Skip to content

Education

Student Loans: Solutions vs. Delusions

The total amount of federal student loans has been growing quickly. The following diagram from the Federal Reserve shows the growth of student loans since 2006.

StudentDebt

The total amount at the time of writing is over 1.3 trillion dollars, and the federal student loan portfolio is 1.221 trillion dollars according to the latest data from the department of education. This huge increase in spending on student loans indicates both an increase in the number of people seeking a college education and a rise in the cost of college education.

The problem of student loans is one of the hot topics this election cycle with both presidential candidates on the left proposing some variations of free college to solve the problem. Many young students with large student loan balances surely cheer that, who doesn’t like free stuff? Free college may make some voters happy and may even win someone the elections but it won’t solve the fundamental problem with higher education.

Let’s start with asking why do people get a college education? Sound economic thinking says that they do that to raise their human capital and raise their productivity and income. College then is an investment that has expected return in the form of future earnings. People who don’t have the financial resources to make needed investments get loans to finance their projects. The interest rate on a loan is determined by the lender based on the borrowers’ ability to pay which depends on the risk of the project. So if two students with similar academic abilities applied for loans one for an engineering degree and the other for an animal studies degree the first will definitely get lower interest rate on his loan because an engineer has a higher earning potential than a person with an animal studies degree. The effect of interest rates will be to steer students towards more productive majors and only students who really are interested in low productivity majors will take the high-interest loans to get into these majors. The other effect of the interest rate is that they force borrowers to take the smallest loans that can meet their goals so each student will have a strong incentive to select the cheapest college program that gives him the education he needs. This will pressure the universities to be more efficient and offer better education packages to attract students with different budgets.

Read More »Student Loans: Solutions vs. Delusions

Education vs. Schooling

Education

The cost of college and public schools education quality are two of the main political issues now in the United States. The progressives believe that we should spend more on K-12 education, although we already spend the most per student, and create a federal standard for school curriculum and force the states to adopt it, hence common core. For college education, the progressives are pushing for plans to make the college free, which means that the taxpayers will pay for everyone’s college education regardless of whether they need or deserve such education. Conservatives on the other side are pushing for school choice, teacher accountability and the return of education powers to the local school boards which are all good ideas if your goal is to make public schools function better, but nobody is seriously considering the role all levels of government are playing in education. Are public schools necessary?

Read More »Education vs. Schooling