Sunday, April 06, 2014

If Student Loans Were Given Out Like Business Loans

            Suppose I went to a bank to ask them for a business loan to start a business. The loan officer would of course want to learn a number of things from me. What sort of business do I want to start? What is my business plan? What research have you done to understand the kind of business you are starting? What sort of background do you have?

            Now suppose these were my answers: I want to write short stories and poetry. I have no business plan, other than to write what I want and send things out when I can. I have done no research whatsoever, other than to read poems and short stories. I have a bachelor’s degree in recombinant gene technology.

            What are the odds that I would get a business loan?

            Yet, when students want to get a student loan, these questions are not even asked. If they were, when I decided to drop out of a Master’s program in biology to pursue a Master’s degree in creative writing and, later, a Ph.D. in the humanities, it seems highly unlikely I would have been given the loans I sought. Or, if I were granted loans, they would have been at very high interest rates – high enough to perhaps make me reconsider the wisdom of taking out loans for the degrees I sought. I may have perhaps decided to change course and get the degrees I now have anyway, but it would have been done without student loans – which certainly would have benefitted me over the long term.

            But this is more than a personal issue. What do you think would happen if student loans were given out like business loans? I find it hard to believe that engineering majors, business majors, education majors, and poetry majors would all receive the same amounts of money at the same interest rates. Who would be willing to invest in an engineering major with good math skills and a clear set of career goals? Practically everyone. Who would be willing to invest in a poetry major, even with good writing skills and a clear set of career goals? Practically no one. Why? The return on investment of the former is much clearer, more obvious, than the return on investment of the latter.

            But wouldn’t this result in fewer poetry majors? Fewer English majors? Fewer humanities majors? Of course it would. We grossly overproduce graduates in these majors, as evidenced by the fact that the vast majority of these graduates cannot get jobs even remotely connected to their majors. And the reason why is that it literally costs the same to get a degree in English as it does to get a degree in engineering. Both the English graduate and the engineering graduate will have the same student loan debt, though the former is in far less demand and will be paid far less, while the latter is in much greater demand and will be paid much more. This would seem to result in more of the latter than the former, yet we have to take into consideration both the fact that people discount the future and often take the path of least resistance in the near future. The costs to getting a degree in English simply are not high enough, which is why we have far more English majors than the market demands.

            There are several consequences to this. One is that with large numbers of people going into fields like English, the average quality of graduates goes down. Another is the creation of downward pressure on wages for those with English degrees. This is what has caused universities and colleges to start using adjuncts at such high levels. Why hire a full time professor or lecturer, when you can hire an adjunct for half the wage? And you can do that because there are so many people out there with Master’s and Ph.D.’s in English competing for these jobs that wages are bid lower and lower. Yet, the universities continue to raise tuition more and more, suggesting they have the funds to pay more. But just because one has the funds, that does not mean one has to pay more. Or will pay more. Why would you, if you don’t have to? Even universities respond to economic incentives.

            The fact that universities respond to economic incentives also explains why tuition keeps going up. With the existence of cheap money in the form of student loans (students see it as cheap money because they do not typically think about the fact that they have to pay all this money back in the future – they are not rational calculators, but rather future-discounters), universities find an increase demand for their services. The customers in this case are budding up prices. And when the universities raise prices, students borrow even more money. The result is spiraling price increases.

            As we can see, cheap money in the form of easy-to-get student loans results in overproduction (of certain majors), misallocation of resources (from more difficult to easier majors), and increased prices. In other words, we get a bubble. If history is any guide, the production of highly educated, unemployable or underemployable people results in social unrest – even revolutions. Our student loan system, as practiced, creates people who cannot be employed in their fields, which in turn creates and will create resentment in those people toward the economic system in particular and civil society in general. It happened in a small scale in the late 1960s with the G.I. Bill. As I noted before, it happened in Tunisia and Egypt with their higher education financing system.

The U.S. is facing this situation on an even grander scale. Worse, unlike in Egypt, where the graduates simply were left unable to get work that matched their degrees, here in the U.S. the graduates not only cannot get work that match their degrees, they are shackled with considerable debt which, due to our laws, they can never get out from under outside of paying that debt. Which is made doubly difficult by the fact that they cannot get jobs that pay enough to pay down the debt.

Indeed, this has been the situation I have been in for a while now. I graduated in 2004 with a Ph.D. in the humanities. In that time I have been unemployed for several years, I have worked adjunct at two community colleges and a university, I have worked as a hotel front desk clerk, and I have done a little consulting. It was only this past Fall semester (2013) that I started my first full time job that had anything to do with my degree. Nine years to get a full time job – as a Lecturer. It would probably not surprise you to learn that, yes, I did in fact feel a great deal of resentment toward society during this time. Yet that was kept in check by my understanding of economics. Without that, I would have surely done as most of my fellow humanities graduates have done and blame capitalism for all my problems. Instead, I recognize the set of incentives that allowed me to make a series of poor financial decisions. I love the fact that I have a Ph.D. in the humanities, and I love the fact that that allows me to do all of the scholarly and artistic work I love to do. But I do not love the fact that our student loan system created a situation where I could not get full time employment for almost a decade (and even so, as a lecturer, it is a year-by-year contract, and it is entirely for teaching and not for doing scholarly and artistic work) and which shackled me with loans I may never be able to pay off.
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