The bad framing of student debt
To the editor:
Who bears the risk in investment? It is the investor putting up the money. This sounds like common sense. But as with all “common sense,” we are blinded by context.
Consider venture capital. Roughly 30% of start-ups fail completely; 75% do not make money back for the investors. More underperform projections. Yet we have venture capitalists. Why? High potential. A few will pay off big.
Imagine if investors expected entrepreneurs to personally pay back the seed capital if the venture fails. That is nuts. We would chide the investors to bear their consequences. They knew only a few investments would work out, and no one knew which ones. Entrepreneurs suffer their own losses. Innovation would be strangled.
Suppose instead a company needs skilled labor. They hire someone and, obviously, pay them while they are training. Later that employee is not kept for whatever reason. Neither side knows if any given trainee will remain. There are expected future losses in turnover or layoffs.
Imagine they want lost workers to pay back the money sunk on training them. Absurd. There is inherent uncertainty involved. They could have been working elsewhere. That industry has gained “human capital” in its net labor pool regardless.
Now introduce an external training program. Call it a “school.” The trainee has to pay for their own training, and since they are not “working,” they are not being paid. They do this full-time for several years of lost wages. What is considered “entry-level” rises.
In principle, even if they learned absolutely nothing useful at all, just finishing is a powerful “screening out” signal. The industries become able to only hire people who finish whole training programs. They prefer specific work experience in addition, even if unpaid internships. Unless someone comes from wealth, the only way to do this is with debt. The government intervenes with personal loans to protect upward mobility.
This allows the schools to increase tuition much faster than inflation for decades. They say if students finish training and happen to get hired, it will work out in their favor. Eventually. On average.
Except as before, many will not finish. Others become “underemployed,” working outside their field. Return on investment often is lower than projected. These training programs, not being tied to particular jobs, involve a lot of training no single job uses. But the economy as a whole needs those more advanced knowledge and skills. We do not want to gain electricians by losing electrical engineers.
Future workers have to gamble it will all work out or automatically exclude themselves. Now our “common sense” chides workers for not being individually responsible for their voluntary debts. That is twisted. Liabilities individuals never should have held were shifted onto them by gatekeeping institutions, who profited immensely by front-loading training over employment.
Student debt relief is bad politics. But it is bad policy that student debt exists at all. The government made itself the underwriter of human capital; it should be responsible for writing off its own bad investments.