Do you have a dream? Someone?s probably there waiting to finance it, even if that dream is actually going to turn into a nightmare. In the last few years, we saw it happen in the housing market, and now we?re seeing it happen in higher education. As I wrote with respect to the housing market collapse, the proximate causes of that crisis were the stated policy goals of things like the American Dream Downpayment Assistance Act (which, for my Republican friends with short memories, was signed on December 16, 2003 by President George W. Bush). Subsidized loans, an ?everyone has to go to college? mentality, and a few years have given us a stark reality in which a lot of young people are saddled with enormous debts.
This isn?t necessarily a bad thing?if the social returns to higher education are private rather than external?and there are good arguments to suggest that they are?then there is no reason for people not to bear the cost of their own education. Some degrees are pretty good investments in that they will increase your lifetime earnings, sometimes substantially.
It obviously isn?t necessarily a good thing, either. You have probably heard stories about people who have taken on enormous amounts of student debt for degrees that are best thought of as consumption goods rather than investments (a three-year, $35,000 master?s degree in puppetry, for example). In his recent TED e-book Launching the Innovation Renaissance and this accompanying blog post, the economist Alex Tabarrok points out how ?Students are not Graduating with the Degrees that Pay. Shockingly, fewer students graduated with degrees in computer science and chemical engineering in 2009 than in 1985. Meanwhile, the number of people graduating with degrees in the visual and performing arts more than doubled. Tabarrok concludes:
College has been oversold. It has been oversold to students who end up graduating with degrees that don?t help them very much in the job market. It also has been oversold to the taxpayers, who foot the bill for these subsidies.
What does all this mean for Average Joe? Brian Wallace from NowSourcing was kind enough to share this graphic explanation of Average Joe?s financial life with me (full-size version here). I suspect anti-debt personal finance guru Dave Ramsey wouldn?t be completely on board, but it illustrates some of the ways in which living a life of debt can be stressful and unwise. It ends with a bit of advice that I have passed along to my students and a question. On one hand, it probably isn?t wise to borrow money to finance consumption.
It also asks whether Congress allowing subsidized Stafford Loan interest rates to double from 3.4% to 6.8% is such a hot idea given what it would add to borrowers? debt burdens. Think Progress quotes the Washington Post and notes that under the compromise that might emerge, students might be responsible for the interest on their federal loans while they are still in school. It?s obviously not going to be politically popular with borrowers and people with a commitment to government subsidies for higher education. At some point, however, wisdom suggests that we should allow people to bear the full costs of their choices, particularly when the benefits of those choices are private rather than external and particularly if ?25% of all federal student loans are past due.? The timing may not be perfect, but when would be? It won?t be pleasant for everyone, but eventually we?re going to have to face the music. Here?s Steven Horwitz with an explanation of how artificially low interest rates misdirect resources in the context of higher education. What do you think?
Graphic Credit: NowSourcing, Inc. Click here for full-size version of graphic.
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