Paul L. Caron

Friday, August 10, 2012

The Coming Student Loan (and Law School) Debacle

The Legal Whiteboard:  Federal Funding of Higher Education -- A Bubble that is Going to Burst, by William D. Henderson (Indiana):

Folks, I am an unapologetic New Deal Democrat. But the current "system" of federal higher education financing is near perfect insanity. We set tuition and, no questions asked, the federal government writes us checks in exact proportion to students' willingness to sign loan papers. For young people who have never worked, it is all like monopoly money. 

The only way the math works is if the real earnings go up en masse for virtually all college and professional school graduates. In a rapidly globalizing world in which our students are competing against Chinese and Indian professionals, the assumption of mass rising real incomes is implausible.  ...

Right now we -- higher ed and the nation as a whole -- are maintaining the illusion of prosperity through debt financing heaped on naive young people. This is immoral in the extreme. Moreover, in the long run, it is economic and political ruination.

The only long term solution is cost containment imposed on higher ed by reforming the terms of federal financing. The financing has to incentivize educational productivity -- i.e., fewer tuition dollars expended to obtain better skills and learning as measured by marketplace earnings and innovation. No more $100,000 checks from the federal government for sorting students by standardized test scores. Our graduates will actually have to think, collaborate, communicate and problem-solve at a very high level. How many of my fellow law professors grasp the depth of our problems? Not enough.

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"The only way the math works is if the real earnings go up en masse for virtually all college and professional school graduates."

Actually, no, this is not correct.

The net interest margins on student loans are quite high, default rates are low, and recovery rates are very high.

The government can absorb large defaults (or non-repayments) and still turn a profit on those who do repay.

The government also profits from increased tax revenues, since the educated earn more and are unemployed less. Roughly 40 percent of the wage premium ends up going to governments.

Schools do a lot more than sort people by SAT scores. The countries with the highest educational attainment (i.e., percent of pop. with a bachelor's degree) have the highest PPP GDP per capita.

Same goes for the U.S. states--the more educated the population, the richer the state.

It's called "human capital" because it is an investment that pays off very well.

If you're interested in facts and data instead of alarmism and hype, read "Risk Based Student Loans" on SSRN.

Posted by: Let's think this over | Aug 10, 2012 7:48:37 PM

If you look at the data, real incomes for those with 4 year bachelors degrees or higher have increased for the last 30 years.

Wages for everyone else have declined.

So the value of a degree--the wage premium--has increased.

Those with more education are also more likely to be employed.

Education is the solution to the problem of globalization. It's the uneducated who get outsourced.

Henderson is just plain flat out wrong.

Posted by: Anon | Aug 10, 2012 7:33:01 PM

Surprise! A "New Deal Democrat" admits that the federal government shouldn't encourage kids to borrow more than they can afford to pay back. It's nice that the lessons of the sub-prime housing loans are beginning to sink in to our intellectual elite.

Posted by: Woody | Aug 10, 2012 6:26:30 PM