Saturday, August 8, 2009

Student Debt is Bad for All of Us

In the Atlantic (online) Conor Clarke wrote a blog entry called "Let College Students Get Into Debt". One statement in the note really stands out.

The second problem is more specific: if the the point of credit-based consumption is to bring lifetime consumption more in line with lifetime income -- as I believe it is -- then college students more than anyone else should be getting into debt.

An interesting rebuttal can be found at
Problems With Clarke's Student Debt Post.

The practical absurdity of the Clarke's statement can be seen in the phrase "bring lifetime consumption more in line with lifetime income". Let us make the giant leap of faith that individuals and lenders are rational enough to take expected lifetime income into consideration. In order to smooth out our consumption we would have to have an accurate notion of an individual's lifetime income. This brings to mind my favorite John Kenneth Galbraith quote. "The only function of economic forecasting is to make astrology look respectable." It is the rare person of any age who can accurately predict their income even five years in the future.

The best information about lifetime income comes from statistics about current and past incomes for people in various occupations. This information is useless to an individual for several reasons. First, it is out of date. If the buggy whip apprentice in 1890 had access to these kind of statistics, he would feel good about borrowing money because his future was so secure. Second, it assumes an occupation. Apparently the average college student changes majors two to three times during the course of their studies. Most basically, aggregate statistics may not accurately describe the situation for any individual Averages and Actuals.

Every debt you incur and intend to pay limits future options. Suppose you are a college student anticipating a career with a relatively high income and you borrow commensurately while you are in school. When you graduate, you must quickly (usually within six months to a year) generate sufficient, steady income to service the debt. This puts lower income jobs out of reach. The problem is, many career paths demand some time at a low income. If you cannot tolerate a low income for a period of years, you may not be able to start a business of your own.

Student debt is pernicious because it limits options at a time of life where options are most important. Individuals and society gain when bright people are free to pursue their dreams. These people often give us the new ideas and new businesses that are the lifeblood of the future. One of the natural times for this adventure is the time between schooling and family. Many of our brightest and most educated end their schooling not with a clear field of opportunity, but with the almost immediate need to generate a steady income to service school debt. For many, this pushes them down the employee rather than the entrepreneur path.


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seppie said...

This is an interesting post coming from you, since I've been under the impression that you thought that debt for education was "good" debt. I'll be out from under mine in 2017 (graduated in 1994) but only because of a new forgiveness program for people working in "public service" (teaching at any public school qualifies.)

Colin said...

I'm writing another post on debt that should clarify my personal views on various kinds of debt.

I regret that any of my children had to take out student loans. I just couldn't swing it any other way. That is partly why I wrote the post. I think it is a bad situation.

That said, I think that having an education and a loan is better than not having an education and not having a loan.