Student Loans Are A Drag On The Economy

Why are student loans so high, the market so ridden with defaults, and the price of education so high? I think (well, I'm a little more certain than that) the answer is basic economics. Here's my take:

You (America) have a government that offers discount loans - i.e. loans with poor prospects/low interests rates - in the hope of driving a higher allocation of capital to education than would occur in a pure private lending market (i.e. the government takes risks with the taxpayers' money that private lendors would not take with their own.) (Also, might be worth noting the psychological effect of borrowing from the government - I think people tend to feel safer doing this than borrowing from an obviously competitive private firm. If you read the article, the casual attitude of student debtors to defaulting on their loans shows this - the government has no teeth. The private firm goes bankrupt if it doesn't get a return on investment. The government just devalues the dollar if it gets in a tight spot.)

The justification here would be that the positive externalities of education are high, and an equilibrium capital allocation following purely upfront costs would be suboptimal.

However because humans are humans, the availability of below-market price loans means that people are willing to spend more on education than they would if they were forced to pay a market price. And again, because humans and humans, colleges, which in America have little government oversight as to pricing, raise their pricing. Why? Because people will still pay it. For whatever reason, colleges are able to bank on their prestige and identity, on the promise of access to important social circles, and so pure pressure for price is diluted.

Forget all the shit about increasing salaries for professors, or construction frenzies. Basically the final equilibrium price for a college is the price that they can get away with charging. And this price happens to be far higher than it would be in a purely private education market. Because students can gamble with taxpayers' money. And the universities can sense that there's cash on the ground - and if they don't rush for it, another will just take it. This is why your institutions glorify the most profligate administrators - the ones with the most grandiose investment schemes, the ones who can create an appearance of money well spent - because the best administrators help draw in as much cash as possible.

So the result is that what started as an incentive to encourage education actually creates a toxic market with widespread debt defaults. Instead of more education, you just wind up enriching university administrators (definitely) and professors (maybe) and creating way more university facilities than private demand would have ever warranted. So congratulations: as a country, you've just spent XX billion building a shitload of luxurious dubiously-useful education infrastructure. Because as a country, you shoulder the cost - through your government's wasteful allocation of capital.

Congratulations. The whole country just gave a shitload of money for nothing to university administrators and contractors. You wanted to push capital into educations, but instead you got rich universities. Well done eh?

See, this is why America's model of mixed-capitalism is so poisonous. If you want to give cheap loans for education, you need to control prices at the institutions where they're valid. Though even that doesn't work - you'll find state-controlled institutions in countries that practice this still constantly pushing for the maximum tuition increase every single year, using every excuse they can.

The better solution is probably no public loans or grants whatsoever. Though that doesn't address the positive externality of education (which I do believe in.)

Seriously.

> When I asked my stepson, who graduated last winter, if he knew of kids using their student loans for non-school-related purchases

Might as well ask your stepson if he knew anyone doing drugs instead of going to class. It's a drug pandemic! Do you know anyone who has cheated on a test? It's a cheating pandemic! Do you know anyone that sleeps around? Promiscuousness pandemic!

People love to gossip, and they love telling stories about outliers. Asking directly for stories that stand out is about the worst kind of "informal" research you can get.

You have some good points, but you also neglect the massive spending cuts on education that have happened throughout the country. While there are many public schools that do buy into this notion of trying to compete on prestige with the well known private schools (and proceed to try to buy their way into the respected club), public school tuition increases in the last decade are very much tied to funding cuts.

Mmmhmm. Several problems:

1) Is that the most money they could have made with these loans? Are they getting a market return on investment? If not, then they're wasting the country's money. It doesn't matter if it's still "profitable." A lot of shit investments still make money - just less than they could have if they were better invested.

2) Are the loans profitable at market rates? Then why have students taken on seemingly such high debtloads? Ah, because everyone knows that with governments, unlike private lendors, you get this:

>"I think they should break even, but it's just wrong that they are making money on it."

>"This is obscene. The government should not be making $66 billion in profits off the backs of our students,"

>Warren and eight other U.S. senators committed to wring government profits out of student loans and address the $1.2 trillion in outstanding student loan debt they say is crushing families and putting a strain on the economy.

>"It's time to end the practice of profiting from young people who are trying to get an education and refinance existing loans."

Great, look forward to any at-market performance of your loans being shredded through political pressure. Another way of saying that your government just threw away your money.

Wow, talk about moving the goalposts.