Monday, June 9, 2014

Should Government Profit From Student Loans, Part II: Are Student Loans Regressive?

Readers might remember that a while back I was sorta-defending the idea that the government might be turning a profit on student loans.  Loan repayment reform is also in the news.  In my opening post I left open a few big questions.  One of the biggest: does relying on interest revenue shift the burden of government from richer to poorer households?  I suspect a lot of people are fine with funding high school programs with a bake sale, and not so thrilled about paying for education by selling lottery tickets.  Lotteries are a pretty regressive way to fund government, and so I’m mostly on the side of their critics.  Are student loans like lotteries?

            The difficulty is that to answer the question, we have to be more specific about what we mean by “regressive.”  Are we talking about how much money borrowers have right now?  Almost by definition, folks who are borrowing money don’t have a lot of it at the moment.  But is that the right way to think about whether loans are regressive? 

            Looked at from a longer-term perspective, the loan system is arguably on net progressive.  Graduate students, after all, earn more than any less-educated group as a whole, and historically law students have done more than ok.  Those results, though, pool together borrowers and debt-free degree holders.  Borrowers are likely to have considerably less family wealth, on average (or, at many graduate programs, are likely to have had less-desirable admissions profiles).  So the question, which is empirically unresolved as best I can tell, is whether graduate borrowers on average are better off than the marginal taxpayer -- that is, the taxpayer who would have to bear the cost of replacing the loan-program revenues.

            Many economists support this life-time view of progressivity, but co-blogger Manuel Utset and I have a bit of different view.  We suggest that the decision to prioritize lifetime over, say, annual welfare depends in part on empirical evidence about people’s preferences.  If one reason we re-distribute wealth is to satisfy popular preferences for redistribution, our measure of redistribution should be influenced by how the public actually formulates that preference.  My own intuition is that “don’t give that homeless man a quarter, he used to be rich” would not strike most voters as the right way to think about redistribution. 

            In other words, I think that the fact that loans might cause some short-term hardship for borrowers should count against the appeal of profiting from those loans.  But suppose that, even accounting for that, student loans are on net progressive.  Maybe surprisingly, a lot of smart folks don’t think that would be a reason for relying on them.  Let’s kick that discussion to a third post.

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Perhaps someone who favors equality as a public policy goal should be trying to discourage people from going to college. Certainly it raises their income even further above that of the poor than it would be anyway given their talent. So perhaps an egalitarian ought to favor high taxes on college education, with the tax money going to people who do not go to college.

Posted by: Eric Rasmusen | Jun 9, 2014 7:48:00 PM

Eric, not sure if your comment is in the spirit of the Mankiw & Weinzierl height tax proposal (i.e., satirical). If not, then I'll say that in effect the profits on student loans are pretty much exactly the tax that you propose, except structured in such a way that their incidence falls more heavily on poorer and less competitive applicants. So a more traditional tax might actually be an improvement, if it didn't have those undesirable features.

If it is satirical, then I take your point that distorting the college / no college decision may be one of the less promising places for government to raise revenue.

Posted by: BDG | Jun 11, 2014 3:21:56 PM

I don't remember the Mankiw and Weinzierl proposal--- was it that if we tax height, we tax talented people, and avoid the distortion due to people pretending not to be talented? The problem with that is that the correlation between height and income-generating talent isn't big enough. Education, on the other hand, correlates pretty well with income. Also, if equality per se is valued, then anything which increases inequality is bad, ceteris paribus. Education increases inequality. It isn't ceteris paribus, because it also increases income-generating potential, so there's a tradeoff, as usual.
Another way to look at it is that egalitarians don't like savings and capital, because that generates inequality. Investment in human capital is a major form of saving nowadays. Thus, someone like Piketty who favors a wealth tax should also favor a tax on human capital accumulation. A family putting $200,000 into a child's college education shouldn't have an advantage over a family that puts $200,000 into a child's trust fund.

Posted by: Eric Rasmusen | Jun 12, 2014 7:32:23 PM

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