Not all Schools are Worth the Debt

Student loans are on the horizon of people in the education world and in public policy.  While much of the debate has focused on the level of debt and the challenge of making payment on those loans in a recession, it seems that all of these eyeballs have lately come to a new conclusion: that schools vary widely in their ability to make good on their promise to train their pupils.

It is a mistake to ignore the significance of investment in education to the overall functioning of our economy.  Gary S. Becker, writing after the stock market crash in 1987, suggested that more than 70 percent of invested assets in the United States were in human talent.  The stock market’s losses amounted to less than 1 percent of our nation’s wealth.

There are plenty of people trying to estimate the value of spending more on education.  This study uses sets of twins.  It infers that they would have identical talents.  It creates a chance, based upon that initial assumption, to compare educational investment with career outcomes.  The author’s conclusion is that there are returns to investment in education, although the greatest gains are not in cases with additional investment by the most-advantaged, but by incremental gains to the disadvantaged.  In other words, the real value in spending more money on schooling is at the lower rungs – perhaps at the community college level.

Let me offer a simpler analysis.  There are scores of schools out there that are completely without merit.  They fail by any standard.  Well, perhaps that is an overstatement.  They fail by any educational standard.  Some of these “schools” are very profitable.  They depend upon student loans to achieve that outcome.  I would like to suggest that policymakers should change the rules on student loans to make that a piece of history.

College is an important industry in America.  Non only does it contribute to the human capital that drives our economy, but it is a field where we are widely viewed as world-class.  Foreign students still desire the best of our name brands in a few industries – chewy chicken feet, tobacco, guns, and education.

That is why it is striking that twenty-seven colleges in the United States did not graduate any students from the cohort of students that enrolled in 2001.  Those failure factories garnered more than $3.7 million from their students.

The market is not working.  Students are not getting an adequate signal on the lack of value of the product at these schools.   It is a hard calculation to make, because the results are experienced by a group of consumers who were present on campus six years ago.  Moreover, those costs are probably muted even more by the use of student loans.  The lost dollars will be paid out for years to come.

To me, this just underscores why federal student lending should develop new guidelines that set minimum standards for how schools can qualify to receive student loans.  The ability to deny student loans to schools already exists.  Schools can be denied student loan money for other reasons already.  Why not schools that only serve the interests of their own pockets.