Thursday, January 18, 2007

Who Should Pay For Upwards Mobility? And How?

I wrote this post for the American Prospect blog and thought that it might be of interest here, too.

A question that occurred to me when I read about the halving of student loan interest on some types of loans:

With fanfare and substantial bipartisan support, the House delivered Wednesday on the fifth of six bills Democrats had vowed to quickly pass, voting overwhelmingly to cut the interest rate on some college student loans.

The bill, however, was much scaled back from House Speaker Nancy Pelosi's campaign promise to cut all student loans in half.

Instead, the House measure, passed 356-71, applies to the 5.5 million subsidized Stafford loans for students whose families earn between $26,000 and $68,000 a year, but would not increase Pell Grants or student tax credits, as originally considered. The bill sets a five-year phase-in of the interest rate reduction from 6.8 percent to 3.4 percent, but then, after six months at 3.4 percent, returns the rate to the original percentage.

House Democrats called it a "first step" on delivering some relief to students and their parents as college costs have skyrocketed 41 percent in public universities and 17 percent in private ones, and after college debt doubled between 1993 and 2004, according to the independent U.S. Public Interest Research Group.

"This is only the beginning," said Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee. "This is a down payment."

The bill faces an uncertain future.

The bill also faces the usual types of criticisms: it's too little, it's too much, it provides the wrong incentives and it is paid by the wrong people (or so the lenders and the Republicans complain).

Yet education is one of the best engines for upwards mobility and poor students cannot afford to pay for higher education on their own. Their families don't have the physical collateral to borrow money in the private financial markets nor the savings to pay for the tuition outright. Financial markets are incomplete in the sense that a student cannot acquire a loan against the collateral of future earnings powers (except with the help of the government and the rules and regulations to ensure such a help). Hence, poor students need either loans guaranteed and/or subsidized by someone or grants and scholarships.

Now, the "rugged individual" would naturally just saddle the horse, ride off to college and work full-time through his or her college (most likely a very long and often interrupted) career but such rugged individuals are few, jobs paying enough for this are even fewer and the whole setup would cause a lot of these individuals to become rather ragged. Not exactly the best case to guarantee upwards mobility.

But assuming that upwards mobility is desirable in a society, who should pay for it? People with degrees earn more, on average, than those without them. It would seem sensible to have the students themselves pay back most of their financial aid as happens in a loan-based system.

On the other hand, the wealthier students often get their educational expenses completely funded by their families. It is as if we gave the wealthier students grants and the poorer students loans. But if we gave poorer students mostly grant-based aid we'd be asking for the rest of the society to subsidize those who are one day going to be wealthier than the average citizen. Two different concepts of fairness or equality are at play here and I'm not sure if both of them could be achieved at the same time.