Negative Economic Aspects of Higher Education

Term Paper, 2018

7 Pages, Grade: 1


Table of Content


Negative Impact of Higher Education on Economy

Effect of Student-loan Debt

Negative Impact of Higher Education on Human Capital



Educational expansion is usually given paramount consideration in the modern society. It is the dream of every parent to ensure his child acquires higher education. This desire has led to an immense expansion higher education in the United States over the twentieth century (Fischer & Hout, 2006). It is explicit that higher education bears a wide range of benefits to individuals, as well as the government. Foremost, individuals with higher education benefit from what is referred to as positive selection. A utility maximization paradigm based on economic factors holds that attainment of higher education corresponds to high economic returns. The precepts of the positive selection hypothesis as described by Heckman, Urzua & Vytlacil (2006) hold that those who acquire higher education benefit most from it. As such, it is apparent that higher education has economic and social benefits. For instance, college graduates receive better remuneration than their counterparts with a high school diploma. It is also true that higher education attracts a high social esteem in the modern society. Despite these benefits, higher education has negative aspects too. Therefore, this paper aims at providing a comprehensive discussion of the negative aspects of higher education.

Negative Impact of Higher Education on Economy

One of the most consequential effects of higher education is economic inequality. Over the past century, economic inequality seems to have reached the highest levels in the post-colonial economic history. From a critical perspective, educational expansion in the 21st century has the core role in the widening of the economic gap among the US society. It is apparent that households of college graduates enjoy a high economic status compared to those of individuals with lower educational attainment. Therefore, educational attainment has an immense impact on the socioeconomic status of households. Despite the introduction of an array of economic reforms to bridge the gap between the rich and the poor, this problem seems to persist if educational inequalities remain. This explains how higher education promotes economic inequality in the society. However, little attention if any is given to this negative aspect of higher education and the reasons are obvious.

Foremost, the beneficiaries of higher education reap immense economic returns from their educational attainment. For instance, they enjoy a high pay in the workforce that enable them to afford high living standards. According to the 2007 US Census Bureau report, the average wage of college graduates was estimated at $55,000, far higher than the average wage of individuals with a high school diploma, estimated at $30,000 (Brand & Xie, 2010). The second reason why this negative aspect of higher education receives little attention is that countries focus on the benefits of skilled workforce in economic development. It is explicit that a skilled and literate workforce promotes economic productivity. This implies that countries promote higher education with the principal focus of generating a highly productive human capital. Interestingly, this approach widens the economic gap in the society.

The Consequence of Up-front Fees

Higher education is also associated with problems in the capital market. In most countries, financing of higher education has always been faced with immense problems. As a result, governments have introduced student loans, in order to promote human capital investments. Under this approach, governments provide government-assisted bank loans to low-income students. Despite the benefits associated with financial assistance on up-front fees including increasing access to higher education by students from low-income families, this approach has immense economic consequences. In reality, up-front fees assistance appears as a key approach in addressing capital market failures (Chapman, 2002).

However, a number of problems have emerged. The first problem to government-assisted up-front fees system is that students’ access to bank loans is based on the family income. It is then presumed that all individuals have equal access to family finances. Interestingly, it is apparent that the distribution of household finances does not reflect the view of prospective students, especially on the value of higher education in their lives. As a result, some prospective students fail to pay their fees for higher education because they do not qualify for government-assisted bank loans to facilitate their education. On the other hand, government-assisted up-front fees system has increased the rates of loan default.

Effect of Student-loan Debt

From a critical perspective, higher education has exacerbated the problem of bank loan default. Over decades, debt recovery from beneficiaries of government-assisted bank loans has been a serious economic and social issue. This has been evidenced in countries whose education system involves government assistance in fees payment including the Unites States and Australia. In reality, default is one of the most expensive financial consequences for taxpayers. In Australia, economic reports indicate that default rates for government-assisted student bank loans are quite high (Harrison, 1995).

Similarly, the US experiences devastating consequences from student-loan debts. It is reported that student-loan debt has increased significantly from 33% in 2007 to 45% by 2010, and this affects the American economy. According to the recent survey, student-loan debt spreads across all ages in which borrowers below 35 years of age hold the highest student debt. Older Americans have also been found to hold high percentages of student-loan debt. For instance, the 2010 survey indicates that 36% of families whose heads are aged between 45 and 54 hold student-loan debt. In addition, 29% and 13.3& of families whose heads are in the older age brackets of 55-64 and 65-74, respectively hold a high percentage of student-loan debt (Valenti, Edelman & Ostern, 2013).

It is apparent that this has led to the rise of student-debt obligation in the American society. Student-loan debt seems to have caused a ripple effect to the US economy. Foremost, student-loan debt has been found to be one of the key factors that have led to delays in household formation. According to demographic reports, the number of adults between the ages of 18 and 34 live in their parents’ households, and the number has increased to 31% in 2011 from 28.2% in 2007 (Valenti, Edelman & Ostern, 2013). This stagnation in household formation is believed to slow the borader economic growth. As a result, it is predicted that financial challenges experienced by young adults and delay in household formation will cause an immense impact of the US housing market. It is also reported that the high student-loan debt is causing immense consequences on retirement security. According to recent social security information, 62% of Americans who are aged between 30 and 39 years will have insufficient resources during their retirement, and this is attributable to the impact of student-loan debt on retirement savings. Therefore, these consequences explain the negative aspects of higher education.

Negative Impact of Higher Education on Human Capital

It is also believed that higher education is associated with grade inflation, especially due to the effect of tuition subsidies. Over the years, the US government has been adopting educational policies that enhance higher education subsidies. It is apparent that such subsidies including the reduction of tuition costs promote enrollment into institutions of higher learning. This occurs because education subsidies increase families’ ability to afford college education for their children. Despite the benefits associated with high education subsidies, it has emerged that such approaches have a negative impact on human capital. According to the 2004 Federal Reserve Bank of New York report, subsidies on higher education causes negative effects on students’ academic choices (Şahin, 2004). This report highlights three key effects of tuition subsidies: the enrollment effect, composition effect and disincentive effect. These effects affect human capital in different ways. For instance, the enrollment effect of tuition subsidies generates benefits to human capital. The simulation results are obvious that a low-tuition strategy increases graduation rates, as well as enrollment rates.


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Negative Economic Aspects of Higher Education
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Caroline Mutuku (Author), 2018, Negative Economic Aspects of Higher Education, Munich, GRIN Verlag,


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