Benjamin Studebaker

Massachusetts Senator Elizabeth Warren has recently come out with a proposal to make the interest rates on federal student loans identical to the interest rates the federal government gives to large banks. This sounds really progressive and wonderful, and it is no doubt well-intentioned, but it is, unfortunately, an extremely misguided and foolish policy. Here’s why.

Regular readers might remember that a while back I wrote about the college bubble in the United States. College costs keep rising, and it’s a big problem.

If you do not go to college, your life will almost certainly be much worse than it otherwise would be. Sure, once in a blue moon there’s a LeBron James who straight up doesn’t need to go to college to be successful, but for those of us who don’t have 40 inch verticals and aren’t extremely fortunate, college is necessary if you want to get a job that pays well. For this reason, everyone who can afford to go to college tries to go to college. Of course, this doesn’t change the fundamentals of how our economy operates. The economy will only support so many high paying jobs. If we pressed a button and turned everyone into a college graduate, it would not make our society as whole any more wealthy. The people who didn’t have college degrees before would individually be more competitive, but the same number of people in total would be successful. If I may illustrate with a hypothetical:

In Marxtopia, everyone goes to college, but this does nothing to increase the number of great jobs. In Marxtopia, everyone has an equal chance at a great job, but the same number of people will go without a great job as will in Nozickistan. That increased opportunity helps the 80% in Nozickistan who don’t have college degrees insofar as it gives them an equal shot, but the same number of people will still fail to obtain great jobs.

You want to be one of those people who has a chance at a great job, so you have to go to college even though, the more people that go to college, the lower your chances are. In the Nozickistan example I gave above, 75% of college graduates would get great jobs. In Marxtopia, it’s a mere 15%. So, once the number of people graduating college exceeds the economy’s ability to generate great jobs, the more people that go to college, the worse the outcome is for college graduates. This is true not merely in my hypothetical, but in the real world. Here we can see that the percentage of people going to college has risen (alongside tuition):

And here we can see that the earnings for college grads is failing to keep pace with the rise in tuition costs:

The result of all of this? More people are coming out of college only to find that they still can’t get a great job, and that all the student loan debt they incurred was for naught. These people end up underemployed. They earn less than they expected. As a result, they don’t pay off their student loans debt as quickly, and an increasingly large number of them default on those debts. Indeed, student loans are now most likely to go delinquent out of all loan types:

This makes student loans a risky proposition for lenders–far more risky than the bank to bank lending the Federal Reserve facilitates with low interest rates. But that’s not my problem with the Warren proposal. No, my problem is not that the Warren proposal is risky for the Fed, my problem is that the Warren proposal would make all of this worse. Here’s how.

Have you noticed that in car commercials, companies and dealerships often attempt to entice you to buy a car on the basis that they offer low interest rates? If you haven’t seen one lately, here’s an example:

Now, 0% financing is not quite the same as a sale. In a sale, the cost of the car is lower. With 0% APR financing, you just don’t pay any interest. Car companies have discovered that if they offer low interest rates, people will buy their cars even if the price for those cars is higher. People don’t think about the cost in terms of the whole price, they only think in terms of how much they have to pay for the car each month. Now, while lots of people need cars, you don’t have to buy one, and you certainly do not need a very nice car to be able to go places. A Civic will get you from A to B just as surely as a Jaguar will, but I guarantee you that Ivy Tech is not going to do for you what Princeton can do.

You have to buy college or you have no chance at a great job, and the more money you spend on college, the better your chances are. Demand is captive–for all intents and purposes, it works like a monopoly. Universities can charge as much as they want in tuition, and you’re still going to buy college if there is any way that you can possibly afford to do so. One way to make it easier for people to afford something really expensive is to give them a big loan and charge them no interest on it, and that’s what we’ve been doing. Why?

When it comes to our university policy, we in the United States have tried to achieve two mutually unattainable goals simultaneously:

1. Determine the price of college through a free market capitalist system.
2. Make college affordable to everyone, regardless of financial background.

We don’t want access to college to be in any way limited by family wealth, so instead of allowing the price of college to reach a stable value, we keep giving students cheap loans. Like the car companies, we offer cheap financing, and this encourages students who otherwise could not afford college because they have no money to buy it anyway. But how does this effect the actual tuition of college?

Imagine I’m selling cars. The state one day decides that everyone, regardless of income, should be able to buy one of my cars. In order to do this, the state starts giving people low interest or interest-free loans for the express purpose of getting them to buy my cars. What will I do? Well for one, I’ll expect a huge number of people to buy my cars, so I’ll make a lot of them.  What else will I do? I will raise my prices, constantly, for as long as the lending programme continues. Why? Because as long as the state is willing to give out low interest or interest-free loans, people will not pay much attention to how much my cars cost. And this is if I’m selling cars, a thing that people do not have to buy.

People have to buy college, so universities can go further still with the price increases. They also can just keep expanding the number of places they offer. The effect is not that anyone of merit, regardless of wealth, can go to college. It’s that anyone, whether suited for it or not, can go to college. And all of those people who aren’t particularly suited for college are the first to fall into that category of “deeply indebted people who are nonetheless unable to get great jobs”.

So what does Warren propose to do? Make those loans cheaper. Create an even larger incentive for people to buy college that they cannot afford and will be unlikely to pay for in future. In other words, Warren is proposing to inflate the college bubble faster. This is a horrible idea. If passed, it would result in:

1. More people going to college.
2. More college graduates failing to get great jobs.
3. More college graduates consequently mired in debt.
4. More college graduates going delinquent or defaulting on that debt.
5. Huge losses for the government.

What should we do instead? We should stop hiding the costs of college from students. We should:

1. End scholarships.
2. End student loans.

If we stopped subsidising college, it would stop getting more expensive, because students would realise that they cannot afford it. Now, anyone who shares my left-wing inclinations will immediately point out that if we did this, it would be impossible for people from poor backgrounds to go to college. Instead of weeding out the unqualified, we would weed out the poor. Indeed, which is why we cannot achieve both of our objectives at once. We cannot have a market-driven university system and a system that provides equal access. Which goal do we drop? I say the free market goal. What we really need is a government takeover of the university system in the United States. What do I mean by this? The state should pay for college for anyone who can meet a given meritocratic, academic standard. It should pay for this programme with tax increases. In this way everyone who has the ability to go to college and do well can go to college and do well, and everyone who does not have this ability will be spared the lies and the mountain of student loan debt.

By setting a meritocratic standard, the state would reduce the number of people going to college, and so reduce the number of people who have invested years of their lives in institutions that have made them no better off. This would also allow the state to eliminate bad universities and bad programmes, ensuring that everyone who goes to college goes to a good college. Not only would it do these things, but it would make our university system as a whole much cheaper.

The tuition fees universities charge do not accurately reflect the costs of getting a college education. Universities are accruing massive endowments of extra money, which they are then sitting on or investing elsewhere. By taking over the system, the state can allocate funds to universities on the basis of need. Universities do not need all the money they are getting in tuition fees, so the total amount paid into this system, while shifted from private individuals to the public, would fall. A state-run university system would be more efficient than the present model.

Of course, all of this requires that we abandon our fixations with having students pay for their own university educations and with having universities operate like private companies. We have to accept that the college market is a broken market, and that it cannot function efficiently with the state playing the peripheral role of “grand subsidiser of infinite cost increases” it plays at present. I do not see that coming any time soon, but it is the only real solution–not more of the same, as Warren is offering.