Jodie Beggs of Economists Do It With Models posed the following via twitter:

Question- how is it that ppl are advised against variable rate mortgages but pushed into variable rate student loans?

I never turn down the chance to lecture condescendingly to a Harvard trained economist, so let me see if I can clear this up for Jodie by arguing why it might make sense for an individual to have a fixed rate mortgage but variable rate student loans.

First note the similarities that lead one to ask this question: a college education and a home are sort of assets. Well, a home is literally an asset, and an education is kind of like an asset, but they both share the features of an asset that they are a long-lived investment that pays investment returns. In addition -and central to this issue- purchases of both are typically financed by debt. A third important similarity is that these are typically the large components of household debt, and two of the most important investments households make.

Given these similarities, it is natural to assume that it would be optimal for households to choose similar interest rates. But it is the nature of the returns these investments produce that explains why an individual might choose different interest rates. For a house, the investment return produed is a flow of housing services. Think of it as a factory that produces a months worth of housing each month, which the individual owning it consumes. Education, in contrast produces higher human capital which translates (usually) into higher value of output that their labor creates. The difference is that inviduals sell their labor output, whereas they consume the flow of housing services.

This matters because if inflation -and thus nominal interest rates- go up then the cost of debt service will go up for both housing and education debt if the interest is variable. In addition, inflation should also drive up the price of the output produced by the assets and the nominal value of the assets themselves: house prices and the value of the flow of housing services -equal, in theory, to rent- will increase, and so will wages. Because households are selling their labor, their income rises with their costs of debt. But households are consuming their housing services, their debt service goes up without an offsetting increase in income. For this reason, it is more risky to use variable rate interest on housing debt than on education debt.

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