Wealth Inequality and Student Debt

It’s commonplace for some to note that there are racial and class disparities in student debt levels and then hastily conclude that the cost of college is a cause of wealth inequality. These analyses strike me as deeply confused. Consider the following example.

Scenario One: Non-Free + Price Discrimination
In the status quo, our college finance system provides means-tested tuition subsidies and living grants, such that the actual net cost of attending college varies based on class. The result is that the richest fourth of students (which we can also assume are disproportionately white) are charged around twice as much as the poorest fourth of students (which we can also assume are disproportionately non-white). So let’s look at how this arrangement might shake out for two hypothetical students.

Rich Student

  1. Rich student is charged $100,000 for four years of college.
  2. Rich family transfers their kid $100,000 of wealth to cover the charges.
  3. Rich student leaves college with a net worth of: $0.

Poor Student

  1. Poor student is charged $50,000 for four years of college.
  2. Poor family transfers their kid nothing. Kid takes out $50,000 of public loans to cover the charges.
  3. Poor student leaves college with a net worth of: -$50,000.

As you can see, there is a $50,000 net worth difference in this scenario.

Scenario Two: Free College
In this scenario, we subsidize all tuition to zero and provide living grants to all students. Let’s see how this plays out for both students.

Rich Student

  1. Rich student is charged $0 for college.
  2. Rich family, freed from having to pay for college, transfers rich student $100,000 for the down payment on their first house.
  3. Rich student leaves college (enters adulthood) with a net worth of: $100,000.

Poor Student

  1. Poor Student is charged $0 for college.
  2. Poor family transfers their kid nothing.
  3. Poor student leaves college with a net worth of: $0.

As you can see, in this scenario, there is a $100,000 net worth difference between the two students, twice as large as the net worth difference in the first scenario. So, it would seem, this scenario actually creates more wealth inequality than the first scenario.

What’s Going On
I suspect there are two reasons people don’t seem to understand this basic reality. The first is that they are fixated on debt as a standalone thing, instead of net worth. Indeed, if you take scenario two and only look at debt, you’d find that the two students have identical student debt (i.e. $0). But wealth is a function of both assets and debts. Freeing up a rich student from paying for college allows them to take the $100,000 transfer and put it into their asset pile rather than using it to pay down their debt pile.

The second is that they don’t actually see that what is driving wealth disparities among these students is not the charging of tuition (which actually reduces the wealth disparity because of the price discrimination), but rather the intergenerational wealth transfers. Crucially, making college free does not stop the wealth transfer from happening, and as such does not stop the ongoing racial/class wealth disparity.

A Better Way
This does not mean that there is no other way to argue that student debt contributes to inequality. It’s just that you have to go about the argument in a much different way. One way to do this would be to say that, because of debt aversion, reduced financial sophistication, and higher risk, the student debt barrier reduces the number of poor people and people of color that attain a higher education. Thus, getting rid of that financing barrier, even if it does mean an increase in wealth inequality in the first instance, will actually reduce wealth inequality in the second instance through the effect of having more equal incomes across racial and class (class defined as birth class) groups.

This argument may or may not be true. It really just depends on how the empirics shape out. But, importantly, it will proceed not by showing the debt levels of poor students or students of color are somewhat higher than the debt levels of rich students or white students. Instead, it will proceed by showing how financing changes affect attainment at the margin. This is a much more interesting type of argument, but for now it seems mostly sidelined in favor of the rather pedestrian observations that wealthy parents transfer more money to their kids than non-wealthy parents.

Higher Education, the Nordics, and the Matthew Effect

Giulia Pines has a piece at Jacobin in which she cautions people not to celebrate too much about Germany’s free college tuition because, among other things, they put kids on educational tracks early in life. This, she suggests, has the effect of baking in class distinctions because working class kids presumably get put on vocational tracks while upper class kids presumably get put on the university tracks. Pines finishes the piece thusly:

In seeking solutions to the ever-widening educational divide here in the United States, it can of course be tempting — and instructive — to look at countries that have been doing it better for years. But we must not shy away from questioning what “better” really means.

The tendency to look to Northern Europe and Scandinavia’s egalitarian shores should be tempered with a healthy level of skepticism: the European model often does not live up to its own hype. Free higher education should be the aim in the United States. But it can’t be constructed on a class-riven foundation.

This piece caused me to have many thoughts, which I’ve decided to write up below.

First, literally the entire rest of the article is about Germany, but then the conclusion is about Nordic countries. Germany is not a Nordic country. Its institutions are not Nordic institutions. They are very different, both in higher education and more generally. There is not a “European model” that can be described with much specificity. At the very least, abstractions of this sort should distinguish between so-called corporatist/conservative countries like Germany and social democratic countries like the Nordics (see Esping-Andersen).

Second, it’s truly rich to call even Germany’s higher education institutions (let alone the Nordics’) “class-riven” in a comparison to the US. Using the latest OECD data (A6), I derived how much more likely a child of a highly educated parent is to attend college than a child of a lowly educated parent:

Germany, with its corporatist tracking system, does the worst of the non-US countries in this particular bunch. There, children of highly educated parents (which is also a proxy for income) are about 4x more likely to attend college than children of lowly educated parents. But in the US, that figure is 5.4x, which is to say 35% higher. The Nordics, by comparison, are doing damn well for themselves. Denmark’s somehow gotten the disparity down to 2.1x, Sweden to 2.7x, Finland to 3.4x, and Norway to 3.4x. I am for criticizing anything and everything, but let’s also keep a level head about whose winning and whose losing in the equal opportunity realm. The Nordics are winning. We are losing. And it’s not even close.

Third, when we are talking about social mobility and making sure poor and working class kids are more represented in colleges, it’s likely misguided to look at schooling and school financing institutions first and foremost. The four Nordics all have free tuition, but I don’t think that’s the main reason why their college attendance figures are so much more egalitarian. It probably plays some part, but the fact that they don’t crush their lower class children under the weight of poverty and economic insecurity for a couple of decades in their formative years probably plays an even bigger part. Perhaps these disparities are overdetermined, but at the very least, we can say that you are going to fail to achieve Denmark-level equal opportunity without overhauling our overall social system first.

Finally, the title of Pines’ piece — “Free and Unequal” — caused me to hope for a minute that she’d get at something she never did get at. As indicated in the chart above, even the best countries have pretty significant class-based disparities in who does and doesn’t attend college. To the extent that you significantly shrink the income differences that sometimes result from whether you do or don’t go to college (as the Nordics do), I don’t find this that troubling. Nonetheless, it is the case that free higher education, anywhere and everywhere, provides significantly more money to the upper classes than to the lower classes.

What’s strange in American discourse over higher education welfare is how much heat and fury this observation seems to draw. In comparative welfare state literature, it’s so much a given that free higher education has this class-based disparity that it is often given as the paradigmatic example of welfare programs that operate so as to give more to the rich than the poor (called the “Matthew effect” or “Matthew strategy”):

Finally, there is the evangelical Matthew strategy … of earnings-related provision that gives relatively more to the rich than to the poor. The Matthew effect is most pronounced in services — for instance, in (higher) education, where the rich profit much more than the poor, not only because they get most of the service but also because education greatly advances their earnings capacity.

Personally, I find this distributive pattern a bit troubling, and American discourse over free higher education doesn’t handle it well. Here, there is a lot of hand-wringing, as Freddie DeBoer catalogues, about how students are oppressed when they aren’t provided higher education welfare benefits because they did all the right things and therefore deserve the benefits. When a class of the disproportionately rich start talking about how their individual merit entitles them to more, that’s usually when I check out.

Even when not made in a merit/desert framework, the supposed justifications I hear for why we should indulge this Matthew-patterned welfare program are almost always focused on the welfare benefits being an individual right of the student. Students are meant to somehow be owed this extra bit of the national product just because they are students. I don’t find this compelling and I actually find it counter-productive to egalitarianism more broadly. If these kinds of benefits are going to be justified, it is not in this individual rights framework, but rather because they secure buy-in from the rich to the overall social system.

This is the way European commenters I’ve read on welfare state policy tend to justify these benefits. It is noted that a welfare state that only provides for the poor is a flimsy one and that therefore your overall social expenditure scheme should at least provide some sort of benefits to everyone. Free higher education is a benefit that can go to the rich and can thereby secure their inclusion in and support of the overall social welfare scheme. Higher education is an especially good benefit of this sort because, in addition to education just being good, it is also easy to include this welfare benefit into a narrative about why it is wrong for the rich to later on act like their market incomes are somehow self-made. This narrative can be an important one if you want to achieve a broader egalitarian agenda.

Ultimately, I am not totally convinced even this argument works, especially in the American context. We had, as the higher education people constantly remind us, very good tuition subsidies in the past and rich people were still assholes, after all. But the left in America isn’t even making this case! Instead, they continue to push a bold individual rights approach to theorizing the necessity of free tuition that, by its own terms, does nothing to bind the recipient of higher education welfare benefits to any kind of broader social welfare scheme. If anything is bound to feed into a Free and Unequal dynamic, it is this kind of students rights silliness.

Quick note on student living expenses

One of the weird things people emphasize when tuition subsidies and the like are brought up is that such things don’t even cover the full “cost” of attending. This is because, they explain, students’ housing and food and other miscellaneous expenses cost a good deal of money and tuition subsidies don’t reach those things. The upshot, as best as I can tell, is that the proper thing is to both cover all of the tuition and living expenses.

But this is problematic.

For starters, to say college students have the additional cost of living expenses is not technically correct. If they weren’t in college, they’d have living expenses just the same. They’d need housing and food just the same. Going to college doesn’t actually incur any additional costs with regards to living expenses. It does with regards to tuition, but not with regards to living expenses.

This is a technical point, but it gets at a more serious point. Covering the living expenses of college students while not covering the living expenses of similarly situated non-college-students seems to be unfair. Why should a 20-year-old college student be relieved of living expenses while a 20-year-old non-college-student who is working (a likely low-paying job) is not? What could possibly justify such asymmetric treatment?

There is a decent case to make for covering the living expenses of young adults. Their incomes are low, their unemployment rates are high, and they have scarce savings. You could imagine, then, a program of age-based cash grants or other benefits that could be used to pay for housing and food and other living expenses. Making such grants contingent on whether you spend your day in class or spend your day working, however, is hard to justify.