The Reality of Education Arbitrage
The term “education arbitrage" means different things to different people. For employers, it refers to the inefficiency in value between higher education and work productivity in the marketplace. But for the student, it’s about the disparity between higher education and earning potential.
Most recently, education arbitrage has been used to describe the imbalance between supply and demand in our labor markets. There are more highly educated workers in the market than jobs available for them, which is why we now have more college graduates working in retail than we have soldiers in the U.S. Army.
So how did we get to this point? Well, let’s just say there’s no one sector to blame.
Government-sponsored fixed-rate student loans don’t allow for risk-based pricing, which could correct the fluctuating market. So while these loans are helping more students pay for college today than ever before, they’re also exacerbating the imbalance in the job market. As a result, the value of college degrees has decreased while college tuition has nearly quadrupled over the past 35 years.
Without risk-based pricing on loans, colleges and their expansive offerings are all equal in the eyes of loan lenders and receivers. But that’s just not the reality. An art graduate won’t earn the same income as a finance graduate, just as a graduate from Wichita State University isn’t likely to earn the same income as a graduate from Harvard University with the same degree. Yet all of these graduates will face the same loan payments and interest rates, regardless of their job prospects or earning potential.
In 2013, our nation’s student loans topped out at over $1 trillion, and the delinquency level on those loans reached 11.5 percent, the highest among all forms of credit. Yet there’s no structure in place for incentivizing students to match their institutions and degrees to the marketplace.
As a result, more and more college graduates are struggling to pay off their student loans on time, not to mention buy houses, purchase cars, or make investments for the future. If we don’t take action to correct this imbalance soon, the negative effects of arbitrage will plague us for decades or more.