In defense of student loans

As college graduates leave the comforts of campus for the toughest job market in a generation, the press is once again filled with the annual, obligatory sob stories of how much debt they must now bear.

On average, bachelor's degrees come with a $23,000 debt load. Recipients of master's and doctorate degrees will, on average, have amassed $33,000 and $54,000 (respectively) in debt, while newly minted doctors and lawyers will have average debt loads of $130,000 and $82,000.

Those are hefty sums, but let's not shed too many tears. Any investment requires up-front sacrifice, and according to the College Board, the rewards to a higher education are substantial. Over their lifetimes, the median earnings of individuals with bachelor's degrees are more than 60 percent higher than those with only a high school diploma.

Earnings of doctors and lawyers are nearly three times as high. According to the board, such high wages allow most graduates to quickly repay their loans. It's no surprise that students borrow to finance a college education.

Indeed it's not what people pay for their college education that is the real scandal – it's what they don't pay. Most American college students attend public institutions where tuition and fees typically cover less than half of the operating costs. Moreover, students at both public and private schools frequently receive generous government grants. As for those much-maligned student loans, the interest payments on them are often heavily subsidized.

Higher education subsidies are paid for with tax dollars collected in part from people who didn't go to college. This has created a scandalous situation where low- and moderate-income individuals with no college are forced to subsidize the process that helps others have high incomes.

That deprives them of resources they could use to make similar investments in themselves. Imagine the frustration of a mechanic who can't buy the latest tool that will boost his productivity and raise his wage because he is forced to subsidize someone else's pursuit of an MBA.

These unfair policies are sold as helping people move up but they unwittingly exacerbate income inequality, an issue that President Obama professes to be greatly concerned about. Yet the centerpieces of his higher education plan are boosting the American Opportunity Tax Credit and increasing college grants. These policies will only shift more college costs to those who did not attend college.

In order to help pay for these expansions the president has endorsed legislation sponsored by House Education Committee Chairman George Miller (D) of California, which would redirect funds that until now have been used to subsidize private lenders' student loans.

That is not progress, since it only takes funds from one inequitable program and uses them to expand others that are equally unfair.

Everyone should have the opportunity to go to college, but fairness demands that students themselves – not taxpayers collectively – pay their way. Because a college degree boosts future earnings so dramatically, the best way for students without wealth to pay for college is to draw on their future earnings with loans.

Often private institutions will serve this purpose, but to ensure loan availability for any willing student, government may have to provide loan guarantees. But those loans should be made at market interest rates. Properly implemented, such a plan would eliminate the transfer of wealth from those who do not go to college to those who do.

In addition to improving the overall fairness of our fiscal system, increased reliance on student loans would also probably improve the performance of both students and universities.

Students would be spending their own money, so they would take their studies more seriously. After all, the price of cutting that 8 o'clock class may be several hundred dollars.

Moreover, because today's students – particularly undergraduates – are essentially captive audiences at many state-supported schools, they tend to get shuffled down the list of priorities, behind professors' pet research projects and fielding successful sports teams.

By forcing universities to raise funds by attracting paying students rather than relying on appropriations from state legislatures, their focus will probably switch to educating students.

Patrick Fleenor is chief economist of the Tax Foundation.