• Skip to main content
  • Skip to primary sidebar
  • Saverocity
  • Home
  • Contact
  • Support the Site
  • The Free-quent Flyer

Independently Financed

Independently Financed

Three bad and one good way to think about public higher education and tuition

April 24, 2019 by indyfinance 2 Comments

Become a Patron!

Elizabeth Warren made a splash this week with her plan to both ensure public higher education is tuition-free and forgive up to $50,000 per student of the existing stock of federal student debt.

I already offered my hottest takes on Twitter, but I think a lot of the disagreements surrounding public tuition and student debt revolve around fundamentally different conceptions of the nature and purpose of higher education. As often happens in politics, that means people who think they are disagreeing about one thing (the appropriate level of tuition at public universities), are actually disagreeing about something else (what is education, who owns it, and who benefits from it?).

I think there are basically four ways to look at the issue, and it’s these competing perspectives that lie at the heart of the disagreement.

Education as a Private Capital Good

In this view, education is literally treated as an investment, made by the student, in a combination of individual “capital” (knowledge, experience, and credentials) and social “capital” (meeting friends, spouses, and business partners). Like many investments, the upfront cost is large, but since it yields an even higher time-weighted and risk-weighted return, it’s still an investment worth making.

Since education is a purely private capital good, purely private commercial loans are an obvious way of financing that investment. In a rationalized educational system, students would simply be charged for the appropriate fraction of their instructors’ time, controlled for salary, enrollment, and overhead, and then borrow the necessary amount semester-by-semester at a market rate of interest.

While this perspective has been beaten into Americans by the Reagan-Clinton neoliberal revolution, it’s important to understand how completely novel it is, and what its real-world implications would be.

First, what is the cost of overhead? If we are to completely rationalize the charge on the student’s side of the equation, it seems necessary to likewise rationalize the expenses on the university’s side of the equation. If they are to charge the entire cost of providing education, then the federal government should also capitalize the cost incurred through the Morrill Land-Grant Acts. Profitable universities, of course, would be able to take out long-term loans to finance the one-time cost of reimbursing the federal government for their land, but some institutions would no doubt fall into default and the federal government would have to seize and auction them off.

Second, what is the market rate for an unsecured debt by a 17-or-18-year-old borrower? If the payoff to higher education has a barbell distribution, with a high percentage of low-income dropouts and an above-average income to graduates, the market interest rate would have to be astronomical: low-income dropouts and graduates will declare bankruptcy, while high-income graduates will repay their loans early.

If higher education is a purely private capital good, obviously there’s no reason for the federal government to get involved with loan guarantees or financing, and without them, it’s unfathomable that private sector financing will be available at all.

Education as Intergenerational Wealth Transfer

Until 2015, this was the unspoken premise of a lot of opposition to universal tuition-free public higher education. And then in 2015, the unspoken became spoken, when Hillary Clinton insisted that “I am not in favor of making college free for Donald Trump’s kids” (Interestingly, she did not insist on means-tested co-payments at public libraries, swimming pools, parks, museums, or elementary and secondary schools, so I gather the Trump clan is free to visit them at will without furnishing their tax returns).

The logic here is simple: since we refuse to appropriately tax high incomes, and we refuse to tax estate transfers, and we refuse to treat capital income the same as earned income, the only mechanism we have left to tax the wealthy is through our system of public higher education, where we charge them full tuition. If tuition were low or non-existent at our public universities, we would lose our last remaining option to share any part of the largest private fortunes in the world.

Hillary Clinton is a savvy politician, and she made this argument for a reason: it has immediate, emotional appeal. The trouble is, it begs the question. If we taxed high incomes properly, why would we need to single out high-income parents for additional tuition charges? If we taxed estate transfers properly, why would we need to finance universities with levies on high-net-worth parents? If we taxed capital income properly, why would we need to single out high-capital-income parents for special tuition fees?

Education as Class War

If “stick it to the rich” is one version of the argument for public higher education tuition, “stick it to the poor” is its mirror image, helpfully illustrated on Twitter. In this version of the story, public higher education is not a public or private investment, it’s an ordinary consumption good. The poor buy cheap public higher education for less money, and the rich buy expensive public higher education for more money; the poor go to technical colleges, the rich go to flagship universities.

I appreciate the fact that this view has resurfaced precisely because it disputes the entire premise of American meritocracy. College graduates do not become more qualified because of anything that takes place during the course of their education; rather, they’re more qualified because of their starting wealth.

However, if anyone really believed this was true (and I think almost no one does), the consequences would be radical. Graduates of elite universities would not receive more consideration during job applications, they would receive less, since such a large percentage of their education is attributable to their starting wealth, rather than any accrued qualifications.

Needless to say, almost no one explicitly professes this belief. Rather, you end up with just-so stories wherein the well-genetically-endowed accumulate their wealth through hard work and intelligence, their children inherit their hard work and intelligence genes, and so the people who “deserve” to attend elite universities (thanks to the genes) also happen to be able to afford it (thanks to the wealth). There’s even a term for it in the eugenics literature: “mismatch theory,” whereby it’s downright dangerous to admit the poor to elite universities where they are destined to underperform.

Conclusion: Student Debt as Aggregate Demand Management

It would be unfair to conclude without sharing my own view of the student debt crisis, which is simple: the experiment has failed.

Federal student loans (and other federal programs like Pell and FSEOG grants) were intended to address a particular problem: if Baumol’s cost disease causes the cost of public education provision to accelerate faster than the increase in productivity in the higher education sector, then the states (which are constrained by balanced budget rules) will be forced to radically reduce the quality of education they offer or radically increase their taxes to finance it, and over time gradually but permanently reduce the education level of the American people.

Instead, the federal government decided to print money in order to finance those public education services. But this decision created a different problem: if the federal government had simply assumed the cost of operating the nation’s public universities, the entire cost of that operation would be brought “on-budget,” creating an expense that would have to be matched with increased taxes or debt.

Instead, we went a different route. Rather than simply operating, and paying for, a system of nationwide free public universities, we created a system of federally-backed student loans. This has the great technical advantage of creating an entry on the asset side of the federal ledger. Indeed, the federal student loan program is “profitable,” in the specific, bizarre sense that the money it earns in principle and interest payments exceeds the amount it loses in loans discharged due to death, disability, or other reasons.

President Obama made important changes to the system again with the introduction of Income-Based Repayment, which allows the remaining balance of federal student loans to be discharged after 20 years of payments.

The question remains, however: why assign the cost of a publicly-financed system of colleges and universities to the people who happen to attend them? If graduates earn higher incomes, then we can easily impose a progressive income tax that captures a share of their increased income over that of non-graduates. If graduates accumulate more lifetime wealth, then we can easily impose an estate tax that reclaims far more than the cost of their attendance at a public university. If graduates earn an unusually high share of income from capital, we can easily equalize the tax treatment of income and capital gains (as we did it as recently as the 1980’s).

The experiment was simple: if college attendees really exerted a unique upward pressure on wages and prices by earning and spending much more money than non-attendees, then isolating them for specific surcharges might have made sense, in order to prevent overall price inflation. But the experiment failed. In the very worst cases, it turned into just another bullshit means-tested program that no one qualifies for.

The fact is, we already operate a system of publicly-financed colleges and universities, because we know as a country we rely on the graduates of that system. All that’s left is to admit it.

Become a Patron!

Filed Under: higher education, rant, student loans

Reader Interactions

Comments

  1. Jason says

    April 27, 2019 at 2:13 pm

    Such a well reasoned argument. I agree with you.

    Reply
    • indyfinance says

      May 21, 2019 at 10:30 am

      Jason,

      Thanks for reading!

      —Indy

      Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

Recent Posts

  • Free and discounted “micromobility” services
  • How to think about stockpiling Series I savings bonds
  • Preserving your eligibility for paid family and medical leave
  • Schwab’s forthcoming direct indexing platform might be worth a look for the merely affluent
  • If supply and the rate of profit were fixed, then all wage increases would be inflationary (they’re not)

Recent Comments

  • Prashant on The Social Security magic trick
  • TravelerMSY on Free and discounted “micromobility” services
  • Jamie on How to think about stockpiling Series I savings bonds
  • gar on How to think about stockpiling Series I savings bonds
  • Irene on Inflation-proofing your life

Archives

  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017

Categories

  • affordable luxuries
  • better billionaire project
  • book review
  • cheap lessons
  • fire
  • free business idea
  • health insurance
  • higher education
  • insurance
  • investing
  • over there
  • personal finance
  • rant
  • real estate
  • self-employment
  • social security
  • student loans
  • taxes
  • Uncategorized

Newsletter

Copyright © 2022 · Magazine Pro on Genesis Framework · WordPress · Log in