Are Bachelor's Degrees Worth the Debt?

Jeffrey Selingo warns in the Wall Street Journal that, increasingly, they are not, depending on where you go. In that, he agrees with I wrote just last week.

Some, like Ben Bernanke, claim that student debt is not inflating a higher education bubble that will cause a financial crisis, because the vast majority of student loans are backed by the U.S. Government. So the taxpayers are on the hook and not the banks. Banks will not be in financial distress if students default.

Bernanke’s claim is revealing in that it is clear he views the financial system as the economy. It seems that if the financial system is afloat, everything is okay. Such reasoning ignores that what helps people achieve their ends is not money per se but the actual producer and consumer goods that are produced throughout the social economy.

This fact points to the economic problem with government guaranteed student loans. Investment made possible by subsidized loans of newly created money contributes to an unproductive use of resources.

In the first place, it is not at all clear that the educational payoff matches the expense. According data from the Collegiate Learning Assessment, 45 percent of students its sample demonstrated no significant learning in their first two years of college and 36 percent demonstrated no learning in four years. According to the National Assessment of Adult Literacy, from 1992 to 2003, literacy among college graduates declined at about the same rate that enrollment grew; All the while government grants and guaranteed student loans significantly increased.

This dismal educational payoff is largely because a much of the greater tuition payments made possible by government student loans have been absorbed by increases in personnel. For example in 2007, colleges utilized 13.1 percent more employees to educate the same number of students than they did in 1993. The vast majority of growth has been in administrative staff. In fact, over a fifteen-year period postsecondary administration grew more than twice as much as instructional staff. From 1976 to 2005, the number of administrative staff per student more than doubled; from 3 per 100 students to more than 6 per 100 students. The financial effect of administrating bloat is magnified by the fact that the average mid-level and senior-level administrative salaries are noticeably higher that the average faculty salary.

Not surprisingly the largest increase in college employment expenditures is for administrative staff. Between 1993 and 2007 expenditures per student for instruction increased 39.3 percent, expenditures in research and service increased 37.8 percent. At the same time, however, expenditures per student for administration increased by 61.2 percent

Making available the college experience, many resources must be used. Land, labor, buildings, desks, computers, energy, all sorts of amenities, etc. These are resources that could be used elsewhere. If they are being used to provide education merely due to government subsidies, they are actually more valued in other uses.

For a lot of students college is more a consumption good and less an investment. Multimillion dollar facilities designed to satisfy student recreation need. These include 53-person jacuzzi’s; massage and pedicure services; movie theaters, and ballrooms.

That student debt is fueling malinvestment is indicated by the rising delinquencies. Like the Old Gray Mare, the College Wage Premium ain’t what she used to be.

Increasing default rates prove this. What matters is not only the level of a post-college salary, but the level of that salary relative to the cost of college. Value of the product is not as great as anticipated. Increasing number of students put at risk of not paying off loan.

Additionally, many students who have borrowed money for college do not complete it. Six-year college completion rates at public four-year institutions have remained just below 55 percent for a decade. At the same time the four-year rate has been stuck around 30 percent.

Colleges, universities, and their students are caught in a costly game of Leap Frog. The perceived need for financial aid and loans results in more government subsidies. More debt results in more demand for college and higher tuition. Higher tuition increases perceived need for more debt. More student debt increases the demand for college which increases tuition price. On it goes. The only solution would be to get the government out of the business of subsidizing student debt so at least decisions of students to borrow and banks to lend, and colleges to set tuition will be made based on economic reality and not the shifting sand of monetary inflation.