The Multifaceted Economics of College

For decades, college has essentially become a normalized part of American lifestyles. However, people begin to rethink their decisions to attend college based on its ever-increasing expenses. College education is sought after by many, but the cost feels like a burden. Through both micro- and macro-economic lenses, we can observe that these costs are both implicit and explicit, illustrating the fundamental concept of economic costs.

College dormitories like Warren Towers are not typically cited by economists as examples of key economic issues in eminent journals. However, places like these present the very nature of economics: applications in unforeseen circumstances. Forty people distributed amongst two bathrooms, 4 stalls, and less than 10 showers is a prime example of scarcity. One can argue that these communal bathrooms may also resemble a market shortage, where the quantity demanded exceeds the quantity supplied. Nevertheless, this explanation may not be entirely accurate because communal bathrooms are not goods that are sold in markets. This is where we can classify communal bathrooms as public goods, goods that are both non-excludable and non-rivalrous. In other words, public goods can be utilized by anyone in an economy, regardless of socioeconomic status and without barriers that prevent their usage of the good.

Presenting communal bathrooms as public goods enables us to further analyze their economic implications. For instance, the tragedy of the commons is demonstrated by the fact that many individuals clog bathroom sinks by draining their ramen noodles or overflowing toilets with toilet paper. In this case, people have no incentive to maintain the standards of the bathrooms as they continue their pollution-oriented behavior. Even though they are diminishing the conditions of their own living space, many students act in this manner because they simply expect the facility staff to take care of their damage. This behavior presents a negative externality that costs the greater good of a tower floor, for example. Any user of the bathroom is negatively impacted by this behavior, even if it is only done by very few individuals.

The most common association between economics and college is the cost of higher education. Although financial aid is granted in relatively large amounts by private institutions like Boston University, many students continue to resort to taking out federal loans as the aid they are provided with is simply not enough to cover their true financial needs. In the past year, the Fed (under an ample reserves regime) has been increasing administered rates such as the discount rate and interest on bank reserve balances, leading to an increase in the nominal interest rate. This, in turn, makes it increasingly expensive for students to borrow money from lending institutions like Sallie Mae. As of January 2024, the Fed has held interest rates at a 23-year high; they target the federal funds rate between 5.25-5.50%.

The student loan crisis has been a pressing issue in contemporary US economics, and these recent changes add to the financial damage that students have when paying off thousands of dollars in loans. According to the Education Data Initiative, half of student loan borrowers still have $20,000 left to pay on loan balances, even 20 years after starting college.

Recently, sources ranging from political commentators to social media influencers have discussed the tradeoffs of attending college. People debate whether the debt is really worth it or whether they are financially better off learning a trade. According to a 2023 Wall Street Journal poll, 56% of Americans do not think that a traditional 4-year college program is worth the financial burden it may entail later in life.

Moreover, continuously mounting debt later in life contributes to lower disposable incomes as individuals lose a portion of their income to paying back lenders. From a macroeconomic perspective, this phenomenon disrupts the loanable funds market. This is based on the circular flow of economic output as incomes earned by individuals (households) fuel investment by firms via consumption spending. Lower disposable incomes mean lower consumption spending, thus increasing the real interest rate and making it even more expensive to borrow money. Alternatively, because more individuals seek to borrow money from lending institutions, the demand for loanable funds is driven up, increasing the real interest rate. In both cases, there is an overlap between the fact that borrowing money becomes more expensive, continuing to spark the debate on the economics of college.

Connecting back to the fundamental economic problem of scarcity, many college students continuously debate whether their investment is worth it based on the scarcity of key resources such as time and money. Nevertheless, higher education of any sort is beneficial for allowing students to develop human capital, which contributes towards long-term economic growth with implications such as increased potential output (long-run aggregate supply) based on more efficient labor through better skills and knowledge. College graduates may also earn higher incomes than high school graduates. According to the Social Student Administration, men who obtained a bachelor’s degree earned $900,000 more in lifetime earnings than men who only graduated high school, while this figure is $630,000 more for women. Regardless, the question is whether the benefits outweigh the costs.

Written by Faizaan Ayub

References

Saul, Derek. “No Cut yet: Fed Holds Interest Rates at 23-Year High.” Forbes, Forbes Magazine, 31 Jan. 2024, www.forbes.com/sites/dereksaul/2024/01/31/no-cut-yet-fed-holds-interest-rates-at-23-year-high/?sh=64d333506f05.

Hanson, Melanie. “Average Student Loan Debt [2023]: By Year, Age & More.” Education Data Initiative, 22 May 2023, educationdata.org/average-student-loan-debt#:~:text=The%20average%20federal%20student%20loan,them%20have%20federal%20loan%20debt.

Mayer, Grace. “A Majority of Americans Now Think Getting a College Degree Isn’t Worth It, a New WSJ Poll Says.” Business Insider, Business Insider, 31 Mar. 2023, www.businessinsider.com/college-degree-student-loans-value-worth-it-survey-wsj-2023-3.