Are Public Schools to Blame for Student Loan Bubble?

Scott Mayer

The potentially explosive student loan bubble in the U.S. has been attributed to the pursuit of certain useless degrees, the urging of some to attend college where doing so may not be warranted, rent seeking on the part of universities and of course — government intervention. But does blame for the more than one trillion dollars in outstanding debt rest squarely on the above causes? Or can a sizable portion of this massive debt be traced further back to failures within our public education system?

edu_small Are Public Schools to Blame for Student Loan Bubble?

We can gain a little perspective on a portion of this student loan bubble if we take a peek through Frederic Bastiat’s “broken window” and focus on one of the byproducts of our “broken” public education system — the need for remedial college courses.

Our already overpriced (talk about a misallocation of resources) public school system is sending students off into the world who lack many of the basic skills that they should have acquired before being allowed to exit high school, diploma in hand. Once in college, these undereducated students must take remedial courses in order to be brought up to college entrance level, wasting valuable time and resources.

Seeing that society had already paid a hefty price to educate these students once on these subjects, the need for such remedial catch-up courses shows that a portion (we can debate how much) of their public education is in effect “broken” and therefore, must be “fixed” (paid for again) just as in Bastiat’s lesson. As a consequence of this failure, the cost of remedial education is adding billions in wasted dollars to the overall cost of college education, much of it financed with debt.

Apart from the obvious damage to the students, Paul Krugman’s Keynesian cult would surely argue that while society may have already paid once for this education, these colleges (and society as a whole) will miraculously prosper from having all of this additional money spent on repeated classes. After all, colleges receive this enormous sum of money which in turn pays the salaries of professors and others who ultimately go on to purchase any number of products or services, “stimulating” the economy into the Keynesian world of unicorns and rainbows.

But back in the real world, no new wealth is actually created during this process and society is no better off than it was before. Just as in Bastiat’s lesson, where society was short one new suit (what the shop owner would have purchased) because the window that had already existed (wealth) was destroyed and needed to be replaced, society is now short whatever those wasted education dollars could have more productively been used for.

And I would argue that society is in fact much worse off. Students who must retake these classes are wasting valuable time that ultimately takes away from future earnings by keeping them out of the job market longer. Also, all these billions being diverted from productive use actually destroy future job opportunities for students as well as for the lower-skilled among us. Further, the future wages and purchasing power of these students are in effect lowered by the cost to service that portion of their student loan debt.

So while it may be correct to blame government intervention for this massive student loan bubble, to be fair, part of the blame needs to be assigned to — you guessed it — earlier government failures in yet one more arena. I guess one of the lessons here is that, be it education, housing, green energy, or “stimulating” the economy, big government has the antithesis of the Midas touch.

But don’t dare attempt a free-market solution to a big government created problem, as you can rest assured that your efforts will be crushed by statists such as President Obama.

Scott blogs at