Education Loans

I would disagree with your comment that if your income increases it is a private benefit. Yes, it is a private benefit but it is also a public benefit. If the objective of public policy is to contribute to higher incomes it is also a public good. If you have a higher income because of your education presumably it is because you are more productive. But this means your employeer also benefits from your education — under normal conditons the benefits of higher productivity are shared between both. If because of higher income from the subsidied education you pay higher taxes the govt or taxpayer also benefits from the education subsidy. If higher education leads to higher income and higher consumption everyone that sells you something you would not have bought without the higher education benefits. Consequently, I would argue that the
benefits to society as a whole of public subsidies of education are massive.

Just thinking that since I give >40% of my income to taxes, if my college education causes me to make $20-$50K more per year, that would provide quite a bit of return back into the public coffers from which the subsidy came.

“Just thinking that since I give >40% of my income to taxes, if my college education causes me to make $20-$50K more per year, that would provide quite a bit of return back into the public coffers from which the subsidy came.”

Ouch. Now gov-subsidized student loans become a justification for high tax rates. Which finance increasing subsidies, which finance…what a racket!

I have a question.

Becker states, Put differently, lenders cannot take ownership of the human capital they finance since that means taking ownership of the individuals receiving the education, and no modern country allows people or institutions to own other individuals.

That’s odd. One of my favorite Economist Milton Friedman, in his book Capitalism and Freedom, argues for precisely that. Saying that student loan lenders should be allowed to take ownership in part of the salary of their customers, provided the customer accepts those terms. Am I missing something? Did something change since the 60’s and 70’s when Friedman wrote his book to now or might this just be a difference in opinion?

“Absent from this discussion has been the question of the effect of tuition subsidies on tuition itself. Tuition goes up in large increments …”

You beat me to it.

Subsidies benefit those college and university staff who collect them far more than anyone else. Just look at how much more they collect as subsidies rise.

Colleges and universities are for-profit institutions just like any other, despite the fact that they are tax-exempt so the profits are divvied up among stakeholders rather than shareholders.

Harvard has a >$20 billion endowment, and instead of using it to give all its students free tuition it charges then near $40,000 and runs at an operating profit that contributes to the endowment.

Does anyone suppose that it and other colleges are any less “taking” of subsidies from the government?

(further to the above, note that my proposition that “the alleviation of a public bad is a public good” is not rigorous, because there could be public bads that could be alleviated privately; I think I can defend it in most real-world cases though)

I wonder why there isn’t more competition in education. With the advent of the internet we now have things like “distance learning” and the MIT open course programs where classes are taught online at very low marginal cost. Where are the e-colleges that will compete with the existing college structure and exert some downward pressure on tuition costs. It seems that most of these types of programs I read about are of the disreputable sort (diploma mills). If the education market in its current form is suceptible to Baumol’s disease, then some entrepreneur should be able to make a fortune by opening a chain of McCollege franchises.

That education is publicly funded yet provides private benefits applies not just to tertiary but also to primary and secondary education. To my mind, the entire notion of education as a public good is misconceived.

Public provision of education is justified, but not because it is a public good. At least, not in the economic sense. Spencer writes that: “[Higher income due to education] is a private benefit but it is also a public benefit. If the objective of public policy is to contribute to higher incomes it is also a public good.” By this argument, every private good is a public good. We might as well say that food is a public good because society is better off when people are better nourished. Public goods must be non-excludable, like national defense or law and order. Education is excludable.

Rather, the reason to provide public education is the one Daryl Gorman points out: “subsidized education … counteracts classism – meaning it helps ensure that there is a route to wealth for the next generation other than being the lucky offspring of this generation’s wealthy.” Without public education, the children of well-to-do parents would do just fine, perhaps even better than at present, in the private education market. But children of poor or shiftless parents would not get an education and would see their earning power permanently reduced. Public education is a means of intergenerational redistribution, of equalizing the initial human capital endowment of the citizenry.

dsquared‘s claim is a variation of the same point: “The argument’s quite simple; there is a financing constraint which prevents many people from buying as much education as they would want if that constraint did not exist.” Whether this point applies to college education is debatable, but it surely applies to primary and secondary education, or it would in the absence of public education, since children are not considered legally capable of binding themselves into long-term credit arrangements. Moreover, the financing constraint would affect children differently: poor children would face it, richer children would not.

The weakness of dsquared‘s point is that 1) the market failure he assumes, namely that private markets could not enforce long-term debt contracts, is probably non-existent (I for one have borrowed a huge amount of money from private lenders for educational purposes) and 2) outside the market mechanism, we have no good way of knowing whether social investment in college education is paying off.

I do not find the claim that college education is an efficient investment in human capital for the purposes of raising long-term income plausible, either from the empirical evidence or from experience. One stylized fact figures against it: the rise of mass college education in the 1960s was followed, not by rising, but rather by a notable fall in productivity growth. In my experience, very little of what I learned in college has had much applicability to life in the real world, and I work at a think tank; for most of my friends, the usefulness would be much less.

I would interpret college differently. First, it’s a form of consumption. For a lot of people, college is one of the best times of their lives. Second, it’s a mark of class or rank, like medieval coats of arms: “Where did you go to college?” is a question that often arises early in a conversation with someone you’ve just met, and it’s good to be able to say “Yale” or at least to have graduated, rather than to say, “One year at…” or “Nowhere.” Another part of the class/rank aspect of college is that you make friends, and likely marry, with people as smart as you. Third, it is an investment in the capacity to enjoy. My Romantic literature class never put a dime in my pocket, directly or indirectly, but I can still read William Blake with pleasure. Perhaps more relevantly, I can participate in much more sophisticated and interesting conversations than I could have without college.

Fourth, for many people it’s just a waste and a mistakeA lot of people I knew in college were confused and directionless. Around senior year an anxiety set in, a fear, terror even, of the Real World. Afterwards, they are deep in debt. The fun’s over, and yet they didn’t even have any fun. Related to this (fifth) it’s a postponement of adulthood. It’s sometimes very strange to note the basic life skills, such as cooking and paying bills, that college students don’t have. On the other hand (sixth) it may have a high moral motivation, a quest for truth. That’s what it was for me, and I was annoyed that so many people were just there to drink beer or make more money. Seventh, the increase in college education is partly a process of substitution for the failure of primary and secondary education to improve. While almost every economic sector is becoming more productive, the public education system is stagnant or deteriorating because it is a government-run monopoly. People go to college to learn what they could have learned before if the public education system were half-decent.

So while the financing-constraint argument makes sense, I disagree with it. I think it would be better if non-trust-fund babies had to work and save for a couple of years, and build up a credit rating, before they could go to college. If we took Mr. Econotarian’s advice to “apply the economic model of colleges (mix of private/public, price discriminatory mix of tuition and government funding) to all public schooling,” better primary and secondary education would probably reduce the need for mass tertiary education anyway. Those who did make it to college after a couple years of work would be more mature, more serious, less angst-ridden, with a valuable exposure to the Real World, and with more of a notion of what they wanted to do.

Meanwhile, there’s another reason to publicly subsidize universities that has nothing to do with the benefit to students: knowledge creation. This is the reason that Jonathan Brown’s comment– “Is there any doubt that Berkeley, Stanford, USC, Calltech and UCLA and UCSD contributed to California’s positionn in computers and biotechnology?”– is cogent. So while we should probably stop subsidizing college education, we might want to look for other ways to continue, or even increase, subsidizing the universities’ knowledge creation role. In the past, the British Crown would regularly shower rewards and money on favored inventors, writers, and so on. Maybe we should revive this function today: governors, legislatures, presidents and so on should create large cash awards for anyone whose work proved pleasing, or valuable: bloggers, book authors, scientists, etc. The Nobel Prize model of funding knowledge creation. If publicly funded scholars were more directly answerable to the public, it would be more difficult for academia to turn into a museum of discredited ideologies.

AK: Only some nebulous “better citizenship” benefits are public.

Some percentage of my quality of life depends on how RATIONAL the government’s policies are. If the government banned the trade of all goods and services except for heroin and sex, almost everyone’s q of l would be much worse than it is today. If the government decided to tax 100% of people’s incomes or ban usury, I’d be bummed.

Some of my q of l depends on whether my government is BIASED against my race, sex, sexual orientation, religion, physical disability, mental disability, etc. Is “my kind” discriminated against economically, socially, politically, physically, etc?

For example, the quality of life for an African-American or a female in the US varies more as a function of time than the q of l for white men.

Since this is a democracy and the laws affect me, my utility depends on the quality of other people’s decisions, the accuracy of their beliefs, etc.

My mind is truly boggled that you view the benefits to self of others being educated as “nebulous.”

Are there estimates of the benefits of college that attempt to distinguish private benefits from public benefits?

The G.I. Bill was the first introduction in Government subsidy, and without the trained labor produced, the economy could not have expanded at the rate it did in the 1950s-60s. Libertarians have a habit of describing increasing Seniors/Worker over the coming decades, and then suggest We leave such Labor uneducated and untrained. lgl

By the way, reading back my original comment, I pointed out that there was a choice of options between subsidising education and “allowing debt peonage”. I’ve never argued that the law couldn’t be changed so as to make it possible to have general use of privately provided loans for education; only that liberal democracies are probably better places to live in because of the legal arrangements which make this market impractical.

dsquared: Thanks for the response. It made me consider why the student loan market would be different from consumer loans for the purchase of things other than hard assets, an example being the credit card market. Credit card issuers are willing to lend money for the purchase of assets which cannot be repossessed, generally speaking. But they also charge high rates of interest, often in excess of 15%. I can’t see students being able or willing to pay those sort of annual rates. Hope this translation into non-specialist terms is correct and helpful.

Besides reducing “classism”, public subsidies of education also give a larger number of people a stake in the system. This means that people are more willing to behave as good citizens, serve on juries, and serve in “service” type professions (such as the military). If the system were designed so only the few brightest or born wealthy could afford an education, then the rest would be less apt to support the system.

This is probably why it is the poor conservative areas in red states, not the educated liberal suburbs that generate the most ridiculous jury verdicts.

Furthermore, the argument that the less wealthy should work a few years before going to college, flies in the face of biological reality. Delaying the onset of a career this way makes it more difficult to raise a family. Furthermore, the claims of “private” financing ignore that much of it is through non-profit institutions (i.e. the schools) who don’t really function as “market” institutions or eventually gets a government guarantee.

Finally a college education often involves factors that are not provided by websites — mentoring, opportunities to do research, and discussions with faculty and other students. The claim that the internet can completely substitute for this has yet to be proven.