:: Life Of Dave ::

student loans and the market for education

Recently there has been a huge debate over student loan debt. Without doubt, student debt has been growing over time - the Atlantic parsed Fed data and found Student Loans Have Grown 511% Since 1999. Many people assert, and I agree that on the face of it this makes sense, that if you sign a contract agreeing to pay back a huge sum of money, you should be held to it.

There are several proposed reactions to this problem. For example, this article on the debt problem proposes that students need to get past the idea that big name colleges equal quality. Ironically, of course, this would mean that after graduating these students would be competing with graduates from 'big name' schools, and unless we are also hoping to change the behaviour of employers, that means they would not be getting jobs (because what employer is going to choose Boise State over Harvard?) So, lower debt, but lower income.

One of the lines of argument that have come up again and again is that people should focus on degrees that will actually net them a job when they graduate. A recent story on Marketplace reveals the weakness of this particular argument. From the story: "Just five years ago, a pharmacy degree was a near guarantee of permanent and well-paid employment. So much so that a lot of universities started their own schools of pharmacy. In Tennessee, they went from one pharmacy school to half a dozen. So you know what happens next." Which is, of course, a glut in pharmacists. The problem here is that education takes time, and there isn't a glut in the market until people graduate. So a rational consumer could look at the market, see people getting high paying jobs in, for example, Information Technology, and choose that major. If they did this in 1996, the dot com crash would have come one month before they graduated. Students who made all the right decisions would find themselves without job prospects.

This is always the difficulty in pushing the responsibility for choice to the end user - sometimes the best information lies with them, but often it doesn't. And even when it does, there is a large body of research that shows that "in certain well-defined situations many consumers act in a manner that is inconsistent with economic theory", specifically the theory that people will choose to maximize benefits to themselves ("Toward a positive theory of consumer choice". Thaler, 1980). And this theory forms the basis for all market-based solutions. Said more succinctly, the market for higher education is broken, and therefore the market for student loans is broken. As such, it may be time to revisit the idea that the individual should choose, or even can choose, the 'correct' major and correct amount to borrow for college.