Sunday, 12 June 2011

MacDoctor on student loans

KPMG has come up with the idea that only students doing courses that "benefit the economy" should receive interest-free loans, agriculture being a example of such a course. In response to this MacDoctor takes up the keyboard and writes,
While I have sympathy for the agribusiness sector, because it is increasingly difficult to interest young people in the sector, I have nothing but horror for the idea of government attempting to pick winners in education. Exactly how will politicians and educationalists determine which degrees would be “useful”? The very fact that both I and the sub-editor at Stuff need to place the word “useful” in inverted commas tells the story. Trying to determine what part of tertiary education will have the most economic impact is an exercise in gross stupidity. Governments are notoriously bad at picking winners.
I have little problem with the current interest-free student loan scheme and believe that, in the long run, the large expense involved will prove to be worthwhile.
Now on the first point he is right: governments can not pick winners, in education or anything else. Markets, by and large, do a much better job of sorting out the wheat from the chaff, sorting out the valuable or worthwhile and rejecting what is useless or worthless. But on the second point he is wrong. If markets are to do their sorting then prices must reflect opportunity costs. This is just as true for loans as it is for bread or cars or pens or ... There may be a case for the government providing loans to students, problems with borrowing against human capital, but pricing these loans at zero will missallocate resources. When taking out a loan one of the questions a student should ask is, How will I pay this back, including interest. If the returns to the education can not pay for the loan and interest then that loan could be better used by someone else.


MacDoctor said...

While you are indeed correct about my second point in economic terms, Paul, I do wonder whether this is correct in human terms. What student can rationally make a decision of this nature? Surely the reality is that most students accumulate debt with little forethought. The net result of interest on student loans is that the debt load of students is higher and the tendency for them to disappear to other countries, where they can earn more, is far greater. I seriously doubt if any of them think "is this education worth this amount of debt?"

However, there ARE students who will be put off higher education by the very thought of that debt. Again, this will be an emotional decision, rather than a rational one. I therefore think that the lower the barriers to entry into tertiary education, the better, despite the fact that this is not economically "pure"!

Paul Walker said...

Mac: "Surely the reality is that most students accumulate debt with little forethought."

Yes but if they had to pay interest I would argue that they would apply more forethought.

"there ARE students who will be put off higher education by the very thought of that debt."

This may be very rational. If they really don't think that they can repay loans with interest then may be they shouldn't be at university, and let someone who repay take that place.

One question. If we are not to be "economically pure" in our decision making how are we, for example, to decide on whether to spend an extra $100 million on heath or education? What criteria should we use when making such decisions?