Sen. Elizabeth Warren, D-Mass., proposed that the federal government charge the same interest rates for student loans as the Federal Reserve Board charges large banks for overnight loans – a rate currently set at 0.75 percent. In making this intriguing proposal, Warren made it very clear that her ultimate purpose is to prevent student-loan interest rates from doubling on July 1 from 3.4 to 6.8 percent.
Critics have been quick to point out that the proposal does not make a lot of economic sense, because students default on school loans far more often than major banks default on overnight loans. This proposal, they say, amounts to nothing less than a taxpayer subsidy of the cost of higher education.
Warren knows this. Her point, I suspect, is that the taxpayers should subsidize higher education. It is a reasonable point.
Most people agree that a college education is a good thing, but Americans have often been divided about what kind of good thing it is.
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Is higher education a private good – like a new car or a laptop computer – that should be paid for by the consumer? Or is it a public good – like an airport or a park – that benefits everybody and therefore should be supported from public funds?
Education, of course, is both. Studies clearly show that a college education can add $1 million or more to a person’s salary over the course of a lifetime, making money spent on college a personal investment with a remarkably high rate of return.
But everybody living in a society with a high percentage of college graduates benefits considerably from higher education – even those who never attend or complete college. An educated population produces more growth, creates more wealth, and retains jobs better than an uneducated one.
As Anthony Carnevale and Stephen Rose documented in their 2011 study, “The Undereducated American,” the current graduation rate of 24 percent is not producing enough college graduates to meet the long-term demand of American industries. This is very bad news for all Americans.
Other countries – especially China and India – are rapidly closing the education gap with the United States and Western Europe. In order to remain competitive over the next 20 years, Carnevale and Rose concluded, America needs to add about 20 million more college graduates to the labor force than we will if the current trends continue.
And this is why, ultimately, Warren’s proposal makes a lot more sense than the current plan to double student-loan interest rates to 6.8 percent – a rate significantly higher than most people pay for a new car.
By loaning students money for education (instead of making all college free), we acknowledge that higher education is, to some extent, a private good that benefits those who receive it. But by loaning this money well beneath the commercial interest rate, we acknowledge that education is also a public good that benefits us all.