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Monday, November 8, 2010

How do we measure what colleges are producing?

One of the main criteria that is being used these days (because it is one of the few statistics we have about the cost-effectiveness of college) is the default rate on student loans. This is a start but it is leading liberals to the wrong conclusion that we need more government intervention. And as a Libertarian I think we need far less government involvement in college.

If we require more transparency about how each college’s specific programs are producing independent and tax-paying citizens, the market will tend to adjust appropriately.

College loan defaults are a function of a number of factors. But first and foremost they are a result of a system that makes costs reasonably transparent but the young consumer indifferent to those costs because he won’t be paying the bill for several years to come. The student has been taught to accept the conventional wisdom that this debt is a great “investment”. And the student has been conditioned to believe that one college major is as valuable as another.

But default rates are also a function of the lack of transparency on what the education produces for the money spent. What is the common test measure that demonstrates the learning achieved? There is none.

Are graduates making the US more competitive, making employers more willing to start a new business in the US rather than in China or India, and creating well-paying jobs and secondary jobs? For example a drug research center is driven by the availability of top scientists. But for each of the scientist jobs, there are many other support jobs from secretaries to janitors that keep the place humming. One “primary” job can support one or more other secondary jobs, all strengthening our economy.

As we look at college loan default rates I think we will find three primary factors that correlate with default rates:

First, is the income level of the college student’s family. Poor students default at higher rates than wealthier students. This is probably the result of less willingness and ability of the family to help with the cost of the college to begin with and probably the result of poor students borrowing a higher percentage of their college costs than wealthier students.

The second factor is how much students borrow. A student that borrows $1,000 over a four year degree has got to be a lower default risk than one that borrows $100,000. Liberals will then suggest that we need to subsidize these poor students more and Libertarians like me will fight hard to stop this ineffective (and usually counterproductive) market intervention.

The third and most important factor is what the student studies at college. Is there a demand for what the student invests his education in? Recent graduates in Chemical Engineering, Petroleum Engineering and Mechanical Engineering are finding well-paying jobs. The same cannot be said for Recreation Management, English and Sociology majors. So we need a much broader discussion on what students are studying. Not all college education is created equal and it matters if there is customer that wants to pay one for that education once you have invested in it.

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