Academia: Against Subsidizing Student Loans

Stephen Kershnar
A College Education is a Good Investment
Dunkirk-Fredonia Observer
April 29, 2012

As usual, Republicans and Democrats are fighting over welfare, this time it’s subsidized student loans. Subsidized student loans are scheduled to rise in July from 3.4% to 6.8%. As The New York Times points out, even the higher rate (6.8%) is lower than the rate on most private student loans. The Republicans propose paying the $5.9 billion in subsidies, which covers both federally guaranteed loans from banks and government loans, through spending cuts; the Democrats propose paying for it by raising taxes. No one is pointing out that student loans are such a wise investment that the government should stop subsidizing it altogether.

There have been horror stories regarding recent college graduates. Manuel Valdes et al. writing for the Associated Press reports that roughly 54% of Bachelor’s degree-holders under the age of 25 are jobless or underemployed (employed at a job that does not require a college degree). College graduates who majored in zoology, anthropology, philosophy, art history, and humanities are among the least likely to find jobs appropriate to their education level. Those who majored in nursing, teaching, accounting, or computer science are the most likely to do so.

Still, it’s worth remembering that the recent college graduates are a relatively small amount of people (1.5 million out of the more than 300 million in the U.S.). Also, the loans are not that high and plenty of graduates do not have any. According to The New York Times and Wall Street Journal, the average 2010 college graduate who had student loans owed roughly $25,000 and roughly 45% of graduates had no debt (the latter is a 2009-2010 figure).

Even with these horror stories, a college education is an incredibly good investment. Consider 2011 study by Michael Greenstone and Adam Looney of the Brookings Institute. On average, the total cost of a four-year college degree (private and public) is $102,000. This cost consists of roughly $48,000 in out-of-pocket expenses and $54,000 in lost wages. On average, four-year college graduates (college graduate) earn roughly $570,000 more than people with only a high school diploma (high school graduates), an excellent return on a $102,000 investment.

According to Greenstone and Looney, the rate of return is more than double the average return on stocks over the last 60 years and multiple times the rate of return on investments in corporate bonds, gold, long-term government bonds, or housing over this same period.

At age 22, the average college graduate earns 70% more than the average high school graduate. In 2010 at age 50, the former made $47,000 more per year. At the peak of her earning power, a high school graduate makes about what a college graduate makes after one year out of school. College graduates also earn much more than those with only an Associate’s Degree (roughly $400,000 more over a lifetime). In March of 2012, college graduates had an unemployment rate roughly half of high school graduates (4.2% versus 8%). College graduates are also far more likely to be working than high school graduates (73% versus 54% last month). College also has many long-term non-financial benefits.

Economists Philip Oreopoulos and Kjell Salvanes found that college graduates are healthier, live longer, and have higher job satisfaction than high school graduates. They found the former make better decisions about marriage and parenting. Also, on some widely held philosophical theories, knowledge alone makes people’s lives go better.

Given that the rate of return on investing in college is much better than other investments (for example, stocks, bonds, housing, and gold over the past 60 years), it is hard to see why the government should subsidize it. After all, the investment typically pays for itself many times over.

One reason often given is that education has a positive externality. That is, people other than the college graduate and the college that educated him benefit from his education. Other people might benefit because the college graduate creates more wealth, has better health, is a more informed voter, or pays more taxes. Still, without a reasonable estimate of the amount of the positive externality, it is hard to know whether it warrants a subsidy and, if so, how much.

What’s more, the subsidy has a bunch of wasteful effects. It encourages many people to go to college who shouldn’t because they can’t or won’t do the work. Writing in the Wall Street Journal, David Wessel and Stephanie Banchero point out, that at four year college 43% of those enrolled as freshmen in 2002 didn’t finish their degree six years later. Along the same lines, only 30% of American adults have four-year college degrees. This is true even though roughly 70% of high-school graduates enroll in a two- or four-year college.

It also encourages many people to choose majors that don’t benefit society as much as other majors. Evidence that a major benefits society less when it typically has greater unemployment or pays less. Both are evidence that the major has less value to consumers. For example, those with a degree in counseling psychology earn a lot less than those with math or computer science degrees ($69,000 less in 2010) and thus likely contribute less to people’s well-being.

There is also strong reason to believe that the proliferation of student grants and loans (that is, student welfare) has fueled much of the explosion in college costs over the last few decades.

At the very least, we need a plausible argument that the benefits of government-subsidized student loans outweigh their costs. I am unaware of any.

There is a concern that the difference in performance between four-year college graduates and high school or two-year college graduates is explained by a third factor, perhaps intelligence (with a significant genetic effects), rather than education itself. This might be suggested by a study of elite universities. A 1998 study by Stacy Berg Dale and Alan Krueger of the Mellon Foundation and Princeton University respectively found that on average once you control for student ability, attending an elite university (for example, the Ivy League) did not increase a student’s income. Students at elite universities made a lot more money but this was likely the result of their greater ability rather than the school.

Still, there is likely a difference between getting a college degree and not doing so even if there isn’t a difference between attending an elite university and not doing so. If college doesn’t make students more productive, then the state shouldn’t subsidize it.

In summary, a college education is such a good investment that the state probably should not subsidize it. The rate of return is better than the stock, bond, and real estate market over the last 60 years and, also, provides other valuable benefits. The arguments from externalities and a third factor do not show otherwise.