Against Student Loans

Senator Elizabeth Warren, one of the few American politicians willing to challenge the current financial system, has introduced her first bill in the US Senate. With student loan rates set to double from 3.4% to 6.8% on July 1, the Bank on Student Loan Fairness Act would temporarily reduce those rates to 0.75%, which is the same rate that banks borrow money from the Federal Reserve.

There’s certainly something nice about the symbolism of this bill: Highlighting the discrepancy between the rates offered to financial institutions and rates offered to students investing in an education illustrates the inequities of the financial system. When Senator Warren frames it as a choice between students and banks, it’s clear which side you should be on. And since the bill has no chance of passing, that symbolism is important. But the spirit of the bill is misguided, because the problem with student loans is not that they are too expensive, but that they are too cheap.

I’m no economist, but I know that making something cheaper means people will consume more of it.* In this case, making loans cheaper would mean that students would accrue more debt. Student debt is already a devastating problem in this country—the average college graduate has more than $26,000 in debt, and there are plenty of cases of debt topping $200,000. Such debt is particularly burdensome to young graduates, who have suffered disproportionately from the economic slump, especially when you consider that student debt is nearly impossible to shed (well, except through death!).

*Admittedly, this is an oversimplification. Many would counter that demand for college is inelastic, and thus not sensitive to small changes in price. This is probably true for many schools, particularly elite the institutions like Harvard and Yale, but there is growing evidence that it’s not true of college in general, and especially not true at for-profit schools, which have exploded in popularity in recent years and would likely benefit most from keeping rates low.

Of course, owing $30,000 at 0.75% is a lot better than owing it at 6.8%, but when you’re talking about principals in the tens of thousands of dollars, these loans would be burdensome with any interest rate. And the low interest rate will entice students who would have shied away from loans at higher rates. So all the Bank on Student Loan Fairness Act would do is exacerbate the already crippling problem of student debt.

This problem exclusively harms students. Politicians like keeping rates low because they can say they are “pro-education.” Schools like keeping rates low because they subsidize skyrocketing tuition costs that would be completely unaffordable without loans. Even the banks Senator Warren enjoys shaming like the current system, since it ensures customers for their private student loans. But when students graduate with thousands of dollars in debt and no job, they don’t like the system.

Defenders of student loans like to point out that keeping rates low makes college more affordable, and therefore makes it accessible to low-income students. But low-income students are precisely those who are most burdened by the debt. Students from wealthy or middle-class families can afford to move back home or take an internship while their parents make payments, but students with no other means to pay their bills are often forced to take whatever job just to start paying back their debts. This means they often get stuck in jobs away from their desired field or with little opportunity for advancement. So a college education, normally a tool for social advancement, actually becomes precisely the opposite.

Of course, people are often quick to point out statistics that show the value of a college degree, like the fact that the unemployment rate for noncollege graduates is even higher than it is for graduates. This is often mistaken for proof that a college education is “worth it.” But this is silly logic: College graduates are more successful, but not necessarily because they went to college. College graduates are more likely to be more intelligent, from wealthier and more stable households, and more dedicated than those who do not. It’s not that college magically makes someone more successful; it’s that people more likely to be successful are more likely to go to college.

Perhaps the most accurate (and honest) defense of a college education is the signaling model, which holds that an education is valuable because of what it signals to potential employers: that an applicant is hard-working, dedicated, intelligent, etc. The problem with this argument is that, when weighed against the crushing burden of the accumulated debt, it would have to be an incredibly valuable signal. Surely there is some way to signal intelligence and diligence to employers without amassing tens of thousands of dollars in irrevocable debt.

If college degrees were really “worth it,” then graduates would be learning things they need to succeed at the jobs they want. This is pretty clearly not the case. Forty-eight percent of college graduates are underemployed—about a third work in jobs that don’t require a college education. Even when degrees are “required,” they are rarely needed: They function primarily as a sorting mechanism for employers who are overwhelmed by applicants in a bad economy. At best, they are a very crude sorting mechanism; at worst, they work as a kind of class warfare, effectively barring poor but competent applicants from jobs like receptionists and file clerks.

The only way to break this system is to stop assuming that every smart, motivated student should go to college. As long as that is the case, employers will continue to use degrees to narrow their pool of applicants. Only when there is a sizable group of dedicated, intelligent, and competent applicants without college degrees will employers stop discriminating based on education. And the best way to do that is to price them out. Trust me, it’s for their own good…

One response to this post.

  1. Posted by Gregorios Plakoudas on May 14, 2013 at 9:40 AM

    good job with this one.


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