Free College Education is Worse Than Useless
A discussion of the signal theory of education and looking at college through an investment lens
I’m a believer in the signal theory of education—the idea that education is mostly used to reflect your traits rather than give you useful knowledge to help you become a more productive worker.
Businesses don’t like to hire workers who produce less than they are worth. Too many of these unproductive people and the company tanks. Workers usually want a high paying job that takes advantages of their skills. Some people early in life forego the more lucrative options to pursue more enjoyable careers. But generally speaking, the economic value of someone is roughly reflected by the best wage that they could find on the market.
If education is purely signaling, then subsidizing education may be actively harmful economically. This would make education a zero sum game which requires more and more effort to win, with the reward not improving. I don’t think this is wholly true but, unfortunately, I don’t think it is too far off the mark.
If an entrepreneur wants to start a company, she needs to acquire funding. To acquire funding, investors have to believe they will get their money back. There is a great deal of time spent on evaluating the economic prospects of companies and all the financial theories related to it. But college doesn’t work that way. Loans are plentiful and those who do not make the right investments are stuck with the loans.
Thanks to the US Department of Education, acquiring a loan to cover college’s expenses is not a major issue even for the poor and middle class. In fact, poor students are afforded benefits in the form of subsidized loans and grants, like the Pell Grant, which can sometimes leave them with less debt than their more wealthy peers. As a result, higher education has become widely accessible and more often expected of applicants. Rather than discriminating at the forefront, the students are just left with consequence of a ton of debt.
If a poor student was going to study chemical engineering and it appeared he was likely to finish, securing a loan would not be difficult. If he wanted to study literature, it might be significantly more difficult. The rate may be a lot higher or he might be denied all together because the lender doesn’t suspect it being worth it. He doesn’t want a student who can’t pay off his debts cause then he doesn’t make money.
But now, we have colleges who make degrees that are not financially worthwhile. These programs often operate off the fact that graduate students do not have an accurate understanding of the opportunity cost of graduate school and likelihood of actually attaining the coveted tenure track position that they so desire. Undergraduates who study such fields then have to continue on to graduate work in order to actually get a job in their field.
As a result, those undergraduates usually just go on to study things completely unrelated to their humanities field that they specialized in. The fact that they get higher wages for totally unrelated knowledge is used as evidence that there was some sort of transfer or learning, but in actuality it was signaling all along. You have to be smart to study philosophy, but that doesn’t mean studying philosophy makes you smart.
If these degrees can’t even pay for themselves while being subsidized, why should they be free? Obviously, a degree which doesn’t give the student enough money to even pay for the education itself, let alone the opportunity cost of four years to five years must not be economically worth it. Some of that productivity—if you believe in the human capital model—would be captured by producers, but the ones that do have trouble paying things off are usually the ones who opted for lower wage and more passionate careers.
If the economic productivity is increased sufficiently to warrant the subsidizing of the student loans, then it should be sufficient enough to pay for itself. The group of people that goes to college are not worthy poor. They are people seeking an economic opportunity and should behave as if it is one. If you view college as for the purpose of entertainment or personal enlightenment, then I believe it should be treated as a personal consumption good—not something we should subsidize.
If we are going to help people with tax money, it should go to the worst off in society not the middle-upper class humanities graduates. A Brooking’s Institute working paper found that:
Some advocates have called to forgive student loans because student loans contribute to racial and socioeconomic wealth gaps. The usual measures of financial wealth, however, is a misleading indicator of the economic status of student loan borrowers. Medical school graduates typically owe six-figure student loans but that doesn’t mean they are poorer than high-school graduates who did not go to college. Wealth, properly measured, should include the value of educational investments students borrowed to make. Measured appropriately, student debt is concentrated among high-wealth households and loan forgiveness is regressive whether measured by income, educational attainment, or wealth. Across-the- board forgiveness is therefore a costly and ineffective way to reduce economic gaps by race or socioeconomic status. Only targeted policies can address the inequities caused by federal student lending programs.
Not only is it regressive, it is also unfair to other graduates who modified their behavior or made sacrifices in order to avoid accruing debt. It also incentivizes colleges to increase prices and more students to go to college, making the signaling problem even worse! Even if the money for it fell from the sky, I would not want to subsidize college education.
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See also https://slatestarcodex.com/2015/06/06/against-tulip-subsidies/
I think it's hard to say whether state-subsidized college educations would be worse or better vs. the status quo.
It would move the cost burden from the students (who are already having 20% of their career years stolen from them) to the elites who push for these policies. That would make the elites less enthusiastic and be a little more fair to the students.
On the other hand there would be more students wasting 4 precious years of their lives.
Probably after a decade or two we'd end up with something like what Europe has - "free" (tax-paid) education, but only for a tiny minority of excellent students. Nothing for the rest.