Investment in Education: A Free Market Approach

If investment is what drives a better future, and students are the future, who then can possibly be against investments in education? The need for educating our future is certainly something that should never be understated. Unfortunately, these good intentions have been the basis of political hubris for policies that hurt the very people they intend to help.  Such is the nature of the government’s student loan program and its attempts at alleviating financial burdens for students through artificially cheap and easy credit.

In a free market economy, private lenders are free to decide to whom they will lend their money. Naturally, they tend to avoid risky ventures and look towards safer investments that have promising returns.  Because lenders naturally prefer to keep their money now rather than to receive it in the future, a promise of a sufficient interest incentivizes them to save and invest. The borrower must earn the trust of the lender and thus behave accordingly in pursuit of a venture that both sides believe will leave them better off. This also means that some individuals will be excluded from borrowing money because their ventures are too risky or not an efficient use of scarce capital.

Government student loans disregard this need for trust and forces lenders, the taxpayers, to lend to students at low rates regardless of whether or not these students can realistically repay the loan. This creates the false signal for students that perhaps it’s not as much of a bad idea to pursue that major in, say, Latin or Art History.  The more ironic aspect of this is that it creates inequality. It enriches students who would have otherwise afforded higher interest rates anyway because the nature of their highly valued degrees provides more job opportunities immediately after graduation and with good pay. On the other hand, students who have been incentivized to take low valued degrees find themselves struggling to get a job and unable to pay back the loan.  To rub salt in their wounds, their degree loses its value progressively as more and more new students get access to easy credit to enroll into that same degree on the false premise that it is valued. Or perhaps a student is well aware that that Arts degree is not valuable at all and recognizes the bubble, but what can he do? Perhaps the worthwhile degrees are too competitive for him while the other programs he can enter are no better valued. If he does not join in he misses out because an Arts degree became the new high school diploma. An oversupply develops with distorted incentives in place to keep it growing.

The full costs of the student loan program are unknown because cheap credit diverts capital away from productive enterprises as it is productivity must necessarily precede taxation. How the taxpayers who are subject to the market pressures of profits and losses would have otherwise used the $15 billion dollars put into the student loan program is unknowable. This is not to say that there would be no loans for students, but fewer loans for unpromising degrees bringing less of a strain on the productive agents which are being taxed to provide the credit.

-Ian CoKehyeng

One thought on “Investment in Education: A Free Market Approach

  1. This is great. Right on.

    You do a great job with this, but there’s more than a few arguments that you didn’t address here (which is fine). There are positive returns on economic growth to post-secondary education. In other words, the more an economy spends on post secondary education, notable Canada and the US (if I remember correctly), we see faster increases in economic growth.

    What if the government diverting resources from productive uses into essentially lowering the cost of post-secondary education actually increases economic growth over the rate that it would have been had individuals chosen where the money ought to go on their own through lower taxes in the first place?

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