PRINCIPAL-AGENT PROBLEM? The Calico Cat takes a look at the possibly perverse effects of government-guaranteed student loans. Salient points:

"The article fails to ask the basic question of why the federal government is involved in this business at all. If the colleges the students were attending really offered such a valuable proposition to the students, then I'm certain that the colleges themselves would be able to arrange loan based financing."

Or, the students could borrow against their future earning power. Problem: jobs offer differing combinations of pecuniary and non-pecuniary benefits. Lenders expect to be repaid out of the pecuniary benefits. (None of what I'm noting here is original with me. I choose to borrowing freely from Free to Choose (details or compare prices.) Students who borrow against future earnings have incentives to seek remunerative careers, which furthers the transformation of an institution of higher learning into Certification University, to the exclusion of those nonpecuniary externalities and the love of learning. Put another way, that might mean the end of theologians, social workers, poets, and musicians.

"The article mentioned how the cost of college education has been increasing faster than the rate of inflation, but the issue of why was never addressed. I believe student loans are part of the reason. By making more money available to students, this just gives the colleges the leeway to raise tuition even more."

Ayup. Here's the principal-agent problem in a nutshell. The taxpayer has given the student a put option on the education received, and attenuated his incentive to conserve resources. That's a separate issue from optimally financing the production of the next generation of preachers and composers.

Here, however, the Calico Cat's argument begins to break down:

"I know it's very anti-mainstream to question the value of a college education, but I'm going to go ahead and question it anyway. My experience is that the majority of college students are just in it for the piece of paper they get at the end which they think will be a ticket to a 'good job.' Yet we have so many college students graduating with no job awaiting them at all. And then to add insult to injury, they are burdened with student loan payments of hundreds of dollars per month. This is debt that can never even be discharged in bankruptcy.

"How are we benefiting society if we make kids get themselves deeply into debt so they can obtain the same jobs that people obtained a generation ago with no college degree at all? Student loan proponents will say that without student loans, people will be denied the opportunity to advance themselves. I say that without federally guaranteed student loans, the bright students who would be able to benefit from a college education will still be able to obtain funding. The marginal students, who don't belong in college anyway, will also be better off because they will be able to get the same job they would have gotten anyway, except they won't be burdened with having to pay back student loans
."

If I grant the first and second sentences, I see no reason not to grant borrowing against future earnings (or, for that matter, charging tuitions for high schools.) The third to the fifth sentences conflate a number of things: students picking the wrong major, students opting into more enjoyable but less rewarding careers, and students exercising the put options. And the transition to the second paragraph doesn't work. What Calico Cat has really recognized is the breakdown of the existing elementary and secondary education, such that the university degree often certifies an entry level file clerk who in years past would have been so-equipped by the tenth grade, with six to ten years of additional on-the-job career development available to him that Self Esteem High and Beer and Circus U have taken for the non-productive reasons the Calico Cat has noted. (And it is also worth noting that the return to experience on the job might be greater than the marginal return to years of schooling, although evaluating these returns on a ceteris paribus) basis is difficult.