November 15 2011
In an interview with the Wall Street Journal, Paypal founder, libertarian “sea-steader” and higher-education detractor Peter Thiel argues that young Americans’ student debt loads are discouraging them from taking professional risks. Watch the 4-minute clip here.
Thiel is a known critic of the higher education system. He made headlines earlier this year when he announced the 20 Under 20 Fellowship, offered through the Thiel Foundation, which awarded $100,000 to each of 20 college students to use in the development of a business plan. The catch was that the 20 fellows were required to leave their degree programs for two years as they try to strike gold in the world of business. One of Thiel’s beefs with post-secondary education, as he describes in the video above, is that the significant debt-load that young adults graduate with – averaging over $20,000 – discourages them from taking entrepreneurial risks. Who wants to max out their credit cards to start a business, or go to work for a risky startup, when they have $300 monthly student loan repayments to make?
Thiel’s most compelling assertion is that the returns to education are much lower than we’ve been told. He breaks down the earnings premium of a bachelor’s degree – how much more a college graduate can expect to earn than a worker with no college education – into three factors. The first is selection, or the notion that acceptance into a top university is an indicator of a student’s “innate” (for lack of a better term) talent. The second factor is signaling, or rather, how “Graduate of Harvard University” makes for a flashier résumé than “Graduate of Midwest State University.” The third factor is the actual education a student obtains, which Thiel says accounts for a paltry 10% of the college earnings premium. The upshot: education has become a credentialing game, and we’re in desperate need of alternative credentialing mechanisms that encourage entrepreneurship and don't saddle students with a mountain of debt.
Arguably, the Thiel Fellowship program (or “credentialing mechanism”) has its own selection bias built-in. A pilot program with 20 motivated, high-performing students is sure to have good results, but scaling such a program up to include the more marginal students is going to result in diminishing returns. And while I like Thiel’s idea of giving young intelligent entrepreneurs seed money to start businesses, without the beneficence of libertarian business moguls, everybody else will have to rely on the private lending industry. Most banks are not going to be eager to give a five-figure loan to a 19-year old with no credit history. However, I'm curious to see whether similar entrepreneurship programs will be launched on a smaller scale.
Thiel’s right in thinking that the value of a college education has been overstated (as our OWS friends have had the misfortune to learn first-hand). The post-secondary education/training/credentialing market needs to be liberalized and led away from following our monstrously inefficient K-12 model. Instead of a uniform, four-years-fits-all university program, educators, business leaders, recruiters, financiers, and students ought to be able to find their own solutions in the education marketplace.