College loans: consumption or investment?

I noticed, in the stats for my blog, that somebody had found there way here by searching – somewhere: I’m still not all that sure how it works – for this question. Are college loans consumption or investment? More accurately, is one consuming a college education, or investing in their human capital via a college education? Wandering around on my own, I found Ezra Klein discussing the question of college loans. I’ve also dealt with it once or twice, here.

A comment down the line in the Klein blog-post:

A college education is either consumption, investment, or both.

If you’re getting an education to be “fulfilled” (or to postpone reality), it’s consumption. Why should the taxpayers subsidize you? We wouldn’t buy you a Porsche or a face lift if that’s what you think you need to be “fulfilled.”.

If you’re making an investment in your future (law school, MBA school, trade school) and it does not pan out, why should the taxpayers bail you out? We wouldn’t bail you out of the Enron or pets.com stock you bought in 2000.

An interesting perspective. I’ve tended to come across as fairly non-sympathetic to student loans (or those there-burdened, more specifically). My argument remains: a university education is an investment in (i) your human capital, and/or (ii) your future earnings (potential). Why, you may ask, do I distinguish between the two?

  1. To some extent, getting a degree does, in fact, make you a ‘better’ (more productive, etc.) piece of value-added Human Capital
  2. To some (some would say, and not without cause, “greater”) extent, that university degree has a signalling effect. It says to employers, “I have my shit together, enough to get to University, enough to see the value in it, enough to graduate.”

These are both relevant contributers to your employability, and the income you will earn if/once employed. Both, you should recognise, are investments. In both instances, you (the student, or not) are investing in your lifetime earnings. That investment, depending upon the degree that you choose, will pay off – and therein lies a detail.

If you choose a degree that is not, probabilistically, likely to increase either your employability or your earnings, is it an investment? If you choose that BFA (sorry: Fine Arts), is your degree an investment, or consumption? Could we, in fact, be mis-characterising the entire enterprise? Who’s to say the investment has to be monetary? The payoff to the individual does not need to be financial. We just view it that way because the costs sure as hell are.

This becomes the problem, as per the comment reproduced above. If a student takes that BFA, they will incur significant costs (tuition and materials), but their earnings potential will not move much, relative to no degree at all. Those earnings will be in a field only enter-able with a BFA, of course, but this is neither here nor there (for us). Those two counter-points remain: if the BFA is consumption, why should society share the burden? If it is an investment, why should we share that burden?

Here’s why:

higher ed market graph

There is a social benefit of higher education that exceeds the private benefit: there is a positive social externality attached to university degrees. Ergo, in “the market”, the equilibrium number of degrees will be Q1: in fact, the social optimum number of degrees is Q*. How do we get from D1 to D2? A few ways. Federally-underwritten or subsidised student loans. Government grants – hell, private grants and scholarships (this is the US, after all). Almost any act whereby we, as society, compensate individuals to turn all of the social benefit into private benefit, so that students demand higher education along D2 instead of D1.

Alternatively, following the other path, we keep D1 but shift the supply of higher education outwards, via public universities. This will lower the price, and – via the law of demand – increase the quantity of higher education demanded. Either way, problem solved.

I’ve called Q* the allocatively efficient equilibrium: the number of degrees society wants. Here, too, lies a problem. I can convince you, somewhat more easily, that economics, physics, medicine, etc. degrees are valuable for society. These are skills we want drifting around our economy and society. Fine arts? Marketing? This is a harder case to make.

In theory we value the earnings potential of these degrees, ultimately, according to the value we – as a society – place upon having people with those degrees. I say in theory – I see a lot of people earning a lot of money for shit that I just don’t see as being valuable. However.

Back to the question: is college education consumption, or an investment? It is investment. It may appear as consumption, at the time (I went to University by default: in Australia one can, fairly easily, and I just didn’t want to work. I did understand the value-added that the degree would confer, but staying in education was the guiding principle. Now I have a PhD – so who’s to say the accidental investment didn’t pay off?). Lord knows plenty of my students seem oblivious to the tens of thousands of dollars being blown on them by their parents.

We have a tendency, however to ‘write off’ (for want of a better description) degrees that “we” do not see as valuable. You take Middle-America, Red-State, etc. – name your Joe Sixpack term of art – and they will, most likely, view a lot of the crap doled out at liberal coastal colleges as useless. I.e., as consumption. This is, though, only because they see no value in the investment – so it can’t be one, can it?

Like I said, I cannot deny there is some economics attached to this. If liberal arts degrees were valued in society, they would have a greater marginal revenue, once received. But they don’t. So…

There is the other, more American proof: money in University goes to Business, Engineering, etc. – because those alumni made the money, so they’re responding to that value-add by putting money into getting to D2 – but only for those degrees. We leave degrees with less social benefits at D1.

Getting back to the issue of student loans, then: what does this mean, for them? For students loans, for student debt? It’s hard (for one person, i.e. me) to say. I would like to see an Australian system of financing (basically you get your loan from the government, and they take it back via taxation – meaning it isn’t structured like a bank loan, which is where the heavy repayment burden comes in). I’ve discussed this with a colleague, though, and he made two very good points in the face of my obnoxious welfarism:

  1. Australia only has, like, 21 million people or so. Not 300 million. We have fewer people living in poverty, we already have health care and K-12 education covered (more or less).
  2. Making the government responsible for where D2 lies, relative to D1, will still result in discrimination according to the value of the degree – why would we trust the government with that rationing decision?

Dave’s latter point was not a part of some neo-Norquistian, twisted, idiot logic. His argument was sound. Our governments are not qualified people. Are relatively technocratic alumni? Maybe – can you think of anyone better?

My solution! The “system”, as it stands, is only – allowing for where we are, and the prevailing social welfare function, market neo-liberalism, etc. – marginally broken. The problem is information: one’s student loans should not (repeat, not) be able to be sold to various companies every couple of weeks. Interest rates should be fixed. The loan, its length, its conditions, should all be stable and easily understood, and students should be made aware, going in, what repayment of those loans will entail. This means that, yes, I want government regulation. Student loans can be as predatory as anything else. We don’t let kids this age drink, for Cliff’s sake. But we try to get them to apply for our credit cards? Come on.

BFA students (for example) should be made aware of where their employment is distributed, the income attached, the costs incurred, etc. Will you add in a few thousand in credit cards or supplementary loans for final-year projects, only to end up at some small indie magazine somewhere, starving in New York? We should all be made aware of the implications of our majors, responsibly, and those implications should not be hijacked (or allowed to be hijacked) by usurers. If we value higher education as an investment, a commitment must/ought to be made to protect young people who make that investment (again: I think. My idealism is not highly-regarded in many circles).

Do I want everyone to end up (like a few of my students) frustrated kindergarten-teachers, miserable in their parent-pushed “sensible” finance degrees? No. Hell no. My wife would make a shit marketing major, and I wouldn’t be half as interested in her if she’d tried (nor, for that matter, would we have even met). But, like anything else, you pay your money and you take your choice. If only we all can make our choices with the proper information, our choices will get to be our own.

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4 comments so far

  1. hegde funds news on

    interesting thought. I think it is arguing a if better education leads a better life. Certainly, some people does not have the best quality of education but in fact they are among the richest person in the world. One typical example of where I live is a tycoon named “Lee Kai Shing”. He is the chairman of Hutchison Whoompa and Cheung Kong (holding) limited in Hong Kong. He did not take higher education because of the second world war and in fact he only have primary education! But he is the richest man in Hong Kong and may be one of the 500 most richest man in Frobes!

    So what’s the catch? Education does not necessarily means make one smarter but it is what the total world see this as a personal asset rather than social value in general.

    In asia, always every one believes higher education leads to better life but is it true? I think you have the answer here!

  2. […] chime in if I’m wrong, Casey). He used to write an excellent blog, and he once wrote about how a college education is an investment in your own human capital, in addition to your future ear… He was writing about college education in the context of student loans, but his post is way […]

  3. Xuber on

    Good input, which helped me substantiate my learning of MA (EPM). Thanks

  4. サイフ ランキング on

    ジャケット 安い


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