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The Demand-Debt Link, and Bursting the Bubble



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Katherine Mangu-Ward, senior editor at Reason magazine, joined Andy Nash this week on Inside Academia to talk about the role of the federal government in creating a bubble of demand for college degrees. In a recent post, Katherine laid it out simply:

When the government subsidizes something, we wind up with more of it. When it subsidizes something heavily—and combines that subsidy with an aggressive campaign encouraging consumption of that thing from the presidential bully pulpit — we wind up with a lot more of it.

Oceans of federal money gush into higher education every day, and every administration promises more to come. That gush obscures the real demand for educated workers. The result is lots of cashiers and waitresses with B.A.s, and lots of people with student loan debt that’s tough for them to repay. For most students, the federal subsides geared toward nudging them to consume more education actually result in the acquisition of more education debt.

In the interview below, Katherine elaborates on this inflationary demand-debt connection, and gets in to why greater transparency or more stringent disclosure requirements for colleges are not in themselves likely to result in real reform, thanks to “smart guys jockeying spreadsheets right now, trying to figure out how to work around these [disclosure] rules.”

Katherine also proposes rolling back federal control of the student-loan industry, at least in terms of career-based training in higher ed:

The solution that I think is the most obvious isn’t entertained. And that’s that, at least for degrees that people are getting ostensibly to make money — so we’re talking about essentially the kind of career training programs that the Department of Education is looking to regulate here — letting banks decide when to give loans seems like a pretty good way to gauge market interest and market worth for a degree.

So if you go to an ordinary commercial bank and say, ‘I’d like to take out a loan to become a sonogram tech,’ just to pick an example. The banks have all kinds of incentives to figure out how much you’re going to earn in that position, and how much you can reasonably expect to pay back. … This is how markets work.

Radical ideas, indeed.

You can watch the full interview on YouTube, or read more here.



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