Last year, total student debt in the United States passed the $1.5 trillion mark. Even after subtracting loans that are paid down, the total has been growing at around $80 billion per year.
Relative to the economy, outstanding student loan debt may have peaked last year, but the amount in question is alarming. Around 11 percent of student debt is either delinquent or in default, which is more than four times the delinquency rates for credit cards and residential mortgages.
A student who is unencumbered by the need to repay a college loan faces little cost when choosing to major in something with little to no future value.
Student debt has become so large that politicians on both sides of the aisle are noticing. Bernie Sanders and Elizabeth Warren have both pushed for legislation to make public colleges “free.” The list of politicians joining them will doubtlessly grow, as more than 20 candidates are presently pursuing the Democratic nomination for the presidency. There is even movement on the Republican side, with Sen. Lamar Alexander pushing for legislation that would require colleges to prove whether their graduates are paying off their loans.
The Unique Nature of Student Loans
Unlike in the housing market, where each mortgage loan is backed by a physical house that can be sold to make partial restitution for a debt, there is often no corresponding asset backing a student’s loan. When a graduate belatedly discovers that a college degree in Early Childhood Education commands less income in the job market than does a high school diploma, there is no asset the graduate can sell off to recoup any portion of the wasted tuition. And therein lies the problem with making college “free.”
The fact that a student must repay a college loan gives him tremendous incentive to at least consider what jobs he could obtain with the college education he must pay for after graduation. A student who is unencumbered by the need to repay a college loan faces little cost when choosing to major in something with little to no future value. Colleges and universities will be under even less pressure to demonstrate what job prospects students might face after choosing various college majors. We would, in short, end up with far more students pursuing, and far more faculty peddling, degrees that have no market value.
There’s no reason to subsidize some people’s preferences at the expense of others.
Whether taking on a student loan is a good idea depends in large part on how much the education increases the student’s value in the labor market. It’s well worth taking out tens of thousands of dollars in loans to pay for a degree that increases a student’s expected lifetime earnings by millions of dollars. But taking out tens of thousands in loans to pay for a degree that increases a student’s expected lifetime earnings by the same tens of thousands or less is, financially, a terrible investment. Conscientious students do their due diligence before enrolling precisely because of the costs involved.
Of course, a college education offers more than mere monetary value. But everything beyond the monetary value accrues specifically and only to the person holding the degree. When discussing whether society should subsidize a person’s education, what matters is not the value of the education to the individual but the value of that education to society. And the best measure we have of the value to society of a person’s education is what society is willing to pay for the work that education enables the student to do.
Proponents of college subsidies counter that more educated people make society better in ways beyond their jobs, but there is no compelling evidence that this is objectively true. Crime rates do tend to be lower among more educated populations, but that’s because more educated people have higher incomes, and people with higher incomes commit fewer crimes.
It may be the case that proponents of college subsidies prefer to be surrounded by educated people, but that’s a subjective preference. Plenty of people prefer otherwise. And there’s no reason to subsidize some people’s preferences at the expense of others. Those who like being surrounded by educated people are always free to donate to the college of their choice or move to more well-educated enclaves.
A Return on Investment?
Payscale.com surveys reveal the undergraduate degrees that return the most and least in terms of career pay. In comparison to a high school diploma, many college majors begin to look like very poor investments.Of the more than 400 college majors appearing in their survey, a 45-year career can yield anywhere from almost $7 million (adjusted for inflation) for students who major in Petroleum Engineering to around $1.4 million for those who major in Metalsmithing. At first glance, a college degree appears well worth its cost.
But this ignores the alternative. The average high school graduate earns half what the average college graduate earns and faces an unemployment rate that is nearly twice that of the average college graduate. But the average high school graduate starts a career four years sooner and doesn’t incur the average $88,000 cost of a four-year degree.
Adjusted for inflation, the average high school graduate earns more than $2 million over the course of a 49-year career. In comparison to a high school diploma, many college majors begin to look like very poor investments. From a financial perspective, majors in photojournalism, musical theater, elementary education, voice, and piano performance actually leave students up to $500,000 worse off than if they hadn’t gone to college at all. From a financial perspective, those majors actually have negative value.
Meanwhile, the career-long payoff from a plumber’s or electrician’s certification exceeds the career-long payoffs of many college majors, including elementary education, middle school education, graphic arts, interior design, and photojournalism.
Interestingly, we’ve been here before. We are in the midst of a college loan bubble for almost all of the same reasons that, a decade ago, we found ourselves in the midst of a housing loan bubble. As bankers were partly to blame for the housing bubble, college presidents are partly to blame for the higher education version. But the lion’s share of the blame falls on politicians once again.
What Is to Blame?
In both bubbles, the government interfered in markets in two critical ways. First, the government stepped in as a lender. Second, it shielded private lenders from the consequences of making bad loans.
Some decades before the housing bubble burst, Congress established Fannie Mae and Freddie Mac and charged them with buying up mortgages from banks in order to provide those banks with more money that they could then lend out for more mortgages. Fannie Mae and Freddie Mac are corporations, but they were founded by Congress, the US government was the majority shareholder, and they were implicitly backed by taxpayers. It was believed that if Fannie Mae or Freddie Mac went bankrupt, Congress would use taxpayer money to bail them out. This implicit guarantee took the heat off of Fannie Mae and Freddie Mac, allowing them to lend to low-income and risky borrowers to whom they would not have otherwise issued loans.
College admissions offices are less concerned about whether students can succeed because they are not on the hook for loans that can’t be repaid.
Repeating this error, in 2008, the federal government directed the Department of Education to act in the college loan market just as Fannie Mae and Freddie Mac had acted in the housing loan market. The Department of Education guarantees student loans, effectively forcing taxpayers to guarantee those student loans.
With Fannie Mae and Freddie Mac purchasing housing loans, banks didn’t need to be concerned about lending to risky borrowers because the banks’ money wouldn’t be at risk. In purchasing mortgages from the banks, Fannie Mae and Freddie Mac took on the lending risk—and then passed it right along to the taxpayers.
Similarly, in the college loan market, college admissions offices are less concerned about whether students can succeed, either in college or after college, because the colleges, like the banks, are not on the hook for loans that can’t be repaid.
A college will happily admit any student who wants to study photojournalism despite the fact that the market value of that major is less than the market value of a high school diploma. Why? Because the college incurs no financial penalty if the student is unable to repay his loans. If the student defaults, it’s the taxpayer, not the college, who is left holding the bag. Caveat emptor, buyer beware, is always good advice. But with student loans, it is already hard to tell who the buyer actually is.
There Ain't No Such Thing as a Free Education
“Free” college will complicate that further. Politicians see the answer to the problem caused by government meddling in markets as more meddling in those same markets.Making college “free” will simply double-down on the very problem we already face. With “free” college, not only will colleges not have to care whether students can repay their loans, but the students themselves will also not have to care. Meanwhile, taxpayers will be on the hook for the numerous imprudent decisions by both colleges and students. It will bring about the worst of all possible worlds.
It should come as little surprise that politicians see the answer to the problem caused by government meddling in functional markets as more meddling in those same markets. What they hope is that no one will put the pieces together well enough to level the finger of blame right where it has always belonged.
If the current debate is any indication, they have succeeded in this beyond their wildest dreams. After all, no one is debating whether the government should get out of the higher education business completely. They are debating whether government should make college “free.”