Information About Colleges and Student Loans-Becker

Colleges in the United States, and in most other countries as well, vary enormously in the quality of education provided, their cost, and their overall efficiency. The over 3000 American colleges compete fiercely for students in terms of tuition, quality of faculty and student bodies, athletic programs, student loans, student grants, and in many other ways. Even though many academics complain about the distortions of business advertisements, the catalogues and other “information” provided by many colleges and universities make lots of advertising look like models of accuracy and probity.

Therefore, to better assess different colleges, high school students, especially those from more educated and financially better off families, spend considerable time and effort in gathering information about colleges. All potential college students can use good information about courses offered, performance of the student body on standardized tests and other information about the students who have attended, the availability of student aid, and the earnings of graduates.

The market has responded to this interest in knowing about colleges by providing guides, rating system, and other school information. These include the well-known US News and Washington Monthly’s rankings, and many lesser known surveys and rankings that range from the frivolous to the informative.

The federal government has a role to play in making readily available many kinds of information useful to students applying to colleges. The government also could help, at least up to a point, by requiring colleges to release relevant information that they may try to keep hidden, such as default rates on student loans, earnings of graduates, dropout rates, and the like. This and other information would be particularly valuable to students from poorer families since recent studies show that these students, even those with very good school records and high scores on achievement tests, are not well informed about different colleges, partly because they put relatively little time into their college choices.

I do not see any good role for the federal government in providing rankings of colleges, as proposed by President Obama, and discussed by Posner. Competition among private market providers of ranking and other college information is far more likely to give students what they want in making their choices. To be sure, market-driven information tends to neglect information that students are not interested in knowing, even when the information might be helpful in their college choices.  But the federal government is unlikely to be efficient in discovering this information, and presumably students will give it little weight in making their school decisions.

Student debt has grown rapidly during the past 25 years, due to the rapid increase in school tuition during this time period, the significant subsidy to most loans, and the growth in high school graduates who attend college. Even though many in the media and elsewhere are complaining about this expansion in student loans, the average student loan of about $26,000 is not large relative to the average income of college graduates of about $70,000. Young families often take on mortgage debt that is twice or even a larger fraction of their earnings.

There is a legitimate concern about those persons with much larger student debt, and about those who make much less than the average college graduate, such as students who drop out of college, or who attended proprietary schools. The federal law that excludes student loans from personal bankruptcies makes the burden for these students still much harder to manage.

The president addresses this problem by proposed various changes in the student loan program, including a move toward a more universal income-contingent repayment system. I have supported income contingent loan programs because returns on investments in a college education are risky. Risky business investments are generally financed by equities rather than debt, and an income-contingent repayment system is more like equity than debt financing of student investments.

Income contingent loans appeal least to students who expect to earn a good income, such as graduates of medical, business, or engineering schools, because the repayment “taxes” on their earnings would be higher. This is why in order to get a balanced demand for such loans from both high and low earners, repayment rates should begin to decline after earnings exceed a certain level.

College is still a very good economic deal relative to their alternatives for the great majority of college graduates, including most of those with sizable loans. The returns from college are not so good for some students with lower abilities and poorer college preparation who come from poorer backgrounds, who do not attend colleges that help them much, and who take on too many loans. These students would benefit from better information about what different colleges have to offer, and from student loan systems that tie repayments to earnings.

Comments

[Mattnotda]

I disagree strongly with the notion of tying loan repayment to income. There are already too many students majoring in areas with a very limited job market. This, of course, is a big part of the reason many students are unable to pay back their loans. Students need to think about how exactly they are going to make a living with whatever skills they are acquiring. This includes a fall back option, such as for history and English majors who hope to teach, but may not find a job due to education cutbacks, or an overabundance of people in their fields hoping to teach. If there is serious doubt about a student being able to pay back a student loan in a given career, perhaps he should choose a different career.

[Lucy Lu]

My firm hires new college graduates in Georgia. Based on my information, many college graduates' annual salaries are around $40, 000. Those kids are from Georgia Tech, Emory, and UGA, which are very decent schools. It is hard for me to believe the average college graduates' average salary is $70, 000, as indicated in the post.

[Whitworth Alex]

Like Lucy, I find it very hard to believe that the average college graduate makes $70,000. A quick google search returns many results showing the average income of college graduates much closer to $45,000.

This link is from the BLS: http://www.bls.gov/emp/ep_chart_001.htm
It shows $55k at the median.

If you're going to provide such an unbelievable statistic, please post your source.

[James Gualtieri]

I think a great remedy would be to make universities partial guarantors on the debt of their students (i.e. you can default on some fraction of your debt through bankruptcy). This aligns university incentives with those of students: providing students with a skill set that is valuable. One might say that these incentives are already aligned, I don't think that is necessarily the case. With loans easily available for prospective students, universities play a balancing act with respect to their current students and attracting future students. I think this would result in schools devoting more energy (and money) to career services and reduce the amount of students studying so-called "soft" majors.

One drawback is obviously that universities would then prefer students with no debt. But, I think this is such a small part of the total student population that any effect would be very small. Alternatively congress could pass a law requiring admissions decisions be blind with respect to financing.

I like this idea because it is somewhat market oriented. If schools provide value above their cost then they will remain open. The likely results would be: a reduction in the amount of universities and a larger fraction of a school's resources going towards majors they expect to provide value in the job market.