This year, my son and I hosted a holiday pie party at our house. Each guest brought a pie and then chose an assortment of slices from all the pies to take home. It was a delicious blast.
Now, back at work, my thoughts turn to the proverbial pie of economic lore. Economics is often defined as the study of the allocation of limited resources to satisfy unlimited wants. In other words, it’s the study of how to slice the pie.
Modern economic theory focuses less on who gets how much pie and more on making sure that the pie is large and that the entire pie is enjoyed. This is the economist’s definition of efficiency—no pie is left on the table.
In our current education market, pie is being left on the table due to inefficiencies in the way education is financed. In a previous column, I proposed reprivatizing the student loan market to improve the way the education pie is sliced. Private lenders have more incentive than the government to account for the value of one’s education their risk of default. They would set interest rates and availability of funds accordingly, and this market information would guide students in making choices they could reasonably afford.
The market solution would fix the debt problem and would get us closer to consuming the whole pie in the education market … in theory.
But, such a market solution is unlikely to work. There is too much uncertainty in estimating the returns to education for a given individual, and unlike with a mortgage or car loan, there is nothing to repossess when someone defaults on an education loan. This is part of why the government stepped into the student loans market in the first place. It is not practical to expect private lenders to get into such a risky business. There would be very few education loans at all if they were not at least guaranteed by the government.
Moreover, even if it would work to fix inefficiencies, the market solution wouldn’t – and doesn’t claim to — fix inequities. See, under the market solution, fewer people would have student debt because fewer people would get educated. It’s exactly the point that those who could not afford education would not get it. They’d understand market signals and stay out.
Even to a devoted free-market economist, though, it raises moral red flags to advocate for a system in which higher education is only accessible to the affluent. The only solution to our current student debt crisis that makes both ethical and economic sense is publicly funding higher education for all. There are many options for shaping such a policy. Funding for each student could be partial or in full, but it should be without expectation of direct repayment.
Indeed, the educated individual does repay society indirectly, through their contribution to economic growth. The social benefits of higher education are too high for us to accept a student debt solution like privatization, which leaves so many out. Higher education is a classic example of an activity with positive externalities; third parties benefit from an individual’s choice to go to college. Education improves productivity of individuals and raises standards of living for us all. A well-educated workforce not only shifts us toward a more equitable distribution of the pie, but it increases the size of the pie for everyone!
In summary, our current system of funding higher education through federal loans is broken. There are two potential fixes: 1) re-privatize student loans, or 2) publicly fund higher education for all.
The former may fix the debt problem but is unlikely to work and would create inequities in educational opportunity that are both morally unacceptable and economically lacking.
The latter fix—public provision of higher education – is recognized even by the father of modern economics as a moral imperative and is the only solution to our student debt crisis that grows the pie rather than simply redistributing it.
————-
Dr. Melissa Trussell is a professor in the School of Business and Public Management at College of Coastal Georgia who works with the college’s Reg Murphy Center for Economic and Policy Studies. Contact her at mtrussell@ccga.edu.
Reg Murphy Center