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01/09/2005

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Corey

I'm really not trying to be the first one to post, but I seem to be on when posts go up and I seem to consistantly have exceptions to them.

I posted on Becker's comments to mention the important overlooked feature of the Stafford Loan program vs. purely private loans, namely the interest rate cap on the former. There is no reason to suspect, given the lack of usury laws in the states major lenders have moved to and given the current legistature, that a private loan systen implemented now would have any cap on interest rate hikes. Those who inevitably got into some financial stretches in starting their careers could see their rate go as high as 29% (Currently the highest I've seen from Citi, Chase, or MBNA)

Given the lesser consumer protections and the higher interest rates of a private loan system, I think the most pressing question is not how MANY students would choose not to take the private loans, but WHICH ONES would not.

Posner is correct that federal loans are currently available to everyone, but since he is comparing to private loans, we should ask, would private loans ALSO be available to everyone, and if not, then which group of students will have lesser/no access to private loans?

And of course we can all see that it is the low income students that are 1) less likely to have the good credit needed to negotiate suitably low interest rates on private loans, and 2) more likely to value the consumer protections of the federally backed system.

So, clearly then, a privatized system would in effect discriminate against lower income students.
One of the chief advantages of the current system is that it is available to everyone, since it is not possible to predict social contribution based on income of the parents. (Despite what everyone in New England seems to think.)

As a secondary effect, privatized loans would also discriminate against low income majors like English, Education, or Art. Since the interest rate would be a function of future earnings, students are more likely to take degrees which fit Posner's assumption of higher future earnings, like engineer or lawyer. Now I suspect the efficiency-worshippers who roam this part of the net might say this simply reflects society's relative valuations of possible career paths, but many of the rest of us would never trust the lending market to make decisions about new teacher production or how many artists to encourage.

That being said, I find Posner's attempt to use the declining progressiveness of our tax system as an argument against progressive subsidies to be borderline absurdist. We should all remember that Chicago-School free-market ideology is the primary rationalization behind the Rega-Bush tax flattening in the first place.

Oh, and for the record, I tested into a top 25 Engineering program which I was only able to attend because of the Federal Stafford Loan program. My undergraduate loans survived my tech-crash induced bankruptcy and I am still paying them down. I am currently enrolled in Law School which I ALSO would not be able to attend with privatized loans. You are free to think that might be a good thing.

David

There is another consideration in the question of government subsidies for higher education, which is related much more to the character of our nation. The political and intellectual leaders of this country, by and large, were educated at the elite universities. For instance, look at the makeup of the Supreme Court: you don't see many graduates of Middle State University Law School. With the skyrocketing cost of tuition (now in the range of $30,000/year at elite schools), access to such schools is out of reach even for the "upper middle class," absent low-cost loans. Subsidized loans not only guarantee access to higher education for low-income Americans, they also allow access to elite education for the best and the brightest of middle America. They thus have a democratizing effect and help ensure that our country is not run solely by an insular group of aristocrats. This, to me, is of vital interest of our nation.

Tom

The effect of student loans upon the choice of degrees should also be considered, whether the loans are subsidized or not. A student who knows he or she will have to repay $120,000 or more will think twice about becoming a musician or a teacher.

J.P.

I think at least one major flaw in Posner's analysis of the student loan situation is that future lawyers, MBA's, and other beneficiaries of a higher education look forward to an ensured rapid increase of income to the "elite" level after graduation. A recent comment on Hugh McLeod's weblog dicussing the state of the advertising industry stated:

Hell, I've got an MBA from a respected school and 15 years experience running my own business--a film/video post-production house. The bulk of my business was tied to marketing and advertising. I sold the business in 2000, just when the recession was raising its ugly head and put the brakes on the economy. Yes, I'm a "creative" and thought that with my experience, I'd have no problem starting a new career. Shit, was I wrong!

Look, there are thousands of folks out there like me; overeducated, middle aged--and unemployed. Few companies are willing to hire a graying, forty-something MBA with a wife and kids (i.e. commitments) when a freshly minted twenty-something MBA with no personal life will work 100 hours a week and travel all over the country.

Now, I'm looking around and I see skilled trades people pulling down serious money--deep into six figures--cabinet makers, machinists, carpenters, mechanics. MBA's are a dime a dozen. Try finding a guy that will fix your car or rework your plumbing; you'll pay out the ass.

A real world example: my friend is a middle-aged, highly skilled programmer with a masters degree. He lost his highly-paid job with a Fortune 500 and was unemployed for well over a year. Now, he owns a small business that cleans out septic tanks. He makes more than he ever did in corporate America.

In my own Federal Income Tax casebook the editor quips that the new American tradition is not to pass along our family business, but to spend money sending our children to college and living off anuitized retirement plans, but I ask- if this is what the majority of Americans are doing, how much is a college education worth in the marketplace?

Posner also seems to suggest that a change in the system will result in more students going to lower cost state institutions; however, I personally am a resident of the state of Connecticut, whose law law school, while inexpensive and well ranked is thus competitive to gain admission to- as a result I attend an private institution in another state which is lower ranked and pay almost 4 or 5 times as much tution to attend.

James B. Shearer

Posner claims it is not clear that the subsidy transfers wealth because federal taxes are no longer "highly progressive". First federal taxes still seem pretty progressive to me. More importantly even if federal taxes were purely proportional to income the subsidy could still transfer wealth because the benefit is per capita.

B.A.

A conspicuous absence in the comments on financing higher education here is any reference to income-contingent loans, an idea first floated by Milton Friedman and Simon Kuznets in 1945.
A well-designed income-contingent financing program would allow for postsecondary education that is free at point of use, and would be funded by payments in the post-study period that vary automatically according to an individuals post-study income. That is, payments after graduation will depend solely on income, with the duration of payments varying extending for as long as a balance is outstanding. Such programs have already been put into practice in Australia, New Zealand, and the U.K. Current mortgage-style student loans have a fixed period for repayment, which places more pressure on those who borrow more.

Ensuring accessibility to postsecondary education for the most talented and meritorious students regardless of means is perhaps the fundamental public role in postsecondary education. Countless students scramble to make ends meet by working long hours at part-time jobs as they juggle full-time course loads at colleges and universities. It doesnt have to be this way.
While the brute-force method of unimaginatively pumping additional hundreds of billions of additional public dollars into postsecondary education would undoubtedly improve affordability, it seems to me that the structural problems that plague the system can be more effectively and creatively addressed by the introduction of income-contingent financing.

The first element would be enhanced access to student funding from governments. Unfortunately, the heavy subsidization of student loan programs means that they are expensive and that funding must be rationed. The answer is to expand eligibility for all students to an unsubsidized income-contingent financing program. If subsidies are not grafted subsidies on to loans as is currently done, students will not be clamouring in the same way for funding. Means-testing could also be made less aggressive and could be limited to a calculation involving the difference between a students expected cost of living and tuition fees and personal earnings.

The second element would be eliminating the fixed schedule on which student loans must be repaid. Many students face 10 years of considerable fixed monthly payments to repay student loans. This fixed repayment schedule understandably gives rise to considerable student unease, since many students are unsure whether they will be able to spare the monthly cash flow necessary to service student loans. This gives rise to the attractiveness of the income-contingent approach.
If instead of fixed monthly payments for 10 years students faced a schedule of payments that would be deducted from employment earnings along with income tax every pay period and would adjust automatically (just as income tax withholdings do) to ones earnings, the fear and stress associated with student loans would decrease palpably.

The third element is administration and collection through the income tax. This would cut down on administration costs and make it very difficult to avoid repayment (with the criminal sanctions associated with tax-evasion if repayment is deliberately and dishonestly dodged).

Much of the subsidization, rationing, and relatively high default rates could be solved through income-contingent financing, while retaining accessibility. It's a puzzle to me why this wasn't addressed in the posts...

Eric Rasmusen

I am surprised that neither Professor Becker nor Posner highlight the crucial difference between home mortgages and student loans: student loans are profitable for the borrower, but home mortgages are not. (Both are, technically, investment, but a home loan is investment only in the sense that it pre-pays for housing consumption.)

This strengthens Becker's point that people would be willing to take out large student loans since they are willing to take out even larger mortgages. The student loans, unlike the mortgages, actually increase the borrower's ability to repay, by increasing his future income.

This weakens Posner's point that if lack of bankruptcy protection is appropriate for student loans, it ought to be appropriate for mortgages too. One reason it makes a difference is that we might think that because of consumer ignorance or transaction costs the default rule should be bankruptcy protection for consumption loans but no bankruptcy for investment loans. Why, then, would education investment be different from, say, investment in apartment houses? -- Because the purchased capital can be used as security if it is an apartment building instead of an improved brain.

Of course, not all student loans are for investment. Some do *not* increase earning ability-- maybe. Loans to people getting B.A.'s in English come to mind. But, first, I'm not sure such a degree doesn't have a high material return. If you looked at English majors 20 years down the line, I would not be surprised if you found they had, on average higher incomes than business majors. The reason is not necessarily that English is so useful in making money, but that it may be that the kind of people who major in English are those with the intellect and family background to be successful in business.

Second, I think it would be appropriate to deal separately with education that does not have the high material return that most education does. The easy justification for most government-aided student loans is that they are loans that have positive return to the borrower, and are merely filling in for market failure arising from bankruptcy. This is Becker's main point-- that this is legitimate, but it doesn't need any government subsidy on top of special repayment rules. The more difficult justification is that even non-income- generating education has positive externalities. That may be true, but it surely depends on the type of education. If so, we should target the subsidy to the externality-generation kind of education. Training to become a research scientist has positive externalities; training to become a diesel mechanic probably doesn't.

Marc Reiner

Mr. Posner, I take exception to your famous economic analysis of student loans. Some majors, like classics and art, have no economic value, merely inherent value to the student and to society at large. An efficient market isn't really efficient if entails education having to compete for money. With all the tax money collected, there really ought not even be this debate.

David

A couple of little points:

(1) "What do you do with a B.A. in English?" Even Broadway has parodied this, and it is fashionable in business sectors to pooh-pooh the value of liberal arts education. But I submit that liberal arts majors are often better prepared than, say, undergraduate business majors to compete in the marketplace. The reason is that a liberal arts education teaches students to think analytically about texts and to write. These are critical skills in the legal profession and in any other profession where communication and analysis are valued (and those are many). By contrast, business majors might learn a lot about marketing or management theory, but often they can't write a clean paragraph. Some law schools refuse to accept undergraduate business majors, and some universities (like Chicago, if memory serves?) have eliminated the undergraduate business major altogether. Many of the world's brightest minds (and brightest scholars) received liberal arts educations. To disparage the value of these disciplines is ludicrous.

(2) I don't know the numbers, but my guess is that the cost of the federal loan guarantee program pales in comparison to the total amount of direct state (and federal) aid to higher education. So we're really arguing about a small piece of the pie. If a college education is essential to ensuring that a citizen has an equal opportunity to participate in the free market, as most educated people today would argue, then the government should subsidize it. Otherwise, we perpetuate a caste system in which opportunity is open only to certain classes. Capitalism works in a liberal (or libertarian) democracy only if there is something akin to equal opportunity. If not, we have a plutocracy.

Corey

Just wanted to point out since the topic has
become English degrees that Posner's B.A. was
in English.

Critical Observer

"Subsidized loans not only guarantee access to higher education for low-income Americans, they also allow access to elite education for the best and the brightest of middle America."


This kind of argument is ridiculous. I suppose that since elite universities provide aid on the basis of need, if one presumes that elite universities make their selections based on intelligence, intelligent students from middle America will be selected and receive need-based aid. But this selection process is also supposed to be need-blind, so that does nothing for rich smart people from middle America. Since it's possible that standardized testing and high G.P.A.s reflect access to resources (tutors, test prep programs, elite private schools, etc.), it's possible that only rich kids from middle America get high enough test scores and G.P.A.s to be accepted at elite universities. In that case, the existence of subsidized loans for low-income people doesn't guarantee anything but government waste.

I don't see the necessary connection between poverty and intelligence. While it might not sound nice: it may be possible that lots of dumb people are poor, so a lot of poor people are dumb; lots of rich people can get high scores and G.P.A.s without being intelligent in the least; and that lots of people admitted to elite universities are neither particularly intelligent nor do they need loans.

So let's just suppose that elite universities churn out dozens of rich dumb kids who end up running the government...why is an empty monetary gesture by that government so worthwhile?

Ken

"Posner is correct that federal loans are currently available to everyone, but since he is comparing to private loans, we should ask, would private loans ALSO be available to everyone, and if not, then which group of students will have lesser/no access to private loans?"

Bad students, for one.

A private loan company would tend to favor good students who are likely to make the investment actually pay off, rather than bad students who are likely to flunk out and flush all the tuition money down the toilet. In the best case, profit-seeking lending compnaies would take over the function of rationing seats on the basis of true likelihood to succeed, and do a much better job than admissions departments tend to do today.

"And of course we can all see that it is the low income students that are 1) less likely to have the good credit needed to negotiate suitably low interest rates on private loans"

Less likely than whom? Freshly minted high school graduates aren't really going to have much of a credit rating one way or the other.

"As a secondary effect, privatized loans would also discriminate against low income majors like English, Education, or Art. "

That's a feature, not a bug.

"With the skyrocketing cost of tuition (now in the range of $30,000/year at elite schools), access to such schools is out of reach even for the "upper middle class," absent low-cost loans. "

Why would the loans have to be "low-cost"? Whether a college is "out of reach" for anyone depends on whether a loan is available or not. The rate of the loan only affects the return on investment and whether the whole thing is worth pursuing, not whether it's possible to attend in the first place.

"I don't know the numbers, but my guess is that the cost of the federal loan guarantee program pales in comparison to the total amount of direct state (and federal) aid to higher education. So we're really arguing about a small piece of the pie."

It really ought to be the whole pie. No aid should exist other than loans, and even that would ideally come from the private sector. If you want students to maximize their return on investment, you don't artificially decrease the amount of the investment - all that does is lead to losing investments that would not otherwise be made. And yes, there are plenty of losing educational investments being made today, even given generous positive externality assumptions. Having the student bear the costs in addition to reaping the profits would lead to better investments overall, and also help rationalize the job market for tasks that really don't require a college education but in which employers can get away with insisting on them because so many applicants have them, what with them being subsidized and all.

David

So the best arguments that anyone here can muster against subsidized loans are, it seems:

1. Only rich kids get high test scores, so no poor or middle class kids benefit.

2. Poor kids are dumb and shouldn't go to college.

3. Government subsidies allow too many people to go to college, so if you can't afford college, you shouldn't go, and employers should stop caring about college degrees.

As to objection number 1, while kids with resources certainly can receive help with their test scores, plenty of kids who need the subsidized loans to attend college do well enough to gain admittance. So while the program might benefit some kids who don't need loans, it benefits lots more people who do. And really, if a student doesn't need a loan, why would he or she take one? If the parents have the cash, they would most likely pay it rather than condemn their kids to a 6-figure debt, with interest. At most, the fact that some non-needy people benefit is an argument for means testing; it is not a reason to eliminate the program.

Also, many kids who don't have rich parents to co-sign might not be able to get private loans, or if they do, the interest rates might be so high to deter them from attending college. In my view, students shouldn't have to face that choice.

Objection number 2 hardly mertis a response.

Objection number 3 assumes a dream world. Every economic study shows that the # 1 predictor of economic success is level of education. So if poor kids can't attend college, they are (as a class) doomed to be poor forever.

Also, why are critics of subsidized higher education so quick to argue that college doesn't really matter? Maybe employers require college degrees because jobs today require reading, writing, computer, and analytical skills that students don't learn in high school. Plus, college grads are more mature than high school grads. There are good reasons why employers in today's high-tech, knowledge-based industries require higher education.

Ken

"Also, why are critics of subsidized higher education so quick to argue that college doesn't really matter? Maybe employers require college degrees because jobs today require reading, writing, computer, and analytical skills that students don't learn in high school. Plus, college grads are more mature than high school grads. There are good reasons why employers in today's high-tech, knowledge-based industries require higher education."

Yes, good reasons such as:

1. Needing a paper trail to document that they did have a good reason for hiring the people that they did - under our laws, they can be called to answer in court for their decision to hire person A rather than person B.

2. Since college is subsidized, there are enough college grads to fill jobs that require college-level skill and jobs that don't. Thus, jobs where college is redundant will tend to go to college grads anyway, since college grads aren't exactly a scarce resource.

3. Employers are generally not permitted to give IQ tests. As a substitute, they tend to require applicants to take and pay for a substitute aptitude test, which takes four years and costs thousands of dollars.

"Plus, college grads are more mature than high school grads. "

They're also four years older. What's your point?

"If the parents have the cash, they would most likely pay it rather than condemn their kids to a 6-figure debt, with interest."

What do you mean "condemn"? If the degree is worth pursuing, then even with that debt, the student makes a profit. He's better off than he would be without the debt and the degree.

"Also, many kids who don't have rich parents to co-sign might not be able to get private loans, or if they do, the interest rates might be so high to deter them from attending college."

Only if by doing so the student does not make a profit - i.e., doesn't increase his revenue enough to justify the cost of the loan. If that's the case, why should he do it? And if it's a losing investment, why should we cover it?

"In my view, students shouldn't have to face that choice."

They shouldn't have to decide whether the payoff is worth the cost? They shouldn't have to decide what is the best use of their resources?

And why exactly should grown-up people be protected from such considerations?

Corey

"If the degree is worth pursuing, then even with that debt, the student makes a profit. He's better off than he would be without the debt and the degree."

We are talking about society subsidizing education so it is misleading and incorrect to evaluate such subsidies only in terms of profit to an individual student. The merit of the subsidy should be judged by the total value confered on any/all members of society.

For example, when I worked as an engineer, I was paid up to 100K per year, during this time, the company I worked for made over 600K per employee per year. In other words, SOCIETY benefited six times more than I did from my college degree.

Personally, I think that now that my fortunes have temporarily dipped, the CEO of my former company should be helping me pay off my student loans. He banked 20 million that year. What do you think?

Ashley Emerole

I am in a rut at the moment I was accepted to various schools across the country from my home here in NYC and would love to go. I am settled in on the University of Arizona, but my parents can not cosign my loan as they have horrible credit. I am trying to apply for the dreaded student loan alone but I have not been employed at the same job for 2 years- how can I possibly get the $23,000 out of state tuition for the school of my dreams in time for August classes?!?

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