Political Economy of Student Loans kinda thaangg

It's been an unintentional hiatus from le blog and le writing, so let's try to start this back up for the summer. Here's a paper I wrote bitching about student debt in the context of social reproduction, intergenerational transfers, inequality, blah blah blah...: 


“And the National Bank at a profit sells road maps for the soul, to the old folks home and the college.” Bob Dylan’s Tombstone Blues

The goal of this paper is to examine the proliferation of student loans to finance higher education in the context of human capital and social reproduction. As neoliberal policies dismantle the welfare state, how does might increasing student indebtedness effect existing inequality between groups, the ability of a generation to support the very young and very old, and who more efficiently should bear the burden of human capital investment. Evidence for now however shows that perhaps the beast may be swallowing its young, as a generation of workers is sandwiched between both rising debt and obligations to work and care for others, without the earnings to offset[1].

Theorizing Human Capital and Social Reproduction, Contextualizing the Problem

Higher education, taken as the standard four-year college or university experience, can be theorized in the context of political economy using the concepts of social reproduction and human capital investment. Education in general is often equated with human capital investment- a process with an associated cost that transforms human labor power into something more productive than otherwise. As an investment then, paying for education either through private individuals or a state system yields returns in individual earnings, overall economic growth, innovation, and other areas both social and private. The interesting question however is who pays for investment, and how?  Should reproduction of labor power and investment in future workers be taken on socially, by the state, or by private individuals? Which means yields the most efficient societal outcome? Further, how does the way in which we finance human capital investment for the upcoming generation of workers affect the nature of intergenerational transfers between age and demographic groups?

To answer these questions, it is important to consider human capital as just one aspect of the intergenerational process of social reproduction, which allows for a broader analysis. Younger generations invest in their own or have the state invest in their human capital, in the hopes of higher earnings and productivity, which in turn supports the safety nets in terms of time and wealth transfers to the very young and older generations. Across time, one hand washes the other. Social reproduction then is a sort of virtuous circle between workers (both paid and unpaid) past, current, and future, complicated by matters of who should pay for and administer these transfers of time and wealth. In this context then, human capital investment can be viewed as “ ….the costs of producing future workers, developing their skills, maintaining their health, and providing for them in old age...”[2] Who bears the costs of human capital production is of course the interesting question at hand.

In recent times though, neoliberal policies and mysterious cost increases have shifted the economic burden of human capital investment through higher education away from state funding and towards self-finance in the form of student loans (though this form of financing too requires great state support). The shift away from state funded, affordable by working part-time at a minimum wage universities towards pricey, near-private self-financed higher education can be viewed as a shift in the welfare state. This shift moves away from a more social democratic model (or even just corporatist) that adopts the costs of social reproduction away from the individual and market and into the social realm via the state, towards a more liberal form of the welfare state where the state function to encourage, not displace, the market in the realm of social reproduction.[3] Gøsta Esping-Andersen presents the conflicts of the welfare state and its function as balancing out the roles of the state, market, and family.

Source: Esping-Andersen.

But when social reproduction misaligns interactions between these three spheres, problems of who bear what costs emerge. So who pays for the human capital aspect of social reproduction? The new generation of workers themselves.

 Why is the turn towards self-financing important? The individual indebtedness associated with the rising private costs of human capital investment is somewhat unprecedented. As of Spring 2012, the total outstanding student debt burden in the United States stands at around $1 Trillion, while only representing a small fraction of the economy, is large enough and historically unprecedented enough to be of concern to any economist pondering social reproduction[4]. The now famous graphic below visualizes how unprecedented this surge is:

[5]

While the reasons for this shift warrants its own discussion, it is also important to understand the social implications of this trend through the lens of political economy. Then it becomes more clear why self-financing continues to persist, and how this form of consumer indebtedness may execrate economic inequality while simultaneously disrupting social reproduction (especially intergenerational transfers). An intersectionality approach allows for further analysis into these effects by class, race, and gender, especially in the role self-financing plays in reinforcing or exacerbating inequality in educational attainment and earnings[6].

Returns on Investment

It appears to be general consensus in economic literature that human capital investment in higher education is a “good” thing, meaning that increasing the overall educational attainment of a population yields both private returns to the earnings of an individual as well as social returns in the form of increased labor productivity of the workforce.[7] Empirical evidence from OECD countries confirms this idea, demonstrating that both the social and private rates of return are well worth the investment, and in particular private return through wage premiums is even more profound for younger workers.[8] This theory and supporting evidence on the benefits of human capital investment has in part contributed to a boom in higher education, with hopeful students looking to secure a prosperous future and stable footing in the competitive labor market.

 Much of this research has helped to produce a “golden ticket” mentality about higher education. The result of this can be seen as enrollments in post-secondary institutions increased by 38% over the decade 1999-2009, compared with just 8% over 1989-99[9]. In a strange irony however, state funding for public institutions has been on the decline. Research institute Demos reports that “Real funding per public full-time equivalent student dropped by 26.1% from 1990-1991 to 2009-2010.”[10] Still, the incentive for enrollment remains. Workers holding a bachelors degree enjoy a wage premium earning 84% more over their lifetimes than non-graduates, while also having unemployment rates much lower than workers with only a high school education.[11] It is important to note that the highest rates of return in terms of earnings for human capital investment are dependent on age, with the youngest workers generating the highest return from increased educational attainment[12]. With these benefits, many students find it worthwhile to attend school, even if it means self-financing through student loans.

Human capital investment also has a return on investment for firms who employ educated workers. An OECD study finds that as educational attainment for workers increases, so does attachment to their professions and jobs, giving rise to higher effort and productivity on the job. In fact, even in the case where firms provide the funding for a worker to attend a post-secondary institution, firms see increased labor productivity, growing profits, and are able to provide a higher wage in accordance with the college wage premium, not unlike the concept of an efficiency wage[13]. The effects on wages, productivity, and efficiency for both the individual and firm explain why human capital models of economic growth are able to explain inequality gaps between countries with high and low levels of human capital investment, implying a positive macroeconomic effect[14]. Theoretically then, firms then have some incentive to fund workers who attend college, or to support taxes that go to support state funding for public higher education.

A win-win-win situation for workers, firms, and national accounts, no? Let’s think again about exactly how the current neoliberal system of human capital investment really works. How does self-financing complicate this matter?

Much of this research has helped to produce a “golden ticket” mentality about higher education. Many young folks, particularly in the United States, have seen earning a degree as a sure way of securing relatively high future earnings and all of the standard things that go with the American dream: a job, home, car, family, retirement, etc. With this in mind, students become more and more willing to finance their own human capital investment with student loans. As public support for universities decline and tuition soars, that golden ticket now comes with a ball and chain, which at graduation is now an average of about $25,00 owed per student borrower.[15] 

            With students now facing a guaranteed monthly outflow of income in repayment of student loans, the returns on investment in human capital must be reconsidered for both private and social returns, as well as in the context of how this may effect existing inequalities and the circle of social reproduction.

Student Debt and Inequality

Sometime after the land-grant universities expanded, the GI Bill passed, and we socially redefined early adulthood as including a college experience, attending university became the norm for everyone, not just for elites and future academics. State universities and grant programs like the GI Bill provided somewhat egalitarian access to higher education. Rumor has it that a student in the late 1970s through early 1980s could afford University of Massachusetts Amherst tuition out of pocket by working a 10-hour per week minimum wage job, which allowed access to higher education easier for those of all socio-economic backgrounds.[16]  

Not so much the case anymore. As tuition costs rise and self-financing becomes the norm, existing inequalities based on race, ethnicity, and gender become exacerbated by this uptick in debt. While educational attainment has increased across all race and ethnicities and certainly among women, these groups face a different set of barriers to entry that may in some ways make college “cost” more than for more privileged groups- struggling to figure out the deal with SATs, FAFSAs, and other bits of collegian alphabet soup take both time and money if you are not already in the college preparatory loop.[17] Blacks and Latinos have both increased in the proportion of graduates with a four-year degree, however at a significantly lower rate than the increases in Whites earning a bachelors[18]. Access is increasing, but not in such a way that it closes the gap between groups.

Without equal footing to begin with, minority groups then tend to face higher debt burdens than their white counterparts, as shown by the chart bellowing tracking debt by race and ethnicity. Particularly, Blacks tend to on average graduate with higher debt burdens than other groups, while also facing higher unemployment risk and lower median earnings.[19] If this group is facing higher costs of human capital investment as well as a lower return, this then “golden ticket” mindset actually acts to exacerbate already existing inequality between Blacks and other groups. In a sense, Blacks are paying more via debt in order to continue earning less than their equally educated non-Black counterparts- in a sense treading economic water. Not quite the social mobility bargain we signed up for. It is interesting to note that a high percentage of high-debt borrowers are coming from for-profit institutions- schools that have capitalized on the drive towards increased human capital investment in higher education.[20]

“Who Borrows Most?” Brief, College Board, 2010

	No Debt	Cumulative Total Debt Less Than $30,500	Cumulative Total Debt of $30,500 or More
White	36%	48%	16%
Black	19%	54%	27%
Hispanic/Latino	33%	53%	14%
Asian	40%	51%	9%

Women face a more complex situation when it comes to weighing the costs and benefits of college education and debt. In some ways, many young women have reaped the benefit of feminist movements that lead more women to enroll in college and enter the skilled labor force. Today, young, highly educated, childless women actually earn more than their male counterparts.[21] More women than ever are enrolling in college and have a better chance at graduating with a degree, however these women still face a gender pay gap, even with bachelors degrees, and those with dependents face a “mommy” penalty in earnings.[22]

While there is progress for women, many issues arise when considering the increased proportions of women enrolling in college and entering the work force, such as whether or not this undermines non-market work (and thus market caring professions) and if pushing women towards “masculine” professions (like studying STEM) majors worsens the problem of undervaluing traditionally feminine, unpaid work. Psychologists Stout, Dasgupta, et al. argue that forms of internalized stereotypes do not allow women the “freedom to choose” careers that would make them better off, such as science or engineering.[23] A more socialist feminist approach to this problem however is to consider that perhaps the more “feminine” professions are the ones that are undervalued, pressuring many women, especially those with dependents, into low paying market work. With the wage gap persisting and indebtedness rising, this continues to squeeze earnings prospects for women, unless of course they can just get over their own oppression and become strong, childless, brawny engineers. (okay, maybe that went to far…) As Anya Kamenetz puts in in Generation Debt, “What all this adds up to is that women my age are finding that the feminism of the 1970s is an unfinished revolution.” [24]

Kamenetz frames how gender inequality is affected by debt in terms related to social reproduction. She explains how students with dependents now and in the future face “mommy” penalties in both earnings and time. For women with dependents and student loans, it turns out that the penalty for motherhood is roughly $1 million- roughly the same amount as the wage premium for attending college in the first place.[25] Treading water, drowning in debt. Student debt can be seen as a setback in this light, but perhaps also as a catalyst for change and uniting issue for student-worker-family solidarity.

Looking at the data, it is clear that student debt poses some kind of problem, at least on the individual financial level. But what about on a social scale? Does the relatively small population of people dealing with student debt undermine the importance of analyzing its possible effects on social reproduction?

So What Does Student Debt Have To Do With Social Reproduction Anyway?

Student debt poses some peculiar and serious problems for human capital investment and social reproduction. The problem relates back to theories of the welfare state, and how to best balance social reproduction through the state, the market, and families.[26] As an investment in the future labor productivity of a new generation of workers, the deal becomes quickly complicated by problems such as student loan default, the lack of bankruptcy protection for defaulted loans, and the particular rules around student debt that allow for practices such as wage garnishment and revocation of professional licensure. With student lending through both the Federal government and private lenders, an investment gone sour turns more into a relationship of indentured servitude rather than free-labor, capitalism, and definitely not socialism. It’s difficult to provide collateral for a human capital investment or repossess something that is an inalienable asset. 

But human capital has other unique traits that distinguish it from traditional land, labor, and capital, in that it is a very social asset. Folbre explains, “human capital is co-produced by a number of different agents who collaborate in its development: parents, grandparents, other family members, the community, schools, social services, society as a whole AND the person who embodies that human capital.”[27] Similarly, these groups also benefit from increased human capital investment, especially in terms of intergenerational transfers where the increased earnings and productivity of the younger generation supports the elderly and very young, making human capital a public good and a part of the process of social reproduction. So what happens when there is a debt expropriation from take-home earnings and one demographically smaller generation becomes squeezed financially?

With the decrease of direct state funding of public higher education, maintaining higher education as a public good becomes difficult. Inequalities are worsened, debt balloons, and new models of profit seeking that do little to really invest in human capital arise. Anya Kamenetz explains the problem of how student debt (as well as the privatization of education in general) seems illogical and even inefficient in the context of social reproduction: 

“Human capital- our next generation- is our most valuable national resource, yet it is overwhelmingly cultivated using private money, time, and love. It’s as if we expected private citizens to maintain the national highway system from their own pockets.”[28]

Kamenetz goes onto explain how this social process is thwarted by the private (specifically self-financed) nature of human capital investment. College graduates grapple with increasing expenses: loan repayments, rents, transportation, and onward. Conflicting feelings towards higher education, career paths, and family life emerge. Personal stories submitted to the community website Occupy Student Debt show a number of student debtors putting off what were once life events due to debt: living independently, marriage, children, home-ownership, etc[29]. These adulthood defining events though are also part of the circle of social reproduction, leaving any economist concerned with the efficiency and effectiveness of this process worried.

            These worries, in fact, are not anything new or just the result of trendy whining as part of the Occupy Movement. An outdated 2002 survey of student borrowers indicated that a reasonable proportion of borrowers put off life events due to their debt.[30]

Source: Baum, S. and O’Malley, M. (2002, February 6). “College on credit: How borrowers perceive their education debt.”

Perceived Impact of Debt on Lifestyle	Received Pell Grant (39%)	No Pell Grant (61%)
Changed career plans because of loans	19%	15%
Loans delayed moving out of parents’ house	15%	12%
Loans delayed buying home	45%	35%
Loans delayed buying car	36%	25%
Loans delayed marriage	19%	11%
Loans delayed having kids	24%	19%

While these are only narrow indicators of how the working generation fairs, it is still concerning that even before the financial crisis student borrowers felt crunched by their debt. This implies that there may be a slow and lumbering generational crisis on the way, as baby boomers retire and their children enter loan repayment. The market solution to human capital investment, student loans, appears to be thwarting the process of social reproduction between generations.

So what do we do?

Student debt is just one of the many aspects of declining (or never existing) public support for social reproduction. It demonstrates the conflicts that emerge when having a system mixed with both the market and the state.  Debt heightens existing inequalities between groups and delays life events for the generations of workers afflicted with loan burdens. While the benefits of human capital investment are clear, it comes with risks of default, delaying adulthood, being unable to meet family obligations, and presenting a conflict between imposed market-based work and family duties.

            So how can these conflicting issues be ameliorated? How can society reap the benefits of human capital investment in both the individual and social returns, without having to squeeze a generation of students?

            New research shows that, at least in Massachusetts, public investment in higher education not only comes with the benefits of increased human capital, but real economic impact as well.[31] In the short run, direct state support for public institutions not only lowers the cost for students, but also provides economic stimulus in terms of easing unemployment in the locality where invested. In the long run, the increase in overall human capital levels results in increased wages, increased tax revenue to continue funding higher education, and lower public expenditures due to efficiency gains.

Socializing the costs of human capital investment then allows for risks to be spread more evenly, resulting in a more efficient outcome for both the individual students and the economy in general. Jobs, tax revenues, less worries, and no ball and chain. With this solution then, a society can enjoy the benefits of human capital that most economists agree on. These benefits then can translate to increased resources available for the intergenerational transfers needed to keep the wheels of social reproduction in spin: revenues of retirement programs, funding for health expenditures, workers able to provide for their family units, etc. In the context of social reproduction then, direct public investment in human capital through (free) public institutions, not student loans, appears to be the most efficient and optimal solution, for individuals, families, and the economy.

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[2] Folbre, Nancy. “The Political Economy of Human Capital.” In Class Reading.

[3] Esping-Andersen, Gøsta. The Three Worlds of Welfare Capitalism. Cambridge: Polity Press & Princeton: Princeton University Press, 1990

[4] Student Loan Debt Clock. <http://www.finaid.org/loans/studentloandebtclock.phtml>  April 25, 2012.

[5] < http://thinkprogress.org/wp-content/uploads/2011/12/student_loan_debt_correct.png>

[6] Shields, Stephanie A. (2008). Gender: An intersectionality perspective. Sex Roles, 59, 301-311. 

[7] Mankiw, N. Gregory, David Romer, and David N. Weil. “A Contribution to the Empirics of Economic Growth.” The Quarterly Journal of Economics (1992) 107 (2): 407-437.

[8] OECD. “Investment in Human Capital Through Post-Compulsary Education and Training.” 2001. < http://www.oecd.org/dataoecd/3/50/2727144.pdf> May 3, 2012.

[9] National Center for Education Statistics. Fast Facts.

 < http://nces.ed.gov/fastfacts/display.asp?id=98> May 3, 2012.

[10] Quintero, John. “The Great Cost Shift”. Demos. March 2012. <http://www.demos.org/publication/great-cost-shift-how-higher-education-cuts-undermine-future-middle-class>

[11] Carnevale, Anthony P., Stephen J. Rose, and Ban Cheah. “The College Payoff.” Georgetown University Center on Education and the Workforce. August 5, 2011.

[12] OECD.

[13] OECD. “Investment in Human Capital Through Post-Compulsary Education and Training.” 2001. < http://www.oecd.org/dataoecd/3/50/2727144.pdf> May 3, 2012.

[14] Mankiw, N. Gregory, David Romer, and David N. Weil. “A Contribution to the Empirics of Economic Growth.” The Quarterly Journal of Economics (1992) 107 (2): 407-437.

[15] “Higher Education.” The State of Young America. Demos. November 2, 2011.     

< http://www.demos.org/sites/default/files/imce/SOYA_HigherEducation.pdf>

[16] “Key Data about Massachusetts Public Higher Education.” Public Higher Education Network of Massachusetts. December 2011. < http://phenomonline.org/wp-content/uploads/2011/11/Key-Data-12-11.pdf>

[17] “Educational Attainment.” The State of Young America, Demos. 2011. < http://www.demos.org/data-byte/educational-attainment-ages-25-34-raceethnicity>

[18] “Who Borrows Most?” Trends in High Education Series, College Board, 2010. < http://advocacy.collegeboard.org/sites/default/files/Trends-Who-Borrows-Most-Brief.pdf>

[19] “Jobs and the Economy.” The State of Young America, Demos. 2011. < http://www.demos.org/sites/default/files/imce/SOYA_JobsandtheEconomy_0.pdf>

[20] “Who Borrows Most?” College Board.

[21] “Workplace Salaries: At Last, Women on Top.” Time Magazine Online, September 2010. < http://www.time.com/time/business/article/0,8599,2015274,00.html>

[22] “Gender Pay Gap, Workers Ages 25-34 by Education.” The State of Young America, Demos. 2011. < http://www.demos.org/data-byte/gender-pay-gap-workers-ages-25-34-education-0>

[23] Stout, J. G., Dasgupta, N., Hunsinger, M., & McManus, M. (2011). STEMing the tide: Using ingroup experts to inoculate women’s self-concept and professional goals in science, technology, engineering, and mathematics (STEM). Journal of Personality and Social Psychology, 100, 255-270.

[24] Kamenetz, Anya. Generation Debt. New York: Riverhead Books, 2006. p 187.

[25] Ibid. p 190.

[26] Esping-Andersen, Gøsta. The Three Worlds of Welfare Capitalism. Cambridge: Polity Press & Princeton: Princeton University Press, 1990

[27] Folbre , Nancy. “The Political Economy of Human Capital.” In Class Reading. p 6.

[28] Kamenetz, Anya. Generation Debt. New York: Riverhead Books, 2006. p 190.

[29] Occupy Student Debt. <http://www.occupystudentdebt.org>  May 8, 2012.

[30] Baum, S. and O’Malley, M. (2002, February 6). “College on credit: How borrowers perceive their education debt: Results of the 2002 National Student Loan Survey Final Report.” Braintree, MA: Nellie Mae Corporation. <http://www.nelliemae.com/library/nasls_2002.pdf>.[31] Ash, Michael and Shantel Palacio. “Economic Impact of Investment in Public Higher Education in Massachusetts: Short-Run Employment Stimulus, Long-Run Public Returns.” MSP/PHENOM. April 2012. < http://phenomonline.org/wp-content/uploads/2012/05/Ash-Report-5-4-12.pdf>