Should student loans be bigger?

I share Holly Walker’s concern about the plight of post-graduate students. She is disturbed by a new survey showing that

[post-graduate students] committed to finishing their study highlight[ed] concerns about being able to provide basic needs for themselves without access to the [recently cut student] allowance, such as food and shelter.

As Matt has discussed previously, it is hugely unfair that students do not enjoy the same safety net as the rest of society when they struggle to find employment during their studies. If they are making a genuine effort to find part-time work during their studies, they should have access to a benefit or allowance, just as anyone else does.

The more important question is whether they should be supported through their studies even if they choose not to engage in part-time work. In that case I don’t see a convincing rationale for providing free support to students. They are voluntarily investing in their human capital in anticipation of better opportunities for themselves in future. As we have discussed previously

[t]hree years after completing their degree, a bachelor’s graduate will earn 51% more than someone with only secondary qualifications. Someone with a master’s degree will earn 74% more and a doctoral graduate 120% more.

It makes sense that a person would invest in education to take advantage of those wage increases, along with all the other benefits of a tertiary education. However, it is hard to justify forcing the rest of the population to pay for their personal investment that they benefit from so greatly.

Nonetheless, some people find it hard to raise the money to attend university, despite the likelihood of higher future earnings. That is why we have a student loan scheme. If students are finding it difficult to pay their way during post-graduate study then it probably means that they are unable to borrow enough during their studies. That is because student borrowing is extremely expensive for the government, so the government limits its liability and costs by capping the level of borrowing. A simple solution would be to re-introduce interest on student loans, since the interest comprises the majority of the government’s cost of lending. That would allow the government to lend out more money to students at a lower cost.

Through that change we could allow students to live more comfortably during their studies, and ensure that the transfers to those, relatively wealthy, individuals do not become inequitably large.

  • disqus_wpFrkFbPkL

    Isn’t the argument that despite the large increase in individual’s income from a qualification, the cost to the taxpayer is justified by the fact that a better educated workforce is also more productive – the cost is offset by a growth of total surplus and subsequent tax-take. The same reason that we subsidise primary/secondary education – just a different mechanism of delivering it.

    • http://www.tvhe.co.nz/ jamesz

      Yes, that’s certainly the argument you commonly hear. I find it more plausible for a subsidy on tuition than for a subsidy on the cost of living. After all, tertiary students are adults, in contrast to students at primary and secondary school.

      However, even if you think that the tuition fees and cost of livign should be treated equally, there are difficulties with it. For a start, the empirical evidence suggests that most of the increase in surplus is likely to be captured privately by the student, so it’s hard to justify a subsidy on that basis.

      The increased tax payments are certainly greater than the cost of the subsidy in most developed countries, and that’s often described as a ‘public return’ from tertiary subsidies. However, it’s more properly treated as an inter-generational wealth transfer via students, since there isn’t actually an increase in surplus as a consequence of the subsidy/tax. If we wanted to make an inter-generational transfer of wealth then there are more efficient ways to do it.

      I think there are very plausible arguments for providing government-backed student loans and repayment thresholds, but we should remember that students are essentially investing when they go to university, not providing a public service. If I quit my job to invest in a new business idea that may make me rich after four years of penury, would the government pay for my investment costs and provide me with a living wage in the meantime? If not, then why is a student’s investment treated with such reverence?