Student Debt Harms the Economy, but is Only a Symptom

These days, Americans are talking a lot about underinflated footballs and overinflated student debt loads. In the latter camp you’ll find the president of Purdue University (and former governor of Indiana) Mitch Daniels. On January 28, he contributed an op-ed piece in the Wall Street Journal entitled “How Student Debt Harms the Economy.”

Daniels points to the fact that the average college graduate in 2014 left school with a debt load of $33,000, then links that to evidence that many young Americans are delaying marriage and childbearing. They are also postponing the purchase of homes, cars, and other big ticket items due to the drain of having to make college loan payments.

Furthermore, Daniels maintains that the student debt burden is impinging on entrepreneurship. He cites data showing that the percentage of younger adults who own at least part of a new business has been dropping for the last ten years. “Common sense says that the seven in 10 graduates who enter the working world owing money may be part of this shift,” he writes.

Daniels is no doubt correct that the economy would be more vibrant if it weren’t for heavy student debts. Those payments divert funds that would otherwise go into home purchases, cars, family formation and new business ventures. I think he is slightly off-target, however, in blaming college loans for the economic drag.

Loan debts are just a symptom of the real problem, which is the waste of time and resources on low-value college courses and degrees. Whether those costs are paid out of pocket or covered by loans is beside the point.

People are tempted to think that going into debt for something is probably bad, but if you “can afford it” and don’t need to borrow, it’s fine.  Not so. A student who borrows heavily to finance a highly useful degree (petroleum engineering, let’s say) that’s essential to a lucrative career has made a good decision. The resources employed in that (his time and energy, the efforts of the educators, ancillary costs for housing, books and so on) have been put to good use. That’s economically beneficial – no matter how the student paid for his education.

On the other hand, if a student goes to college and derives little or no benefit from it, the resources utilized have been wasted, and it doesn’t matter if the money was borrowed or spent out of accumulated family wealth.

Let’s say that the student above, rather than studying engineering, spends four or five leisurely years in college to accumulate the credits needed for a sociology degree. If college was just a long extension of adolescence, the resources involved were wasted.

The economic burden is the misuse of limited resources to produce something of scant value.  Whether the student borrowed or paid out of pocket is immaterial.

So when Daniels concludes, “As a matter of generational fairness, and as an essential element of the national economic interest, the burden of high tuitions and student debt must be alleviated, and soon,” he throws us off course. Our real problem is that so many young Americans who are ill-prepared for and barely interested in academic work are being lured into higher education.

Armies of professors go through the motions of teaching them. Even bigger armies of administrators oversee campus life.  Great sums are spent on amenities to make the students comfortable and happy. And instead of quickly and efficiently obtaining whatever knowledge they desire, students tend to coast along, finding the courses that yield high grades for little effort.

That comprises the economic burden. That is what’s diverting resources away from homes, cars, businesses and so forth.

The way to lower the burden is to eliminate the government subsidies that cause young Americans to see college not as a learning experience worth striving for but instead as a pleasant interlude between high school and work that they’re entitled to.