Student Loans, Indenture and Constraints

Sarah Jaffe has a story over at Alternet, Is the Near-Trillion-Dollar Student Loan Bubble About to Pop?, that starts with stories about people buried under student debt, unable to make their payments in this terrible economy. Jaffe opens with stories of people for whom the tradeoff – great education and full opportunities combined with massive debts – didn’t work out.  People, for instance, who had to drop out of college and thus ended up with a debt load and without the necessary credentials to get ahead in the economy.

Jaffe goes on to look at the large amount of student debt out there and what can be done about it. I want to add three additional ways of looking at this problem.

Firstly, notice how the debt works here. For those that can successfully graduate from college and transition into higher paying work – often people with the most resources behind them – the debt is less of a burden, but for those who don’t finish college – those who often have fewer resources – the debt is a gigantic burden. It’s like rolling dice, with the consequences being how much the debt impacts your life.

A nice comparison is to late 19th century Western and Great Plains farmers with mortgage debt along with sharecropping in the South. Success of their enterprises were a dice roll, but either way the debt had to get paid. As J.D. Fields, a leader in the Texas Alliance (which would later evolve into the People’s, or Populist, Party), put it, farmers’ two alternatives were “success and freedom, or failure and servitude.” How well does that describe out educational debt system now?

A second point is that the analogy should be extended to the notion of indenture more broadly.  For all the talk about freedom, the majority of whites who came to the British colonies arrived under indenture.  Indenture was extensive and prevalent, secured not by property but by people and an extensive legal code that limited recourse if things went bad. Indenture was the means of social mobility, something that could transfer people across space – class and distance – and into a better life with more opportunities.  It was used more by the young and those with less resources, of course.  And it generated a major financialized secondary market to go along with it.

How well does colonial indenture match up with student loans?  Pretty well I’d argue.  That’s the provocative thesis of this great Jeffrey Williams piece in Dissent, Student Debt and the Spirit of Indenture.  I brought this thesis up to a conservatively-minded economic historian I know and he delighted in it – as he pointed out, in colonial times people died so quickly and they could disappear easily.  As such indenture needed to function in a “total institution”-like space with coercive punishment very present to get maximum returns to creditors.  With today’s longevity, as well as our surveillance and monitoring technologies, indenture can function in the background as a cut deducted from your checking account every month for a few decades.

But Jaffe’s piece focuses more on those for whom this arrangement doesn’t work out.  What about those for whom it does work out?  What about those who go to a great, highly-selective school and place into the job market?  How does student debt impact them?

Beyond a major drag on their income at a crucial point in their lives, there’s another interesting factor.  As the third item, we luckily have this fantastic Jesse Rothstein paper to examine, Constrained After College: Student Loans and Early Career Occupational Choices. From the paper (my bold):

In the early 2000s, a highly selective university introduced a “no-loans” policy under which the loan component of financial aid awards was replaced with grants. We use this natural experiment to identify the causal effect of student debt on employment outcomes…We find that debt causes graduates to choose substantially higher-salary jobs and reduces the probability that students choose low-paid “public interest” jobs…Specifically, in our preferred specifications in columns 6 and 7, we estimate that an extra $10,000 in student debt reduces the likelihood that an individual will take a job in nonprofits, government, or education by about 5 to 6 percentage points. This is a large effect…students with more debt are less likely to accept jobs in low-paying industries and accept higher paying jobs more generally.

There’s a lot of great stuff in the paper about life-cycles of economic agents for those who would find that interesting.  For our purposes, even those for whom this arrangement works find themselves pushed out of government, education or non-profit work by their debt loads.  Debt puts contraints on what people are capable of doing, and one way out of that constraint is to work in the fields that pay the most.  For those who want to see our best working in schools, government, nonprofits, taking chances starting entrepreneurial work or simply not working to replicate already existing power structures, this is a terrible arrangement.

And as a reminder, moving from subsidizing loans and grants, capital that can be easily captured by incumbent institutions, to providing a cheap public option, is one way to use the market to combat this runaway educational price inflation.

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9 Responses to Student Loans, Indenture and Constraints

  1. CCT says:

    Great topic with nice embedded references. I wrote an article on the subject a while back which draws the same conclusions about indentured servitude. You might find it interesting. I posted some insightful student loan calculations and a “realistic” post graduate budget as well – Stuff that you don’t normally see attached to an article about student loans, but that really should.

    Take care, and I really enjoy your posts.

  2. ??? says:

    Nice point about the indentured element. And you forgot another development from the last decade that makes student loans indentured servitude: A law was passed in 2005 that makes it impossible to default student loans (forget which one…very under the radar, this one).

  3. SteveLaudig says:

    The strategic goal is control a/k/a slavery. The tactics include bait and switch selling of the value of an “education”; keeping consumers ignorant; distorting the bankruptcy laws; and others I shan’t name. To be debtor is to be a slave.

  4. Tom says:

    Two comments. Possiby the causality of the effect of college on future income versus the cost of college could run either way: the bigger the college pay differential, the more college is worth, or the higher the cost of college, the higher pay must be for jobs requiring college, to compensate for both the cost and the risk of not finishing. In general, I would say the high cost of college is just another symptom of the general trend toward higher inequality.

    My more conspiratorial comment is that the high cost of college and student debt servitude is a conscious but unstated policy, intended to reduce the possibility of another student movement like the antiwar movement.

  5. Blissex says:

    «the high cost of college and student debt servitude is a conscious but unstated policy,»

    It is designed to reproduce the ruling classes as a group, “meritocratically”, just like admission to Oxford and Cambridge in England which depends largely on ability to spend on a prep school.

    Membership of the upper middle class/lower upper class becomes hereditary by ensuring that “good” university degrees are a meal ticket for life, and then that only upper middle class/lower upper class students can afford them.

    That “good” university degrees are a meal ticket for life is demonstrated by the fanatical devotion of many or most upper middle class/lower upper class to admission to them, and the large “prep” industry that coaches upper middle class/lower upper class applicants on how to succeed.

    Making such degrees expensive reduces a lot the need for upper middle class/lower upper class to invest in application coaching and prep schools, as admission can just then be simply purchased amongst a much reduced applicant pool.

    The occasional upper middle class/lower upper class applicant may fail, but as a whole it is a way to make good jobs effectively hereditary for most. Some academic paper found that children’s income has become more correlated with parent income than children height with parent height, and a lot of this is thanks to admission to “meal ticket” degrees.

  6. GiT says:

    Of course, the finding from the natural experiment fits nicely with conservative ideology.

    Under the pressure of debt, students are driven to those jobs which most highly compensate them. High compensation, as a reflection of both the relative scarcity and marginal productivity of labor, means that with debt skilled labor is more efficiently allocated to those sectors where it is most needed and most economically productive (it is in need because the marginal returns for hiring an additional worker are high – diminishing marginal returns lead to diminishing wage levels). By forcing adaptation to the incentive structure of the market, economic wealth is maximized.

    If you absolve students of the cost of their education through grants, they have diminished incentive to train themselves in the most ‘in demand’ lines. But ‘education’ is merely a means of developing a maximally productive work force, so any intervention which subverts the connection between labor market prices (wage levels) and individual choice makes us worse off.

    By increasing the financial pressure to train one’s labor in those fields with the highest returns, society more effectively produces a supply of labor in conformity with the demands of capital. This will have the tonic effect of lowering wage levels across all industries, decreasing the costs of production, which will decrease price levels, which will improve everyone insofar as they are a consumer.

    Further, since the cost of education will need to reflect the returns a student can get by investing in their training, the price of education will need to fluctuate across disciplines on the basis of the expected rate of return from their personal investment in their own human capital. As such, the university will need to maximize the efficiency of its departments in providing its customers with valuable skills if anyone is to actually demand their services. With their customers fully subordinated to the dictates of the market, the university must likewise prostrate itself before the dictates of Mammon.

    Unprofitable areas of education will either need to lower their costs of production or shut down all together. If this causes an excessive scarcity of a certain skill, wage levels for that skill will rise and make the academic program viable once more. The academy will simply have to restructure itself around the skills demanded by industry, offering its services at prices sensitive to the profitability of a given line of employment.

    Students will only take on as much as debt as they themselves judge to be rational based on their expectations about the rates of return for a given line of work. In the long run, outcomes should equalize as debt levels equilibrate with wage levels, and the cost of training in a particular occupation becomes purely a reflection of the amount of time required to learn the requisite skills, combined with the relative risk of the line of work remaining profitable.

    In this way, the profitability of a given line of work, after factoring in the cost of receiving the training, will be equal across all lines of work and students can simply pick whatever course of development they like, within the limits defined by capital’s demand for labor.

    Freed from selfish, bourgeois concerns about what makes them ‘happy,’ what constitutes a ‘worthwhile life’ or what is conducive to ‘democratic citizenship,’ a just society, democracy or other such idealistic clap trap, individuals will now only make choices on the basis of what most effectively guarantees their survival. What most effectively guarantees their survival will be whatever is of most use to society. Their individual desires will be entirely determined by the common good, as dictated by the market. Whatever is of most use to society will earn them a wage, after factoring in the costs of attaining the required skills and the risks associated with their investment, reflective of a social utility equivalent to all other lines of work.

    No need for politics, as the standard to which society aspires will be nothing other than the standards produced by the market. What’s the common good? Why, nothing more than the system of prices. No need for voting when you can simply buy, buy, buy.

    End result, a perfectly efficient – and perfectly egalitarian – society, where everyone is compensated on the basis of the cost of their training, the productivity of their skills, and the psychological and physical costs and benefits associated with a particular profession.

    Wonderful, right? The only think holding us back from utopia is a sufficient amount of fear and desperation. So bring on the debt! Only by removing your freedom to choose how to spend your time can we all be truly free.

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  8. @GiT: I’d make just one caveat to your idea – a lot of students get conned into studying for worthless degrees, mostly in the liberal arts, like “American studies” or “gender studies” or suchlike, where the number of available jobs in the US is one or two per year. These are kids with little or no experience in the real world, so they’re easy prey for academic con artists. I suggest, therefore, the following: Any students who major in fields in the liberal arts or “soft sciences” who are unable to find a tenure-track or like job within one year of their graduation, shall have the debt for their undergraduate education paid for in full by the major department with departmental funds, and when these are exhausted, from the research money for the professors in that department, and when these are exhausted, from the money budgeted for professors’ salaries. Graduate studies in these departments would be on full tuition scholarships with a stipend for living expenses and books (as is the current situation in the hard sciences). This would have the salutary effect of sharply reducing the number of people who graduate with unsaleable degrees.

  9. Pingback: A New Metaphor for Student Debt Burdens: Faculty Taxes | Rortybomb

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