The Market and Student Loans

You may have wondered why student loans aren't priced according to the economic risk of the student's proposed course of study. Or maybe not. As I posted here and here, student loans are part of system subsidized by the federal government whose purpose seems less to provide meaningful education than to enable providers of so-called "education" to prosper.

I came across the abstract of an interesting piece here by Michael Simkovic that argues that student loans should be priced according to risk. Why? Because risk-based pricing would discourage potential student loan borrowers from taking on debt that they are unlikely to be able to repay. Simkovic believes that lenders would be able to price loans to, say, anthropology and music theory majors above what computer engineering majors would have to pay. After all, Simkovic reasons, higher rates of interest would signal to prospective anthropologists and music theory grad students that they run a greater risk of not earning enough money to repay their loans. Not that anyone would be prohibited from pursuing education for education's sake; instead, all prospective students would have the benefit of the market's evaluation of the riskiness of their pursuit, an evaluation which, of course, could be wrong.

Simkovic acknowledges that there are powerful social and political forces arrayed against his idea. Duh. For an example, take a look at an article from the June 2012 issue of Harper's titled "The Price of Admission" (not yet available online) suggesting a correlation between student debt of $80,000 for a Ph.D. from Columbia (is that all?) and the newly-degreed doctor's current life as an "escort." There may well be a correlation but the author notably fails to suggest that the young woman in question should not have gotten an economically useless degree. Indeed, I can hardly imagine Harper's taking a market-based approach to the problem of student loan futility.

So, is the root of the problem with student loans in America the indirect subsidies of unscrupulous for-profit "education" mills that federal guaranties provide or the lack of market signals to budding scholars about the economic value of their degree? The short answer is "yes." Whether our federal government is likely to do anything about either problem is, to put it gently, approaching zero.