Two famous University of Chicago professors, Gary S. Becker and Richard A. Posner have a blog on which a great variety of topics come up for discussion. Becker is the 1992 winner of the Nobel Prize in Economics and Posner is a judge on the 7th Circuit Court of Appeals who has written many books in the field of law and economics. In an exchange posted on December 3, they traded thoughts on the proposals floating in Washington for making student loan programs less costly.
Becker is not convinced by all the political rhetoric that students are overburdened with their college debts, writing, “Although the debt of graduating students is not a minor burden, it is not usually a major one either….” He points out that “if the only way to go to college would be to borrow $20,000 under a student loan program at the prevailing 7 percent interest rate on these loans, the returns from college to a typical graduate would be big enough to allow the borrower to pay off the loan and have a lot left over.”
Becker also suggests that contingent loans that have an “equity” repayment system built in might be an improvement over the current system. (A system of pure equity financing is advocated in this paper.)
Posner comments that the cost of higher education (whether or not it’s financed through student loans) does not appear to deter many people from going and worries that if legislation is passed to further subsidize college, the result will be wasteful: “To repeat an earlier point, which tends to be neglected in discussions of the student-loan issue, if I am right that very few persons who could benefit from a college education are deterred by its cost, the main effect of increasing the subsidy will be to attract applicants who would not benefit if they weren’t being ‘paid’ to attend college. That would be a misallocation of resources.”