Something that occured to me recently (I think it was after reading this post by Freddie deBoer but I don’t quite recall) is that, in all the talk about the problems surrounding escalating aggregate student debt and average individual student debt loads, nobody has quite made the case that all student debt is really, really stupid. So I will:

Student debt is really, really stupid. Debt is an instrument by which to finance an acquisition. There are many of them; debt is one. It is, specifically, where you trade a portion of your future earnings for increased present consumption, usually because you are purchasing something which it would be beneficial to own now but would take a long time for you to save for. If you’re talking about an individual, think house and car; a firm, big capital investments.

Of course, since we haven’t invented time travel (and even if we had if giving money to your past self changes the future we might trap ourselves in an infinite loop) you are assisted in this process by an outside lender, usually a bank or bankish institution, who assess you a fee for borrowing this money. However, a fee doesn’t quite solve the big inherent problem in this model, which is "what if you don’t give the lender the money back" which is why we invented collateral, which in addition to being an excellent movie is the formal name for "if you can’t pay the bill the bank takes your [thing you borrowed the money to buy]" and assuming your legal system functions sufficiently well then you’ve got yourself a financial system.

However, education poses two major problems to this model. Firstly, there’s no collateral – once educated, your education cannot be reclaimed or clawed back. Secondly, there are massive positive externalities to education – a more educated workforce is more productive, more innovative, and produces higher quality goods and services for everyone to consume. And the big problem is that these mitigate in opposite directions, the former against having an education loan market at all even though the latter makes widespread education hugely desireable.

We’ve kludged this together with a network of subsidies, but that has produced the status quo which obviously sucks in many ways. So what we really ought to do is try to think of ways to get students educated without using a primarily debt-based market to make the whole thing work, or a radically-altered one.

Advertisements