spend billions of dollars on it, nor would you encourage individuals to take on crippling debt to pay for it.
The federal government now has $1 trillion worth of student loans in its portfolio, a substantial portion of which will be forgiven entirely or in part. But almost no one even dares to ask what we’re getting for all this money. The economic and social benefits of education are a political given, as axiomatic as mother-love or the speed of light. Periodically, people complain about the cost, and ask whether we’re getting value for our money -- but how can we figure out the answer to that when we’re not even clear on what it is we’re supposed to be getting?
It’s hardly surprising, then, that the only policy we’ve been able to come up with is bigger subsidies. Politicians don’t know much about making people richer, smarter or better citizens. But they’re pretty good at writing checks.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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