Student loans creating income inequality?

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Engineering Professor - complains about the destructive effects of capitalism requiBy Dr. Eric Fruits, PhD
EconInternational,
Oregon economist

The distribution—and redistribution of income—is back in the news. The Economist reported on study of the persistence of income distribution from generation to generation, which generated some discussion.

Then, Gary Becker and Richard Posner jumped into the debate with some often overlooked observations.  Judge Posner, however, flag a growing problem that is just getting some attention:

And it must be borne in mind that some programs that purport to reduce inequality, such as the federal student loan program, may well increase it, by imposing debt burdens disproportionate to the value of the education that they finance.

Seems only a few years ago, the discussion of higher education focused only on the benefit side: How much more money will you earn with a BA, MA, or Ph.D.? Now, the discussion starting to turn to the costs: Will the bump in income more than offset the additional cost of debt?

MarketWatch reports that students who go to the most “affordable” four-year public colleges are more likely to drop out and to fall behind on their student-loan payments, according to a “College Scorecard” released by the U.S. Department of Education.

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MarketWatch argues that, in general, colleges with lower net costs tend to attract more lower-income students who are also more at risk for leaving school before graduation if their families suffer a financial setback. From there, a domino effect ensues: Dropouts are less likely to have the means to keep up with student loan payments, which in turn leads to a higher default rate for that institution.

Oregon Public Broadcasting’s “Think Out Loud” ran a segment on the long lasting impact of student debt. One of the commenter’s, “Dave in Depoe Bay” highlighted the problems with high student debt:

I have a B.S. in psychology that is currently billed at $200,000. Every year or two they get sold to another collector that then adds more (along with daily interest). Since, I am in default I am considered a criminal without statue of limitations. No chance of bankruptcy, only $800 a month or $85,000 up front.They harass my job, family, and friends without a glimpse of reality. EDUCATION IS THE LARGEST, HAUNTING REGRET OF MY LIFE.

Perhaps before students sign up for ever larger student loans, schools should make them take a short course in the principles of net present value calculations.