Generally, it is more efficient both socially and privately for the consumer, in this case the student, to pay the full cost of the goods and services that he buys than for the government to pick up any part of the tab. A student admitted to an elite college like Harvard and Yale has high expected lifetime earnings, and it seems absurd that the federal taxpayer should be required to defray a part of the cost of his education. This is not a point about distributive justice, for nowadays most federal income tax is paid by high-income individuals. It is a point about the inefficiency of using the federal tax and spending power to subsidize purchases by affluent (as measured by expected earnings over the recipient's lifetime) consumers. The inefficiency lies not only in the transaction costs associated with the subsidy (including lobbying expenses), but also and more importantly in distorting the allocation of resources. Suppose that for some marginal student the expected return from a college education, net of tuition and opportunity cost (the forgone income from working if the student attends college instead), is negative, but turns positive if his tuition expense is subsidized; then the subsidy is inducing a waste of resources.
This would be obvious if the subsidy were for a course in automobile repair, but maybe there is something special about college or university education that distinguishes it from other services, including other educational services. There are two arguments. One is that higher education (lower also, presumably) confers social benefits (that is, benefits not captured by the student), whether by making people more informed voters, or by making them more productive workers (assuming they cannot capture their entire contribution to social output in their wage), or by reducing subsidized health costs by increasing health (Becker notes that educated people are healthier than uneducated people).
This is not a good argument for a subsidy because it does not appear that many persons who would benefit from a college education fail to obtain one. As Becker points out, the private returns (higher earnings) from a college degree are very great and a student can borrow to finance the tuition and other costs of the degree. It seems unlikely, though it is not impossible, that kids who would not personally benefit from college nevertheless would, if paid to go to college, confer the social benefits of a college education that the students who do benefit personally might be thought to confer.
But the points I have made so far really argue just against increasing the existing subsidies for college education, rather than against any subsidies. College education is already heavily subsidized, notably in the case of state and city colleges, where the taxpayer picks up a big share of the cost; but private colleges receive various tax breaks, so they are subsidized too. (I would not call alumni donations "subsidies," however, since they are voluntary and give value to the donor.) Since a worker usually cannot recapture in his earnings the full effect of his labor on output (because he produces some consumer as well as producer surplus), and college increases the productivity of those students who are intelligent enough to benefit from a college education, there is an argument for making college affordable by any qualified applicant. However, it is unclear to me whether this requires any subsidies; all that is required is that the boost in expected earnings from attending college exceed the cost of the loans, or other costs, that the student must incur for college to be a rumerative choice. For then the student will be motivated to attend college even though his doing so will produce social as well as private benefits. All that is important from the motivational standpoint is that the private benefits exceed the private costs.
The second argument for subsidizing higher education is that its high cost nowadays, which for students who must borrow to pay tuition and living expenses forces them to go into debt, deflects students from nonremunerative jobs, such as (in the case of debt-written law students) public interest legal practice, or public school teaching, that (especially teaching) may confer substantial social benefits. (I doubt that public interest law practice does.) The students have too much debt to be able to pay it off without taking a high-paying job. However, a student loan subsidy is a clumsy device for channeling students into employment that is underpaid from a social standpoint, since every student gets the subsidy but only a handful are induced by it to enter the desired channel. It would be more efficient to raise the pay for the jobs that are thought to confer social benefits. A loan-forgiveness program, where forgiveness is conditioned on taking one of the favored jobs, is better tailored to the end of encouraging students to take such jobs than a loan subsidy; it operates to raise the full income of the job.
To repeat an earlier point, which tends to be neglected in discussions of the student-loan issue, if I am right that very few persons who could benefit from a college education are deterred by its cost, the main effect of increasing the subsidy will be to attract applicants who would not benefit if they weren't being "paid" to attend college. That would be a misallocation of resources.
I conclude that the case--for which I gather there will be support in the new Congress--for increasing the student-loan subsidy by having the federal government subsidize a larger part of the interest on the loan is a weak one.
IF! as most of the thread indicates, higher education IS primarily voc tech, a BA and a pile of debt is a clumsy "signal" to a prospective employer, and I think that's often the case, it's time to reflect upon more efficient means of "signalling" and acting.
Many of the entry level jobs that require "a degree" seem only to require a level of competence in English, science or math that is available at HS levels, so "college" seems something like a crude and costly way of "sorting" for such abilities. Today little differentiation is made by the employer if an applicant shows up with a HS diploma even though the Advanced Placement or other front-runners could easily compete with many college grads.
So a win-win may be that of employers giving more consideration to good HS students with an apprentice-like job designed that college could be fitted in over a longer time around the job. With turnover so high in the US the "deal" for the employer would have to be made worthwhile with lower "apprentice" wages, with government kicking in a tax break (much of which the Feds would get back due to the "student" being a tax paying employee) while the benefit to the student would be that of both learning on the job as well as not being saddled with crippling debt.
Even in the sciences or rapidly changing technical areas such as bio-tech or IT I suspect that getting started on the job and learning more technical aspects may be more efficient that learning so much that will be obsolescent by the time of graduation.
Any thoughts? Jack
Posted by: Jack | 12/06/2006 at 09:17 PM
Elisheva
Obviously older students face a more difficult choice: given their education and experience, their labor is worth more, and they face a much higher opportunity cost. If a 22 year old with no experience goes to grad school, he misses three years of intro salary. Someone with experience obviously misses three years of a much higher salary. I don't think that a general policy is affected by this, since more experienced workers will always face a higher opportunity cost than inexperienced ones.
Posted by: Haris | 12/07/2006 at 11:55 PM
I think this whole discussion misses something in that it insists of economicizing education. This is what I was hinting at when I said "public good", which I now admit was a mistake. I should know by now not to use terms on here that appear in econ textbooks unless I want that meaning.
Anyway, I am also an older student, in my third year of borrowing $30K to go to law school instead of making $130K as an engineer and part-time investor. I gave up my car, live in an apartment, and although I have job lined up for next year, unless and until I go for and make partner, my income minus loan repayment won't be higher than if I had contined on in my engineering career. For all I know, my number might have come up at one of the startups I was working for and then I would be sitting on a boat off France reading Adorno rather than sitting in the cold with a Federal Courts textbook.
Anyway, long story short, I don't know and don't care if going to law school ever pays back. It was and is a fun and interesting experience. One that I am lucky to be able to take off and do. I feel more educated, I understand life and the world around me more, and I feel proud, rather like the time I ran a Marathon or proposed to my fiance. Graduate school improved my well-being, in an entirely non-economical sense.
Education is a reward unto itself in other words, and more people should be able to do it. That is why tuition should be cheaper. (And by the way, if lower prices indicate lower quality, then we are all better educated than Posner or Becker because we paid a lot more.) :)
When you economicalize something like learning, it cheapens (in the moral sense) the whole process. Now the tuition gets set according to the loan rate, which is set in reference to the default rate, which is set in reference to legislation and indirectly the earning power of graduates, but of course that is the average earning power, which disincents alternate career paths like public interest that pay less. And then we all run around like little robot zombies lining up to qualify for our assigned spot in the rotation, and human striving gets reduced to competition with other robots for a better certification leading to a better spot in the rotation.
Bah, its Christmastime, and the poorhouses are full of people for whom a law school education would be life changing. And I am blessed to have one, and I am going to try and help them. Peace and joy and best wishes to you all.
Posted by: Corey | 12/09/2006 at 02:02 PM
Corey
I agree with you about the benefits of education to a person, and I definitely agree that more people should have access to it. I wouldn't trade my time in college for anything, regardless of whether it ends up reflected in my paycheck or not. [Fortunately, it looks like it will. Go Tigers!] I disagree with you, however, in that I don't share your disdain for economics and its use in this context. The benefits we're talking about, the ones you call "non-economic," don't have to be excluded from economic analysis. Personal happiness or psychic rewards or "utility" or whatever inadequate word we want to use, when one weighs the costs and benefits of going to college, there is no reason not to take broadened horizons and a sense of achievement and other non-monetized units of "utility" into account. If your lifetime earnings are the same going to college or law school as they would be not going there, but going to college gives you those lifetime earnings along with an exciting and fun experience, you would obviously choose to go to college. As much as it pains you, that's economics.
The bigger question is whether federal subsidies of student loans are the best way to give access to most people to this education. Because federal loan guarantees allow students to borrow more, colleges have room to charge more in tuition - willingness to pay is constrained by ability to pay, after all. Higher tuitions invite more federal subsidies, and thus costs of college spiral upward while salaries of teachers and social workers don't. [That's due to other problems in those areas. Tenure being the worst of them all.] The question, then, is how to ensure that everyone who wants to go to college can do so but also that a sufficient number of college grads take the jobs we need them to take. Since reform of these other fields is unlikely [California tried to reform tenure laws...and failed] the way higher education is paid for should be the first step in stopping the disparity between costs and certain salaries. The simplest step would be to deny federal subsidies to students whose families can afford to pay for college. I have no idea what the next step should be.
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