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June 8, 2013

The Burden of Education on Students Grows but It Shouldn't

By Seymour Patterson

Education as a public good is explored. The $1.1 trillion student debt is a burden hard to repay. Student loan interest rate boubling to 6.8 percent creates a disincentive for students to get an education. The U.S. ranks below many European countries in math and science scores, and some of these countries have lower education costs and no tuitions. Higher education should be affordable to everyone given its public nature.


The High Cost of Tuition in America
The High Cost of Tuition in America
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Economic advance requires many levels of investment; such as increased private savings, the construction of modern infrastructure, and the resumption of commodity production.  Among these investments is the investment in human capital, one form of which is formal education. The political kerfuffle around raising the student loan rate is symptomatic of a trend in the political debate that emphasizes the private sector and prices and profits as the best allocators of scarce resources over the public sector. The "commons," or public goods, all of us pay for and benefit from, should be "free". We generally accept that some pubic goods must best be "free"--for instance, national defense. We don't disavow national defense because of the high number of rape case in the military, or because of Abu Ghraib, or Guantanamo, or Benghazi, or drone attacks. After all, in spite of these anomalies, defense is still fundamentally a public good. There is little debate about that; although increasingly the government enlists "private military contractors" to supplement the provision of national security.  For example, according to Overview the US employed private military contractors--Blackwater, Dyncorp, and Tripple Canopy--in Iraq. 

However, with respect to education spending and support there is always some push back to the viability of the Department of Education, and in the throws of the Great Recession of 2008-2009, there were calls to lay off teachers around the states, and for reducing funding to public schools. Since the Great Recession ended in June 2009, more than 300,000 education jobs have been lost. And according to a piece from The Council of Economic Advisors, et. al. this caused larger class sizes and a higher student-teacher ratio, (which increased by 4.6 percent from 2008-2010), and more layoffs, which appear inevitable, obviously will increase the ratio.

Then there are debates about funding programs that keep the nation healthy. In a real sense, like national defense, the nation's health is a public good. But here, like with education, there is strong resistance to its public provision--with calls for cuts in Medicare and Medicaid--and, of course, 37 failed attempts in Congress to repeal Obamacare. These are three examples of public goods that should be "free."

In all fairness, there are some problems with getting a college education: graduates can't find work or are in jobs that don't require a college degree. So, you have an education that serves seemingly no purpose. The time and money expended could have been redeployed to more productive uses. In addition, some students who enroll in college don't complete their programs, for whatever reasons--loss of interest, bad experiences, indifferent teachers, or just other things impinging on a student's life, such as issues at home. But I suspect these glitches won't go away even if the educational system were completely privatized. Education is a public good with spillovers on the welfare of the country in terms of civic consciousness, health, and political participation based on informed understanding of the political process.

Student Debt

The gargantuan student debt of $1.1 trillion is a millstone around students' necks; 37 million Americans are in hock to the government, more than 10 percent of borrowers have defaulted on their loans between September 30, 2008 and September 30, 2011, and the default rate is 22.7 percent.

The current cost of student loans in terms of interest rates is 3.4 percent, which is poised to double on July 1, 2013. This might be good for a government profiting enormously from this student debt. The loans have generated over the last five fiscal years $101.8 billion in profits for the Department of Education. A four-year college degree is pricey. The College Board says that the average price of tuition, fees, room and board for an in-state student at a public university runs about $17,860 for the 2012-13 academic year. However, for out-of-state students, the average price is $30,911, but at private, nonprofit colleges it is $39,518 on average for one year.

Doubling the cost of student debt on July 1, 2013 will add an onerous burden on students. This is especially ludicrous if government makes money from these loans.  The government benefited from these loans to the tune of $101.8 billion dollars in profits over the past five fiscal years. The message Congress would send to students by allowing the cost of student loans to double is at least twofold: it deters investment in human capital while it also puts at risks the liabilities of students whose pursuit of a higher education might have roots in wanting to achieve the American dream.

Comparison with Other Developed Economies

Education is expensive in the United Sates. However, the performance of U.S. students is not connected to what it costs to get educated here. In some other countries where getting an education is much cheaper, student outcomes in math and science is better than ours. This is clearly indicative that costs and outcomes are not directly correlated. So, bringing down the costs is a good thing, especially the costs associated with the large student debt load on students' backs. There are some tuition "free" colleges in the United States according to Bankrate: The Cooper Union (New York City; College of the Ozarks, Point Lookout, Missouri; United States Coast Guard Academy, New London, Connecticut; Webb Institute, Glen Cove, N.Y., and Macaulay Honors College, New York City.

In 2011, there were eight education systems with average mathematics scores above the U.S. score: Singapore, Korea, Hong Kong-CHN, Chinese Taipei-CHN, Japan, Northern Ireland-GBR, and Belgium (Flemish)-BEL.  In science there were six education systems with average science scores above the U.S. score: Korea, Singapore, Finland, Japan, the Russian Federation, and Chinese Taipei-CHN.

But the tuition differs across courses, institutions and residence (domestic vs. international). The data below was compiled from Business Insider International and HubPages. The current euro/dollar exchange rate is $1.30. And the British pound to dollar exchange rate is one pound equals $1.53. Education costs is a broader concept than tuition, as it includes tuition, room, board, other fees, "and the cost of books and study materials." (see Global Higher Education Rankings 2010) In fact, there are some countries according to Global Higher Education Rankings 2010, GHER 2010--this is somewhat dated information obviously--that do not have tuition: "Sweden, Norway, Germany, and Denmark. There then follow a number of 'low' tuition countries, including the Netherlands and New Zealand, and then some 'medium' tuition countries, which include the United Kingdom and Canada. Finally, there are the two high tuition countries -- Japan and the United States, both of which have substantial private provision of four-year higher education . . ." (GHER 2010, p. 12)

Table 1: Selected costs of education in Europe and North America by Seymour Patterson

The data demonstrate there is a great disparity in tuition fees across countries in Europe. Students in Europe face the least cost of $530 a year for education in Denmark, but they are expected to pay $4,950 a year for tuition in the United Kingdom, which is at the upper extreme of the tuition continuum. In any event, European students pay considerably less to get educated than American students who must pay between $5,000 and $30,000 a year. Data for two countries outside of Europe also reveal higher tuitions than the U.S. For instance, Australia charges about AUD 10,000 to 20,000 per year, or, at an exchange rate of AUD 1 equals $0.98, $9,800 to $19,600. Japan's education costs $11,865.

I went to great pains to list the above countries and their tuition costs to contrast them with the U.S.. One interesting comparison is the growth in European student debt to 40 billion pounds (or about $61 billion) by mid-2012. The idea of making people pay for education is catching on. And some of the immediate implications of this idea are its disincentive effects, and its potential rationing effects skewed in favor of people of means.

The problem is that public goods are not the same as private ones--goods whose consumption excludes rival consumption, and for which there is a one-to-one correspondence between payment and consumption. Thus, if I purchase a Coke--apart from the property rights implicit in the transaction--and consume it, I effectively prevented someone else from consuming it. By contrast, given its public nature, the acquisition of an education does not generally exclude others from getting one. But it can! Yet, if education makes me a viably, productive member of society, it enables me to make contributions--intellectual, artistic, technological, creative--to that society, and from these contributions to pay taxes, and to save to enable the funding of investment that will grow the economy going forward. I alone enjoyed the Coke, but society collectively benefits from my education. Since society benefits from education shouldn't society pay for it? This is more than a rhetorical question. But what appears to be going on here is an effort to discount the value of education and its accessibility--recall that 300,000 education jobs vanished, the student-teacher ratio is up by at least 4.6 percent, and the interest rate on student loans might double to 6.8 percent on July 1, 2013. Any love affair with public education in the United States is being tested.

Submitters Bio:
Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in Botswana in 1991 and the most recent in Ethiopia in 2009. He was on the Truman State University faculty until 2008.