The College Debt Trap

After giving a talk on "the higher education bubble," Glenn Reynolds writes:

The government decides to try to increase the middle class by subsidizing things that middle class people have: If middle-class people go to college and own homes, then surely if more people go to college and own homes, we’ll have more middle-class people. But homeownership and college aren’t causes of middle-class status, they’re markers for possessing the kinds of traits self-discipline, the ability to defer gratification, etc. that let you enter, and stay, in the middle class. Subsidizing the markers doesn’t produce the traits; if anything, it undermines them.

There is much truth to this, though the GI Bill is an obvious counterexample – most beneficiaries proved their self-discipline and ability to defer gratification far more than your average entering freshmen from the upper class, and many of these former soldiers were helped into the middle class by the government help. Megan says the problem is subsidy in the form of loans:

In the past, college degrees conferred higher incomes on those who earned them.  But almost all of that surplus went to the student rather than the college, because aside from a small number of extremely affluent families, the students were young and did not have that much cash.  If colleges wanted to expand their market, college tuition was constrained to what an average student, or their family, could pay.

Introducing subsidized loans into the picture allowed students to monetize that future income now.  It's hardly surprising that colleges began to claim more and more of the surplus created by their college degree.  Think about it this way:  if colleges create an extra million in lifetime salary, you're theoretically better off if you pay them the discounted present value of $999,999 in order to earn that extra million.