America’s $1 trillion student loan mess

Students such as these at the University of Pennsylvania are racking up mountains of student debt to earn college degrees. Many don’t pay their loans back in full.
Students such as these at the University of Pennsylvania are racking up mountains of student debt to earn college degrees. Many don’t pay their loans back in full. AP

College is expensive, and getting more so every year. Since most families don’t have tens of thousands of dollars lying around, the government has responded with ever-more-generous student loan programs.

First there were the loans themselves, with interest subsidized while you’re in school. Then, when that proved inadequate, we instituted income-based repayment, allowing students to cap their payments at a percentage of their discretionary income (stretching out the loan, and getting forgiveness on any balance remaining after 25 years). Then we made the terms more generous. Now the Obama administration has announced that it’s making 5 million more people eligible.

You know what they say about doing the same thing over and over and expecting a different result. This is certifiable. College is too expensive, so have the government make it easier to finance – then keep shifting more of the cost burden to the government, without doing anything about the underlying cost inflation.

The income-based repayment programs are relatively new, so the government hasn’t yet been handed the bill. But when the government gets that bill, people are going to notice that this is a costly business.

The government has restructured the educational system to make it look more like the health-care system, with the costs paid by third parties while the service is consumed by individuals who have no incentive to think about price. The effects are predictable for both.

There’s some evidence that a lot of the benefit of a college degree comes not from what you learn but from signaling to employers that you are the kind of conscientious, hardworking student who can get into college and get a degree. In other words, much of what we do in school is obtain a credential that certifies us as good potential employees.

As an individual, it’s still perfectly rational to borrow money to invest in that credential, considering the sizeable income bonuses it confers. But public policy has to look at the system, not just what might benefit a particular individual. And at a system level, helping people borrow money to obtain a credential is crazy. A credential doesn’t increase anyone’s productivity; it just determines the distribution of better- paying jobs. The net economic benefit is zero.

The payoff from college is not just economic, of course. Regardless of whether the experience or the diploma makes you more productive or raises your income, you ideally left college a better citizen, leading a richer mental life. But if someone proposed a program to help people be better citizens leading richer mental lives, you probably wouldn’t be prepared to encourage individuals to take on crippling debt to pay for it.

The federal government now has $1 trillion worth of student loans in its portfolio, a substantial portion of which will be forgiven. But almost no one even dares to ask what we’re getting for all this money.

It’s hardly surprising, then, that the only policy we’ve been able to come up with is bigger subsidies. Politicians don’t know much about making people richer, smarter or better citizens. But they’re good at writing checks.

Megan McArdle writes on economics, business and public policy.