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Student loan debt: it’s a good thing

Billions owed to the government proves many people benefit from student loans


 

The Internet was flooded today with reports that Canadians collectively owe billions and billions of dollars to the federal government, borrowed to finance postsecondary studies. Seriously, this is a good thing. A few reasons? Sure.

1. It shows that students believe that they will be able to find good jobs in the future. Let’s face it, most people aren’t struggling into 8 a.m. introductory calculus for the sheer joy of it, but because they need it to get their degree, which they hope will in turn pay off later in life with higher wages. If students are willing to borrow a lot today, that means they collectively believe that their income tomorrow will be even higher. The odds of the collective being wrong are always low.

2. Choice is a good thing. Suppose you have just graduated from high school in two different versions of Canada. In one, your only option is to enter the workforce or fund your education yourself. In the second, our version, you have an extra choice: enter the workforce, pay your own way, or get a good deal on a government loan. Nobody is coercing people to get student loans. In fact, the only rational reason to get a student loan is because it’s a better alternative than anything else. The fact that the program is so heavily subscribed only indicates the government has been very successful at providing people better alternatives than anything else they can find.

3. Consumption smoothing is a good thing. Suppose you are faced with two choices: Live off $50,000 every year of your life, or live off $90,000 for half the years and $10,000 for the other half. There are no savings instruments. Most people would take the constant income. The student loan program allows people to smooth their consumption over the life-cycle where banks fear to tread, consuming more as a poor student and less as a productive member of society.

Neither of these points have addressed what is implicitly being called for in many of these articles, namely to give students even more money to attend university. This is a question economists are ill-equipped to directly judge, since it is mostly a moral one. Is it correct to forcibly take money from the rest of society via taxes and give it to students? I will leave that to philosophers, but I can say some other things.

4. Over a quarter of student loans in Canada fall into default, i.e. are not fully repaid. So effectively we are giving lots of people grants under the current structure anyway.

5. Government transfers have bad incentives. When the government raises tax rates, it reduces the incentive for people to go out and earn more money – if the tax rate was 100 percent, how much would you work? How much would you thus pay in taxes to fund the educational system? Higher taxes make us collectively poorer as a whole, so if you want to use taxes to fund public projects, you should be sure it is worth it.

6. No-strings-attached grants have bad incentives. If the government decided to fully pay for all costs of education – in the extreme case, living expenses as well – I would not be surprised if I chose to remain a university student for life. Unfortunately, there’s a real cost to hiring professors and maintaining universities, and someone has to pay for it. I’ve also had professors argue that higher tuition fees keep poor students out and thus enhance the academic experience for the dedicated students. I am personally just shy of willing to go there.


7. Willingness to pay higher future taxes is for all intents and purposes equivalent to bearing student debt, at least in my eyes. It is logically inconsistent to support higher taxes to fund education but oppose student debt relative to grants – money is money either way – unless there is an ulterior motive involving redistribution from rich to poor. Again, a moral issue, but I see no need to clutter up educational policy with income equality policy.

There are, however, a couple of points I can’t refute.

8. Are there large numbers of people without private options rejected for sufficient government assistance to attend PSE, thereby keeping them out of universities? I do not believe there are reputable figures for this, but I think most would agree that anyone able and wanting to attend university should be able to. This is not a necessarily a call for grants, but simply to ensure that loans are available to all.

9. Does the population systematically underestimate the benefits of a university education relative to the current subsidized cost? If so, that’s another argument for increased funding, but one I find hard to swallow, particularly after being repeatedly told growing up that not attending university was one step away from a cardboard box under an overpass, but that’s a different blogpost.

I think it’s worth pointing out again that education is something we do for ourselves, not for the public good. At that level alone, I find it difficult to countenance the idea that government should be handing out large chunks of block grants.


 

Student loan debt: it’s a good thing

  1. Your arguments are flawless.

    Oh wait, nevermind, it seems you’ve missed the entire point of the student debt debate.

  2. my god you have absolutely no clue….

  3. “4. Over a quarter of student loans in Canada fall into default, i.e. are not fully repaid. So effectively we are giving lots of people grants under the current structure anyway.”

    Andrew, you and I disagree on this point especially (and a couple of others). Default is devastating for the individual who falls behind and the government is not know for treating these people kindly.

  4. Andrew,

    It would be preferable to see these points substantiated by some actual evidence. As it stands, most of what you have written in this post is simply polemical and ideological.

    For example, what is the evidence to support this statement: government transfers have bad incentives?

    Another example: No-strings-attached grants have bad incentives. Is there a shred of evidence to support this?

    Again: give students even more money to attend university. This is a question economists are ill-equipped to directly judge, since it is mostly a moral one. After reading this post, I tend to agree that you are ill-equipped to judge this; however, I believe economists still study the economics of education. If this is news to you, you may wish to read the following:

    Cohn, E., & Geske, T. (1990). The economics of education (3rd ed.). New York: Pergamon Press.

    Yeager, J. L., Nelson, G. M., Potter, E. A., Weidman, J. C., & Zullo, T. G. (Eds.). (2001). ASHE Reader on finance in higher education. Boston: Pearson.

  5. If billions and billions of dollars is in Ottawa to lend to students, why did’nt Ottawa make being a student a lesser burdon. IE York students face a lost year due to the bumblings of the administrators. 99% of these first year students are in a great amount of debt a lot of it from their parents life savings. Some MBA degrees get you a job at Tim Hortons weighing the dough.Some degrees don’t even get you an interview anymore. So I feel like students today are getting a bad rap.This government has the worst lending practices ever and it will never end. The York students deserve a full refund and be allowed to to attend another University without charge to complete their term.

  6. Another variable to consider is how long it will take you to find employment in your field of study. Student loan debt usually falls to the bottom of the priority list if you have gotten your degree but are struggling to find a position for your qualifications.

    B. Johnson

  7. I don’t normally bash on other bloggers here, but you lost me at this:

    “[Willingness to assume debt] shows that students believe that they will be able to find good jobs in the future.”

    Umm … no. Your logic applies equally well to desperate foreign nationals who pay $10,000 each to be smuggled into a more wealthy country in a packing crate in the hope of finding work illegally. The mere fact that many people are willing to pay for that chance does not, by any manipulation of logic, prove that it’s a good deal.

    You’ve willfully ignored the alternative. That is, quite simply, that students have no other choice. The days when you got an entry level position in some respectable trade with a high school diploma, and then worked your way up, are simply gone. You may still be able to point at exceptional cases, but exceptional cases make for very bad general analysis.

    I’ll let other people pick apart the rest of your post. It seems selfish to hog it all for myself, when there’s such an embarrassment of riches at hand.

  8. #8 In Quebec, government student loans take into consideration the income of the student’s parents. My parents refuse to help me financially, and I can not get a loan because their income is too high. No bank loan either, because I don’t have a co-signer.

  9. This post is so laughably out of touch with reality that I find it hard to believe it wasn’t written as a joke. If it was, good one Andrew!

  10. I’m not sure that such a laughably unresearched, unreasoned argument deserves a serious response.

  11. “I’ve also had professors argue that higher tuition fees keep poor students out and thus enhance the academic experience for the dedicated students.”

    High tuition is great, it keeps poor students out of our universities! We should really raise tuition, so the universities can finally focus on their true task as boarding schools for rich kids.

    …this article is a joke, right?

  12. “7. Willingness to pay higher future taxes is for all intents and purposes equivalent to bearing student debt, at least in my eyes. It is logically inconsistent to support higher taxes to fund education but oppose student debt relative to grants – money is money either way – unless there is an ulterior motive involving redistribution from rich to poor. Again, a moral issue, but I see no need to clutter up educational policy with income equality policy.”

    You honestly don’t see a difference between a graduated income tax and a student loan? For real?

  13. I assume by “poor students” he means the ones who aren’t very good students, as opposed to the ones who aren’t very wealthy. But given the tone of the article generally, I can’t claim I’m positive.

  14. Andrew’s main point is exactly correct, and the only people who don’t understand are those who don’t understand basic economics. Seriously, people: you guys are being bone-head stupid.

    Student debt is not a problem per se, in the same way that mortgage debt is not a problem per se. In both cases, you’re getting something valuable that will generate payoffs (higher incomes, housing services) for pretty much the rest of your life. My own back-of-the-envelope estimates for the present value of the after-tax average wage premium associated with a university degree is something like $250k. How much debt would you be willing to take for a payoff of a quarter of a million dollars?

    There is a case for offering targeted transfers to students from low-income households in order to make PSE more accessible. But the idea that student debt is an irredeemably bad thing is just dumb.

    So far, I’ve seen no-one who has even understood the post, let alone make an intelligent counter-argument.

  15. Well, you’re right Stephen, but that doesn’t excuse Andrew’s various canards – the “poverty” imposed by taxes, loan defaults as ham-handed “evidence” that students needn’t pay the money back, or the notion that raising taxes *causes* people to have less incentive… to work? Or something. I’m not really clear, since whatever small merit there may be in Andrew’s post, it’s entirely obscured by the polemical and ideological tone.

    For myself, I would be more keen on loans if they were more subsidized – less (or zero!) interest, and more along the lines of repayable grants. My own student loans will be in the ballpark of $80k by the time I’m done my professional program, and while I’m more or less guaranteed of employment when done (you can guess which profession, perhaps), the fact that I’ll need an LOC for the difference is not so great.

    I think it’s reasonable that students today should pay tuition fees – I do not favour eliminating fees by any stretch – but given the necessity of paying fees alongside living expenses and limited time/opportunities for employment during school, there is much to the argument that – at least in some parts of the country and for some programs – fees are too high.

  16. Andrew,

    By stating the following, you are actually using a false argument to state your case:

    “Over a quarter of student loans in Canada fall into default, i.e. are not fully repaid. So effectively we are giving lots of people grants under the current structure anyway.”

    However, the definition of default used in the source article
    is a three-year default rate. However, repayment of Canada student loans is amortized (by default) over ten years. Thus, it is not surprising that after three years, one-quarter of borrowers still owe.

    In Canada, in fact, it is incredibly difficult in to default on student loans, even through a declaration of bankruptcy. Thus, your claim that we are providing “grants” to these students is blatantly false.

  17. I’ve only come across this article a year after it was written, but the fact that such a narrow-sighted ideological unfounded article that is associated with a relatively reputable publication is speaking with such authority compelled me to comment all this time later.

    Stephen”
    The only people who can’t see the utter short-sightedness in Andrew’s main point as well as every “supporting” argument (if you can call them that)is someone who does not understand the FLAWS in basic economics. That is to say that economics is based on MODELS that life does not necessarily adhere to.

    To suggest that the fact students own billions in loans indicates an optimism in future job availability is again, completely laughable. As a current student, I can say that there is utter pessimism among students who recognize that their degree is almost useless but yet still necessary, as degree inflation means that you often have no option other than to get a post-secondary education which does not only no longer guarantee a well-paying job, but does not even guarantee a job in your field, or a job at all.

    No one here has outright said that student debt per se is a bad thing, as you’re suggesting by their valid shredding of his arguments, but rather that the current social and economic reality (not theory), renders student debt unmanageable given the low payoffs, limited options, degree inflation, and limited funding sources while tuition rises.

    To suggest that economic theory is the standard that reality should be held to is ridiculous.

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