"The bad framing of student debt"

July 18th, 2023
Adirondack Daily Enterprise

To the editor:

Who bears the risk in investment? It is the investor putting up the money. This sounds like common sense. But as with all “common sense,” we are blinded by context.

Consider venture capital. Roughly 30% of start-ups fail completely; 75% do not make money back for the investors. More underperform projections. Yet we have venture capitalists. Why? High potential. A few will pay off big.

Imagine if investors expected entrepreneurs to personally pay back the seed capital if the venture fails. That is nuts. We would chide the investors to bear their consequences. They knew only a few investments would work out, and no one knew which ones. Entrepreneurs suffer their own losses. Innovation would be strangled.

Suppose instead a company needs skilled labor. They hire someone and, obviously, pay them while they are training. Later that employee is not kept for whatever reason. Neither side knows if any given trainee will remain. There are expected future losses in turnover or layoffs.

Imagine they want lost workers to pay back the money sunk on training them. Absurd. There is inherent uncertainty involved. They could have been working elsewhere. That industry has gained “human capital” in its net labor pool regardless.

Now introduce an external training program. Call it a “school.” The trainee has to pay for their own training, and since they are not “working,” they are not being paid. They do this full-time for several years of lost wages. What is considered “entry-level” rises.

In principle, even if they learned absolutely nothing useful at all, just finishing is a powerful “screening out” signal. The industries become able to only hire people who finish whole training programs. They prefer specific work experience in addition, even if unpaid internships. Unless someone comes from wealth, the only way to do this is with debt. The government intervenes with personal loans to protect upward mobility.

This allows the schools to increase tuition much faster than inflation for decades. They say if students finish training and happen to get hired, it will work out in their favor. Eventually. On average.

Except as before, many will not finish. Others become “underemployed,” working outside their field. Return on investment often is lower than projected. These training programs, not being tied to particular jobs, involve a lot of training no single job uses. But the economy as a whole needs those more advanced knowledge and skills. We do not want to gain electricians by losing electrical engineers.

Future workers have to gamble it will all work out or automatically exclude themselves. Now our “common sense” chides workers for not being individually responsible for their voluntary debts. That is twisted. Liabilities individuals never should have held were shifted onto them by gatekeeping institutions, who profited immensely by front-loading training over employment.

Student debt relief is bad politics. But it is bad policy that student debt exists at all. The government made itself the underwriter of human capital; it should be responsible for writing off its own bad investments.

Robert Schnibbe
Saranac Lake


(1) This is a bit of an oversimplification, due to the 500 word limit. Part of the reason for escalating tuition is the market rate of labor for people with the credentials to be university professors. Part of it is that universities are mostly in competition for families who can outright pay the high tuition, and so seek to offer the most on campus services. There is even a luxury good aspect to it in that higher price is perceived to equal higher quality, and high rejection schools do produce significantly better employment outcomes (e.g. accepted versus rejected students from the waitlists) due to networking and exclusivity of the brand names. But to a large extent it is a government created problem because of the perverse incentives of the funding model. It is more of a question of whether the government should be held responsible for bailing out the problems it creates by distorting the market.

(2) One might quibble with this investment analogy by speaking of business loans. However, businesses are their own entities, and can file for bankruptcy. With personal loans such as mortgage, it is also possible to declare bankruptcy. Up until now it has more or less not been possible to discharge student loans through bankruptcy. The more general point is that investments are not funded through personal debt. But that is the way we invest in "human capital", which amounts to corporate welfare.

(3) Depending on the accounting standards used, it might be argued that the federal government does not make net money (i.e. profit) from student loans, that it is just trying to break even for the taxpayers. This is ignoring the analog of equity for the government. To the extent that there is a wage differential accessed through completing degree programs, the government gets several decades of higher taxes from a fraction of college graduates. The point of this analogy is that we roughly know in advance the failure rates (or "was not worth it" rates) for the whole cohort, and so this should be conceived as a portfolio of students, where the winners more than pay for losers. In this perspective the taxpayer is not being held liable for the losses but entitled to the returns (i.e. higher tax revenues from other people) from the successes. Student debt as a funding model is also perversely more costly for those who the schooling did not help, because it takes longer (if ever) for them to pay down the principal.