Why it’s useful for students to think about debt in terms of balance sheet accounting.
As I wrote previously, student debt is generally an overblown issue. Students, as a class, are a relatively affluent bunch and are set to make, at the median, an extra $1 million over the course of their lifetimes. Like most groups, students would like society to give them more money, but to present that desire in social justice terms is deeply misleading. Given the privileged position of students — both in and after college — redistributing money to students would exacerbate existing social inequality.
Given the immense empirical data detailing just how affluent students are and will be relative to the population in general, a curious question arises: what exactly motivates students to protest about debt issues? The answers to this question are of course various. Some students enjoy activism and the aesthetic and fun that goes along with it. They are not particularly interested in wonky explorations of distributional charts; they are more about the activist subculture and 1960s nostalgia.
Outside of those lifestyle activists though, there are some who seem reasonably confused by the student debt situation. After all, students do occupy a somewhat unorthodox position during their time as students. Many do not have any income. One even hears about how students are “broke” despite of course purchasing upwards of $50,000 of education and board per year. Additionally, at the end of all of this front-loaded spending, it seems as if students do not even have anything to show for it but a piece of paper.
It is this last bit that I want to address head on. Inspired by a recent Yglesias post, I think it would be useful to think about student debt in terms of balance sheet accounting. It is very easy to fall into the trap of focusing just on debts. In fact, as Yglesias has pointed out, this is a common flaw found in federal debt debates. Focusing just on debts is misleading because debts are only half the story.
In balance sheet accounting, you have two columns: assets and liabilities. When students take on debt, they add whatever debt they take on to the liabilities column. Importantly however, they add education to the assets column. When considering whether this entire transaction is beneficial, one has to ask whether the value of the asset is higher than the cost of the liability.
We can get at this question a few ways, but the easiest way is just to consider what sort of dividends that asset pays out. When it comes to a bachelor’s degree, the answer is around $1 million dollars at the median. That is, people with bachelor’s degrees make around $1 million more in their lifetime than those without them. More than that, even graduates that do jobs that do not require degrees tend to make substantially more than their non-graduate counterparts. For instance, truck drivers with college degrees make $200,000 more over the course of their lifetime than those with only high school educations.
A person who takes on $12,000 in student debt — the median amount of student debt — uses that debt to acquire an asset that pays dividends of $1 million. That is a pretty amazing return, and it certainly should cast doubt on any claims that students are somehow an oppressed class of people who deserve cash redistribution. Given just how big a wage premium acquiring a college education provides, it is doubtless that redistributing social resources to college students would increase overall inequality, something those interested in left-leaning notions of social justice should oppose.
With that all said, there are very good reasons for changing the entire financing model of college education. I have outlined what I believe to be the best model previously. In short, I think a universal income-based repayment scheme would serve the purposes of higher education the best. Such a scheme would render college education free at the point of delivery, ensure that nobody has an insurmountable repayment burden (since the burden would be based on income), and — most importantly for proponents of decreasing inequality — ensure that the higher education system is exclusively funded by the 30% who actually access it, not the relatively poorer 70% who do not.