Friday, May 22, 2015

Why Swedish College Students Are Happily in Debt

The Scandinavian nations have chosen to implement highly sophisticated social support structures.  Their societies are often labeled as “welfare states,” but that is a quite misleading label.  Yes, they do provide generous social security nets to take care of people in need, but they also use their high tax rates to invest in services that are available to all rather than depend on individuals possessing enough income to purchase the benefits themselves.  These services include education, healthcare, pensions, and childcare.  Unequal access to these services is a characteristic of social policy in a country like the United States.

Since Scandinavia and the US are heading in opposite directions in terms of social evolution, it is reasonable to assume that both cannot be doing the correct thing and one is headed towards a tragedy.  One can also view the implementations of the two social concepts as a grand social experiment and try to conclude which model works best and why.  In that spirit let’s look at how Sweden and the US have chosen to make college education available to their populations.

Matt Phillips has produced an interesting article in The Atlantic titled The High Price of a Free College Education in Sweden.  He begins with this lede:

“Here's why Swedish college students still graduate with a ton of debt.”

The first question to be answered is why Swedish students pay no tuition yet still end up accumulating debt as they acquire their education.  The second question that arises is whether the Swedish approach is better than that available in the US.

Phillips provides this chart.



The vertical axis provides the average tuition fees for public colleges in a given nation.  The horizontal axis provides the percentage of students in a nation who receive public assistance, usually in the form of loans.  As expected, the cost of education is highest in the US and the majority of the students finance their education by taking out loans and accumulating debt.  Consider the Scandinavian nations and Sweden in particular.  All provide public education with zero tuition and all have significant numbers of students who go into debt in order to finance their schooling.  In Sweden it is essentially 100% of students who borrow money to obtain a “free” education.  What is going on here?

Sweden has a particular view of the importance of individual autonomy.  In Sweden’s Collective Individualism it was pointed out that in the US liberty is usually thought of as a license to do something, whereas in Sweden liberty is viewed as the ability to be something.  Sweden has the acknowledged goal of making their children independent at the age of eighteen.  Providing zero tuition schooling is part of the implementation of that policy.  Being dependent on parents for school funding is considered an intolerable constraint.  Parents can limit their child’s independence by demanding a particular course of study be followed, or a particular school be attended, or, perhaps worst of all, demanding that the child live at home in order to save money.

For an eighteen-year-old to be completely autonomous, she must have resources to cover living expenses while in school.  That is the reason Swedish students accumulate debt.  The government makes funds available in an amount that depends on the student’s income not that of her parents.  The funds are available with low cost, minimal payment loans in order to encourage students to follow this path.  As the chart indicates, they all do.

Phillips provides this insight.

“While Swedish students end up with relatively high levels of debt, the monthly costs of carrying that debt are pretty cheap. (It's about 3.8% of estimated average monthly income of new graduates, according to one study.) Interest rates are low. They're set by the government and maintained through subsidies. And the length of repayment is long: 25 years or until the student turns 60. In other words, the Swedish system of student debt is financially manageable and sets students up to begin their lives as viable adults separate from their parents.”

In other words, the price Swedish young adults pay for the freedom to go to school wherever they want, and study whatever they want, and to provide no burden on their parents, and to not be constrained by dependence on anyone is the equivalent of a tax on their income of 3-4%.

In the US, parents, unless they are exceptionally wealthy, spend their entire working lives worrying about saving money for college expenses, saving money for retirement income, and worrying about being financially devastated by illness.  Most are unable to assist their children at all except perhaps by helping them get loans to finance their schooling.

What are the benefits to the students and to society in general from the two approaches? 

In Sweden, students are much more mobile.  Since they are responsible for their living expenses they can choose to move from an area where jobs are scarce to one where jobs are more plentiful for their education.  They can choose to pursue a career that is personally satisfying but not lucrative, such as public service occupations or the arts, because they know they will never be overburdened by their school debt.  Perhaps of most importance is the fact that all prospective students have the same opportunity to pursue an education.  Once schooling is completed they become full-fledged participants in the economy.  They can manage their school debt easily and still purchase cars and homes, and they can establish relationships and have children.

In the US the situation seems to be the exact opposite.  The debt burden will frighten away many potential students.  Students who choose to proceed, and often their parents as well, are burdened by debt that is difficult to manage.  The size of the potential debt limits schools and the locations of the schools that might be attended, and also places constraints on careers that students might consider.  Why acquire a large debt burden in order to work in a profession where income is low?  The debt burden after graduation can be large enough to minimize purchases and eliminate the possibility of starting a family.

The US seems to have conceded on this point and is heading for a student debt solution where monthly payment requirements as a percentage of income are being lowered and the length of time over which the student must make payments is being decreased, essentially replacing a debt with a tax on income.  It is choosing to do this for new federal loans, so not many people have the newer terms available yet, but eventually more will be able to participate in this way.  This is a step in the right direction, but the terms are still more onerous than those provided by Sweden.

The Swedish system requires higher levels of taxation to support, but it also provides economic advantages that will somewhat compensate.  The increased equality of opportunity is a benefit difficult to quantify, but it is a substantial benefit to society.  One has to suspect that US parents with children to educate might be willing to pay a few more percent in taxes in order to be relieved of the burden of trying to pay college expenses.

Score: Sweden 1, US 0.


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