Wednesday, December 06, 2006

Is Student Debt Too High?

Economist Gary Becker asks that question on his blog. He concludes that student is not too high, especially considering:
On the other side of the ledger, higher tuition over time was related to sharply higher financial benefits from a college education. The typical college graduate earned per hour about 50 per cent more than the typical high school graduate in 1980, and the gap is now about 95 per cent. Earnings of graduates with a professional degree or other post-graduate education grew even faster over time than did earnings of college graduates.
His main conclusion is that interest rates on student loans should be determined by the amount of income you make after graduating from college:

Within any category of graduates, earnings vary considerably by type of job-- teachers and clergymen earn a lot less than investment bankers--and by degree of success within jobs. Fixed interest loans are not the best way to borrow when loans are used for risky activities. Returns on higher education are rather risky, even after adjusting for how they co-vary with returns on assets. Businesses often borrow with the equivalent of equity to finance start-ups and other risky activities, where the equity pays off well if the venture is successful, and pays little if the venture fails.

This suggests that student loans should not have fixed interest rates that require a fixed amount to be repaid per $1.000 borrowed, but rather should have the equivalent of an "equity" repayment system. That would mean that persons who earn very little repay little, while those who earn a lot repay a lot (per $1,000 borrowed). Requiring individuals who are repaying student loans to submit their income tax statements each year, so that lenders could document what the borrowers earned, could enforce such an income-contingent repayment system.

(Source: Becker-Posner Blog)


Anonymous said...

This idea does make some sense in that it sort of follows the same basic guidelines as our progressive tax system: the more you make, the higher percentage you must pay. This system also seems a little unfair, since someone might choose to go to a certain college for the purpose of not having to take out as many or any student loans, and this could create a way for some other people to "fight the system", like if you know you want to be a teacher, you might choose to go to an expensive, private college if you know you're not going to be making that much money and won't have to pay it all back in the same amount of time as someone who makes more money. -Carrie

Anonymous said...

I don't think that this would be a fair system. Students who make more money after college usually do so because they have a better degree and spent more money and/or more time getting their education. This means that they are already paying more money at a time on their loans, because it was necessary to borrow more. An interest rate based on income is similar to the income tax rate that is based on income. People who make more should not be required to pay more money. This system would discourage people from attending expesive but prestigous colleges because they would be forced to pay more money on their loans and even more money on income tax than other people with lower paying jobs. People who make less are able to keep a much higher percentage of what they earn after tax and payment on loans.
-emily spurlock

Anonymous said...

This idea doesn't seem fair at all due to the facet that school like medical and law school are more expensive. Therefore those who make more money would then have to pay even more..not very fair

Anonymous said...

I agree with Drew...this whole concept does seem a little unfair. If you look at the jump from 50 percent to 95 percent, thats huge! Success should be rewarded instead of punished. However, I do see how if you were not successful and up to your knees in debt, it would be a huge burden as opposed to some who just got lucky and became successful. I think that they should be fixed interest, however, regardless of the situation.

Brian Zabell said...

One thing to point out is college is an investment. A college graduate will make about $1 million more than a high school graduate.

Anonymous said...

i read carrie's blog entry very quickly, and absolutely agree with her. Her example of a teacher going to an expensive school and manipulating the loan system is perfect. If the loan companies did employ a progressive interest system then it would depend where the minimum interest percent was. If it is below the flat interest number then they run a risk of everyone making low income and the loan company not making a profit. If they start the lowest progressive percent at the same percent as the fixed cost then they could make profits. On a moral standpoint it is incorrect beccause the companies are taking advantage of people who want to succeed and inturn raise the weath of the U.S. If this did occur I can definently see the government intervening and giving the companies some type of subsidy so the students would not be penalized so much
seth weiland