On Campus

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.