Students from richer and some middle class families have their college education financed by their parents and other relatives. Students from poorer families may gain a lot from going to college, but they have trouble raising the tuition and financing their living expenses while in college. It is difficult to get outside financing for college education because education becomes part of the individuals with the education, and hence cannot be offered as collateral for commecial loans from banks. Government-sponsored student loans have enabled many students from less privileged backgrounds to finance a college education.
This inability to offer human capital investments- in particular, college education- as collateral for commercial loans on these investment even when the returns are excellent is the fundamental “externality” behind the case for government support of student loans. This externality could justify governmental provision of student loans, although whether the government should guarantee student loans is questionable.
Student loans have increased the supply of young persons who go to college. In a competitive higher education market-which describes the American situation where thousands of colleges compete for students- a greater number of college students induces increases in tuition. However, the increased supply of places for college students moderates the increases in tuition.
The fraction of American students who take out loans from the government or private lenders has increased since the early 1990s to about 65% from under 40% at that time. Outstanding student loans now amount to about $1 trillion. The 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.
Although students and their parents complain a lot about the rise in college tuition, since the early 1980s monetary and other benefits from college have risen even faster than tuition and other college costs. As a result, the rate of return on college education in the United States – benefits net of all costs- grew greatly during the past 30 years. The increased net return to college, despite the increase in tuition, explains why a larger, not smaller, fraction of young persons are going to college than did prior to the sustained rise in tuition.
That monetary gains from college increased faster than tuition does not mean that higher tuition and greater student loans are not financial burdens. These loans are still a burden, but it is easier to repay them when college earnings are much higher. According to the NYTimes of May 12, in 2011 the average student loan debt was about $23,000, but 10% owed more than $50,000, and a small percent owed more than $100,000. Since typical graduates of 4-year colleges or from postgraduate studies earn on average over $30,000 per year more than typical high school graduates, these graduates could completely repay a $50,000 student loan in under 2 years from the greater earnings they get from their education. Students who contract debt that exceeds $100, 000 usually have gone to medical, law, or business school, or have received PHD degrees, and they earn far in excess of $30,000 per year more than high school graduates. Hence they too usually can finance their larger student debts without much hardship.
Of course, as Posner indicates, the prolonged recession has hurt the earnings prospects of young college graduates. Many of them need to be given, and are receiving, greater flexibility in repaying their student loans until economic conditions return to more normal levels. Others with student loans do not earn much because they went to bad schools, or they dropped out of school before acquiring much in the way of useable skills, or they went into occupations that do not pay well. Doing away with federal guarantees of student loans would discourage college from trying to foster excessive debt on students with these unpromising economic futures. Moreover, especially if federal guarantees were eliminated, student loans should become dischargeable through personal bankruptcy, the way most other loans are dischargeable.
One might also want to experiment with student loans that are like equities; that is, where the amount to be repaid depends on earnings. These equity-type student loans have their own problems, but they might be a useful complement to the present system where loans are given with fixed rather than effectively variable interest rates.
Young families with mortgages that exceed $100,000 under normal circumstances are not considered to be in dire economic straits, even though their homes can be taken if they fail to meet their mortgage payments, and they are only investing in more comfortable living arrangements. Young couples that contracted a similar level of debt when they were students have invested in raising their earning power, usually by a lot. So I find it difficult to comprehend why sizable mortgages are accepted while there are political and media outcries over comparable student loans that are based on usually highly productive investments in human capital.