Costs More Than Average Student Debt Burden
In a recent post on the Becker-Posner blog, Nobel laureate Gary Becker sheds some useful light on the controversy over growing student debt. As Becker explains, such loans overcome a market failure caused by the (legal) inability of students to pledge their human capital and thus future earnings to lenders as collateral. (Absent such collateral, private lenders would decline to lend or charge exorbitant rates.) Thus, he says, the availability of such loans provides access to a college education to many students who otherwise could not afford it.
At the same time. Becker also recognizes that student debt has risen significantly since the 1980s. Indeed, as others have reported, student loan debt has reached $1 trillion dollars, an amount equal to Americans credit card debt and auto loan debt. Becker attributes this rise to higher tuitio, viz. "[t]he proximate cause of the increase in student loans has been the sharp rise in tuition at both state and private colleges during this time period." Two thirds of American college students take out some debt, and the average debt of those who do is $23,000. That's less than the price of a Fiat-Chrysler Town and Country Minivan, pictured above, which has a manufacturer's suggested retail price of $29,995.
Unlike some pundits, however, Becker does not, like some on the right, chastise colleges and universities for high tuition or call for debt forgiveness like some on the left. Instead he points out that college education, including an education financed with debt, has, since the 1980s, increased in value faster than increases in tuition. (One might add that, despite these tuition increases, tuition and fees still pay only part of the cost of a college education; alumni, federal grants and, at public colleges, states, pay the rest. Moreover, published tuition and fees are only a sticker price. Many students receive discounts, including discounts of 100 percent in some cases.) "As a result," he says, "the rate of return on college education in the United States – benefits net of all costs- grew greatly during the past 30 years[,]" thereby explaining why a larger proportion of young Americans have been attending college in recent years despite tuition increases.
Becker acknowledges that these debts can burden students after they graduate. Still, he recognizes that the large returns from a college education make it relatively easy to repay them, given that college graduates earn on average $30,000 more annually than high school graduates. Indeed, as Becker points out, graduates could readily repay even $50,000 in debt in short order with the higher earnings they receive as a result of a college education.
Of course, and as Becker notes, many college graduates are currently finding it difficult to obtain employment of the sort that such graduates have traditionally obtained. Put another way, and as this blogger has explained in a related context, a strong macro-economy would alleviate many of the concerns about the economic sustainability of debt-financed higher education. For instance, if unemployment were to fall to the level experienced during most years of the George W. Bush Administration or the Clinton Administration, college students would gladly borrow $23,000 or more to attend college, knowing that a college degree would significantly enhance their earnings prospects. Unfortunately, the current economic recovery is very weak by historical standards, with no prospects for a strong recovery in sight.
While Becker does not expressly say so, some of his observations imply that concerns about a "student debt crisis" are overblown or misplaced. Capital markets and debt play an important role in a free society, allowing individuals with constrained liquity to make present investments that can pay dividends in the future, thereby benefiting individual investors and society at large. Comparisons to debts taken on for consumption, e.g., the purchase of automobiles, are therefore misplaced. Student loans exemplify this principle, allowing individuals of modest means to invest in human capital, thereby enhancing their own productivity, their own welfare and the welfare of society at large. Such investments exemplify the economic dynamism necessary to economic growth and the expansion of economic opportunity. However, until the Nation experiences a strong economic recovery, pundits on both sides of the aisle will likely continue to question the value of such investments, casting blame on a symptom of a much larger problem.
While Becker does not expressly say so, some of his observations imply that concerns about a "student debt crisis" are overblown or misplaced. Capital markets and debt play an important role in a free society, allowing individuals with constrained liquity to make present investments that can pay dividends in the future, thereby benefiting individual investors and society at large. Comparisons to debts taken on for consumption, e.g., the purchase of automobiles, are therefore misplaced. Student loans exemplify this principle, allowing individuals of modest means to invest in human capital, thereby enhancing their own productivity, their own welfare and the welfare of society at large. Such investments exemplify the economic dynamism necessary to economic growth and the expansion of economic opportunity. However, until the Nation experiences a strong economic recovery, pundits on both sides of the aisle will likely continue to question the value of such investments, casting blame on a symptom of a much larger problem.
