Thursday, June 18, 2015

Student Loans Are Better Than the Alternative (Michael Simkovic)

A number of recent analyses purporting to show the negative effects of student loans compare group A, which has student loans and a bachelor’s degree to group B, which has the same level of education but no student loans (see here for an example).  Not surprisingly, the studies find that the folks who have a college degree but no student loans are doing better on a variety of measures.  Unfortunately, many of the studies improperly conclude that student loans are causing the bad outcomes.

The problem is that the likely alternative to student loans and a college degree for people who need to borrow to afford college is not a free college degree.  The likely alternative is no college degree and no student loans—i.e., lower earnings, and eventually, a lower net worth. 

Among those who will eventually graduate from college, those who will graduate with no student loans are very different from those who will graduate with student loans.  These differences are present before they even set foot on campus.

Why do some people graduate from college with no debt?

1)   Their parents are rich and pay for college—and most likely provide additional financial support after college 

2)   Their parents are not rich but are extremely devoted to their children’s education and find a way to pay for college—and most likely provide additional support after college

3)   The students are exceptionally talented academically, athletically, or artistically and obtain large scholarships

4)   The students are unusually hard working and market savvy and find a way to earn a lot of money while in college

5)   The students live in a wealthy city or state that generously funds public services such as higher education, and probably also funds other public investments (Note that most public colleges are not generously funded and have lower completion rates than resource-rich private colleges).

These “student loan studies” are not studies of the effects of student loans.  They are studies that find that people who are more talented, harder working, come from wealthier and more supportive families, and live in richer communities with more enlightened governments are more successful.  This is neither surprising, nor is it relevant to student loan policy.

Eliminating student loans won’t magically give everyone rich, devoted parents, boost students’ intellectual, athletic, or artistic abilities, or turn the least developed and most mismanaged parts of the U.S. into centers of economic activity and paragons of efficient public administration. 

Criticisms of student loans seem to be motivated by an idealized conception of public, taxpayer funded higher education.  In practice, these systems are too often characterized by weak, underfunded institutions, misguided political interference (for an example of left-wing interference, see here; for right wing interference, see here, here, and here) and micro-management (here and here) by political leaders , price controls (here and here, and here), disruptive budgetary uncertainty (herehere and here), and resulting shortages (here, here, herehere, and here). 

This does not mean that we should abandon the goal of a well-funded public higher education system where academic freedom is protected, but it would be imprudent to put all of our eggs in a single basket, particularly one that political leaders frequently raid to close budget gaps.

Scaling back student loans will undermine investment in higher education, to our collective detriment.  Without access to credit, students from modest backgrounds will too often be trapped in the under-resourced institutions that our tax-adverse political systems is willing to support (or denied access altogether because of enrollment caps) instead of at least having the option to pursue the higher quality education that is ultimately in their best interests.

https://leiterlawschool.typepad.com/leiter/2015/06/student-loans-are-better-than-the-alternative-michael-simkovic.html

Guest Blogger: Michael Simkovic, Of Academic Interest, Science, Student Advice, Weblogs | Permalink