Replacing Student Loans with High School Graduation Payouts

My coauthor and I are both students, so naturally student loans and education policy are areas of at least passing interest. Months ago, ensconced here,  we engaged in a lively debate on those very subjects. President Obama’s recent comments regarding the utility of an art history degree prompted a return to them, and this post is the result.*

If my memory serves (and given the quality of Watershed’s beer list it may not), our conversation started with the premise that as a society we produce too many college graduates. To be sure, the value of a college degree continues to increase, but that doesn’t rule out significant and simultaneous degree inflation (see here for a discussion of both phenomena). The basic argument might be something like: even though the average value of a degree has increased, this is driven largely by specific subsections (STEM fields, Ivy League econ grads, elite liberal arts college English majors who become lawyers, etc.), and higher education also pumps out thousands of graphic design majors from East Moron State University who will never get a high-paying job ever and still have many thousands of dollars in student loans to repay, and perhaps these people would be better off not going to college (i.e. our gross consumption of higher education should be lower).

You can frame this (assumed?) overconsumption of higher education as either a supply or a demand issue. The demand-side argument says that we choose to send too many people to college because we place a social value on holding a college degree that for many people exceeds its long-term economic value. As a result, loads of people who don’t want to go to college feel compelled to pursue a college degree anyway. The supply-side argument says that Federal subsidies for student loans make the cost of a college education cheaper than it should be and so more college is consumed than would be at “true” market clearing prices for a four-year degree. In this scenario, people who would otherwise spurn a college degree figure, “Well, for a price that low, how could I not attend?!”

I wondered if perhaps the timing of student loan subsidies might indicate which of these is a more plausible story; if their advent predated the explosion in college attendance it would seem to lend credence to the idea that excess consumption of higher education is more a supply-side issue than a demand-side one. This appears to be the case; unfortunately so for me as my intuition lies with the demand-side diagnosis.**

So if we’re worried about overconsumption of college, perhaps we shouldn’t subsidize student loans. (At all? Perhaps only on a means-tested basis?) Given the structural changes the economy is undergoing and the increasing returns it provides to knowledge-based workers, I think it’s difficult to say we shouldn’t subsidize degrees at all; at the very least some sort of means-tested student loan subsidies would seem appropriate.

Except, not quite. If we subsidize college (even on a means-tested basis) because doing so is viewed as part of ensuring some minimum level of opportunity for all Americans, then it’s not clear it actually makes sense to subsidize college specifically. There is a decent argument to be made that the value of the four-year college degree as currently imagined is fairly contingent; in ten years it may be more valuable (it may already be more valuable) to finish high school, learn to code, and get a job at a software company.*** Or do something else entirely. Who knows? But if you accept the historically contingent utility of a four-year college degree, then from a pure policy perspective (I have no hope of this idea ever becoming political reality) it might make more sense to have a means-tested program which awards high school graduates a lump sum to be put towards whatever seems like the option with the greatest return on investment (college, learning a trade, setting up a business). It would be hard to prevent abuses; surely thousands of graduates would find ways to spend it all on beer, drugs, clothes, and fast cars. But at least then we’d only suffer from too many convertibles instead of too many art history majors.

*As an aside, I’ve always thought if I could do another B.A. I would do one in art history
**On the other hand, it is difficult to disentangle all the various causalities at play; Federally-subsidized student loans predate the explosion in college attendance, but so do women’s lib and the Civil Rights Act, which played a large role in expanding the ranks of U.S. collegians
***Yes, this is kind of a stereotypical example. But also, kind of true