Why I’m not optimistic the student loan debt situation will improve

My opinion has generally been that the student loan bubble/crisis, like global warming or the ever-looming threat of China, is overblown and the product of media hype. For as far back as I can remember we’re been told by the alarmist media that America is on the brink of war with China, or that global warming will render entire regions of the world uninhabitable and displace millions of people, yet none of those things has happened. Moreover, we’re not even in the general direction of any of those things happening. There haven’t even been those much-feared and hyped blockades against Taiwan by China, let alone warfare.

So I am optimistic it will not lead to crisis as some in the media seem certain and have been crying wolf for the past 13+ years it would. On the other hand, I am pessimistic that anything can be done about it either.

This excellent article The Truth about College Costs shows how putatively high tuition costs are due to marketing, and that the amount actually paid is much less than the stated sticker price. The media latches on to the catchy, inflated figures, overlooking that hardly anyone is actually paying those huge tuition fees in full. But that is also the point: to get the media’s attention. The public is convinced that the high price makes it worthwhile, which is subsequently discounted heavily to something more affordable but still expensive.

In the late 1980s and early 1990s, colleges discovered that the appearance of high tuition was good for marketing. Positioning one’s school as “almost as expensive as Harvard” created a sense of exclusivity and, somewhat contrary to economic theory, resulted in increased applications. It also led to free media coverage, as newspapers found stories about the high cost of college were evergreen.

This would make it like a Veblen good, which does not obey the expected inverse relationship between price and demand.

Of course, almost nobody was willing to pay Harvard-level tuition for a middling college education. Colleges resolved this problem by canceling out their high sticker prices with “institutional scholarships” that had no money behind them; they were simply the discounts a school had to offer to convince students to enroll. The game was easy: It required no fundraising to endow scholarships, just the appearance of a high price paired with the appearance of a scholarship. This “high-sticker, high-discount” practice worked magic for enrolling students — and it was free. It soon spread to institutions nationwide.

Even after factoring in student loan debt and inflation, the college wage premium still makes college worthwhile . This holds for all majors and institutions, including low-ranked ones and ‘useless’ majors. It’s not uncommon to read first-hand accounts, such as on Reddit or Hacker News (although this demographic does tend to skew above-average in terms of SES), of individuals in their 30s or 40s who have solid upper-middle-class incomes, a primary residence, and retirement accounts, who still have small monthly student loan payments that are inconsequential compared to income and overall net worth. It’s not like these payments have prevented such individuals from attaining this high standard of living. It’s the opposite: this high standard of living would not have been possible without the degree.

For dual-income households this is obviously magnified even more so. When traditionalists on the right complain about how young people are delaying family formation or how women are prioritizing degrees and jobs over raising children, they are overlooking the strong economic incentives for why this is so. The incentives heavily favor devoting one’s young adulthood to the attainment of degrees and careerism. Past a certain age, typically the mid 30s, opportunities tend to dry up. Why do recruiters for top companies target colleges? Because younger employees tend to be more quick-minded (again, fluid IQ) and more malleable and less ‘set in their ways’ (which comes with age). Also, people of similar educational attainment tend to be attracted to each other, so both genders bear some responsibility for this.

For all the hype and anger about student loan debt, the terms and interest rates are way better and more forgiving compared to private debt, such as credit card debt or car debt, yet there is much less outrage by the media and politicians about those things. Good luck borrowing at the the ‘prime rate’ from a private lender if you have no credit history. This is again where I depart from the right. If you think college loans are onerous or exploitative, private debt is as bad or worse, usually worse. Credit card companies and banks are known for all sorts of arbitrary fees and trickery. Private companies are known for hidden costs and recurring billing buried in fine print, such as cancellation fees or surprise billing (pay $5 for shipping but then get a surprise bill for $100 later if you do not explicitly cancel, which is a common practice). At least with a federal student loan you know what you are getting upfront.

A degree, despite the debt, is still a solid hedge against inflation. Whether it’s tip-flation, shrink-flation, credit card payments, surging insurance premiums, healthcare, or just good ol’ CPI inflation, Americans are getting squeezed left and right. And unlike a new car, which loses half its value after you drive it off the lot, the degree gains value in the form of higher wages that match or beat inflation. It’s not like people without degrees are somehow shielded from inflation (except perhaps the very poor, who get lots of subsidies anyway). Food inflation squeezes non-degree holders even worse relative to income given that they have less money, but it’s not like demand correspondingly is less. Likewise, it’s not like college grads who earn $120k/year vs $40k/year (without a degree) require 3x as much food, 3x as much phone plans, 3x as much car insurance, or 3x as much healthcare etc.

This is not to condone the status quo though. There ought to be better alternatives for young people, who are at their peak productive years (cognitive ability tends to drop with age, especially fluid intelligence), than having to go tens of thousands of dollars into debt (even with generous discounts, college is still expensive) and having to set aside 4-8 years in the hope of attainting the necessary credentials for entry into the ‘middle class’.

Trade schools are assumed to be faster and cheaper, but often aren’t. The average annual cost of a trade school is around $17,600, which is comparable to college tuition, but with much less aid and lower wages. ‘The trades’ also require a lot of certification, which similar to a 4-year degree can be expensive and time-consuming to attain. According to the BLS.gov, “licenses and certifications are usually valid for a limited term and must be renewed periodically,” whereas a degree does not ever expire. Same for coding bootcamps, which have high upfront costs comparable to college tuition. Success rates are mixed at best, and it’s hard to find accurate estimates as to how many coders land middle-class jobs.

There needs to be a better way, and maybe there is, but we’re stuck with the system we have, and I don’t see things getting better or any reason for it to change. And despite attention-grabbing headlines about college closures or the college wage premium falling a bit (the losses mostly concentrated among Asians in STEM subjects), the underlying trends are still intact. Given that there are “3,982 degree-granting postsecondary institutions in the U.S.” we would expect for any given year for some of them to close.

Part of the reason I am not optimistic the situation will improve is that the student loan crisis or bubble (or whatever you want to call it), is the byproduct of a voluntary mutually beneficial economic transaction between the employer and the prospective employee. Young people exchange their time and money for a credential, which confers a significant wage premium, and companies, in turn, hire college grads, voluntarily paying this large premium even when a huge pool of inexpensive high school graduates is available. Both parties win. There is nothing stopping high-paying firms from dipping into this pool more often, but for whatever reason choose not to. There is no government agency that compels companies to hire college grads. So evidently, employers perceive enough value that they willingly keep paying the premium. Even publicly traded firms, which prioritize maximizing profits and cutting costs to please shareholders and analysts, find enough value. Labor is one of the biggest costs for any large company; imagine how much money could be saved by hiring fewer college grads.

I have seen some on the right argue that IQ tests or other proxies that correlate with IQ are the answer to credentialism. I used to think this too, but I was wrong. The assumption is disparate impact law stands in the way of such testing, and thus the only safe option is to require degrees as a filtering mechanism for intelligence. The thing is, this already exists. It’s called the Wonderlic test, and it’s been around since the 70s. Despite Griggs, thousands of companies use it, and thousands of people on Reddit and elsewhere report taking it. So despite disparate impact, the test is safe for employers to use and common. Although it’s sometimes called a ‘personality test’, it’s implicitly understood to be an IQ test. It asks similar questions as found on IQ tests, its scores correlate well with full-battery IQ tests, and it produces a nice bell curve distribution of scores, similar to IQ. The NFL used it for decades despite blacks consistently scoring worse on it, and were never sued. Another type of cognitive test is the widespread use of phone interviews, which ask brain teasers. This is to test fluid IQ. Additionally, over half a century ago, before the rise of credentialism and before the ‘civil rights era’, it’s not like employers used IQ tests or the SATs to screen applicants.

Some conservatives are inclined to blame political correctness or cultural values, such as college grads being more fully assimilated with the values of the left compared to high school grads. I disagree with this too. This is does not make economic sense. If companies only cared about assimilation, again, there is a huge pool of high school grads who are also fully assimilated. It does not cost that much to brainwash someone, nor are the intellectual barriers that high. It’s not like it’s only college grads who hold woke values, as the 2020 BLM protests/riots showed. Are all those people on social media who are tweeting social justice hashtags have college degrees? Doubt it. If instilling DEI values was of upmost importance, companies can easily do this with high school grads without having to pay the premium.