Saturday, March 27, 2010

Rationality and Student Loans

I had been looking into education financing methods when this Op-Ed, by David Brooks, came out. He describes the substantial shortcomings of modern economics. It traditionally implies perfectly rational people who always make utility-maximizing decisions.

This is not so, he says. In fact, rationality--though a useful assumption for making early headway in the field--is hardly an appropriate characterization of human behavior.

As I have been looking into taking out ridiculously large loans in the coming year, I have been discussing the situation with my father, who teaches physical therapy at a nearby university. Apparently, his program is a cash cow for the school, bringing in mid-30s tuition fees per student, who then go on to making between 50 and 70k a year. So that's a $150,000 debt students are paying down over the next 10 years at approximately $2,200 a month. Worse off are the female students who decide to have children within three years of graduation, thereby deferring their debt repayment by many years as interest accrues.

I should remind the reader, the program is a cash cow, meaning, it makes a disproportionate amount of money for the school in comparison to the other programs, in effect allowing physical therapy students to finance other programs in the university.

Then how is the cost of tuition set? It all comes down to "what the market will bear" (and is decided by university administrators, not professors). This is an explanation meant to soothe the conscience, suggesting the market is an all-benevolent invisible hand.

This is where the David Brooks article becomes relevant: should students taking out oversized loans be considered rational behavior? I know that for myself, it is hard to grasp the full implications of having nearly $60,000 in loans hanging over my head. Additionally, my main source of consolation is in knowing many other students have taken out even larger loans. Would I be doing this if it were not a cultural norm? And if it were not a cultural norm, would tuition costs have ever come so high?

This seems to represent an instance of a market pathology where individuals are rather removed from a realistic sense of the dollar values they are dealing with. I don't think it is very clear at all that the decisions to take out student loans are utility-maximizing.

So my point: should universities use this stripped-down,"all-humans-are-perfectly-rational" version of market economics to soothe their consciences? I don't. For programs that do not produce high-salaried graduates, I think it should agitate their sleep.


  1. Great post! I very much agree - many grad programs (mine included) are big cash cows for their university, and that the huge amount of money flowing to them is to some degree inflated. I agree, also, that there seems to be an unspoken assumption that the market magically sets prices which are perfectly true and just, when in reality much of the price simply has to do with the value we place on the good or service and our willingness to pay at a given price. The fact that bachelors degrees don't carry as much weight in the job market makes grad degrees more valuable in people's eyes; Certainly for me, it is very valuable, but some of that value definitely lies in acquiring the piece of paper which attests that I am an intelligent and competent person.

    Also, agreed about the assumption of rationality not always being met in real life. As I've observed, economics is becoming more sophisticated in recognizing the limits of its models and adapting their models appropriately. Still, I'd be loathe to throw them out completely - economics still has great explanatory and even predictive power, and people DO act rationally on a whole lot of other things.

  2. This is a really interesting post. I agree that taking out massive student loans seems to have become so "normal."

    What you've written reminds me of this article, arguing that no one should pursue grad school in the humanities unless they are independently wealthy. I don't think you're in the humanities (anymore?) but I think it's a sentiment that fits in with this analysis.

    Hi, by the way.

  3. That was a really good, straight-talking article. Incidentally, I spent the last 12 hours (most of which was spent sleeping) pondering the possibility of pursuing a PhD in philosophy. Don't worry - I've since recovered :-)

    I think it's really sad that nurturing "the life of the mind" carries so little value in the marketplace, because like so many other right-brained, artistic types, I would love to earn my living doing something which captures my interest and harnesses my creativity. It's also too bad because, as I see it, the meager financial rewards of gaining a humanities/liberal arts education makes people less inclined to learn about old and new ideas, current events, great questions of the soul, etc. In short, people become less interesting (and less informed!) without a clear incentive to learn interesting things.

  4. That article does not exactly put the soul ease. My masters program will, in fact, be in a humanities field. I feel my individual situation is different, however, since it's only a year long and I don't see it as a terminal degree (meaning I plan to use it as a stepping stone to something else). I think the article is good for the scare factor, since people definitely need to have a reality check before they jump into costly, less useful degrees. However, I don't believe his advice is true across the board. For instance, if I were to pursue a PhD in Chinese history, or even art history, with a Chinese emphasis, I don't believe I would have the difficulties he describes, because let's face it, China is very hot right now and more and more universities are wanting to expand their China-related offerings. You just have to be smart, and be aware that the principle of supply and demand is true even with careers in the ivory tower.

    And Bryce, I'm glad your recovered ;)

  5. Weeks later, I saw this response! I think you are right on. If one plays it smart, as it sounds like you are, then even an advanced humanities degree can do great things for his or her future. An artist with a brain can be a powerful force in this world, so kudos to you!

    ...and yes, I'll never do that again :-)