The Student Loan Charade

From Bloomberg: Who’s Profiting from $1.2 Trillion of Federal Student Loans?

For-profit colleges profit, so does the higher-ed bureaucracy.

The issue is while student loan debt and tuition is high, the amount paid out of pocket by the student is low relative to the sticker price and only modestly exceeds the CPI. After taking into account debt forbearance and other options, it’s probably not as bad as the media makes it seem. There is evidence of a feedback loop of more aid and then higher tuition, which leads to more aid.

Another problem is that high school graduates who are not intellectually suited for college are prodded to enroll, subsequently dropping out with little show for their efforts but a mountain of debt that they will never pay off. The newest iteration of SAT has been dumbed-down to such an extent that it’s ineffective at screening for college suitability for all but the highest of scores, and grade inflation renders high school GPAs nearly worthless, too. If the financial aid application process took into account IQ to weed out the students who are most likely to fail, as the military already does to screen eligibility of recruits, maybe we would stop going in circles in this unproductive finger pointing about student loans.

Not to make this too partisan, but liberals are the problem, again and again. Liberals like Sanders whine about student loan debt, despite the fact that it’s their policies that are making life hard for millennials.

Too many bureaucrats jobs depend on the student loan charade continuing, as summarized by Pournelle’s Iron Law of Bureaucracy:

…in any bureaucratic organization there will be two kinds of people: those who work to further the actual goals of the organization, and those who work for the organization itself. Examples in education would be teachers who work and sacrifice to teach children, vs. union representatives who work to protect any teacher including the most incompetent. The Iron Law states that in all cases, the second type of person will always gain control of the organization, and will always write the rules under which the organization functions.

From Upton Sinclair, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

That’s the situation we have now with financial aid.

Then there is the issue of credentialism, contributing to the tuition feedback loop. With the exception of certain degrees (medicine, biology, engineering, computer sci, etc), a degree is more of a signal of ‘baseline’ general competence rather than competence of a specific skill. But the thing is, there are much cheaper and better * ways to signal general competence, such as with IQ tests or the SAT, than with expensive, time-consuming degrees. Political correctness and fear of disparate impact litigation can explain creeping credentialism.

An finally, the student bears some responsibility for: 1, not dropping out due to laziness or other factors within his control (dropping out eliminates all of the hypothetical income gains from going to college); 2, understanding the terms and conditions of the student loan instead of whining about being exploited; 3, majoring in a field that is likely to pay enough to cover the loans; 4. understanding his limitations, in declining to apply if not smart enough to benefit from college.

* Grade inflation is making GPAs less effective at signalling competence, contributing to creeping credentialism. If a 3.0-4.0 GPA bachelors of arts doesn’t mean much, then the next step is a Masters. Then it’s PHD, and so on.

There is also tendency for things to become harder and more efficient as time goes on, due to competition, evolution through trial and error making people smarter and savvier, and the low-hanging fruit being picked. This is observed in the investing world, with the majority of active management failing to beat the indexes whereas in the past active management was more successful at generating ‘alpha’.

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