The education balloon

[nairiporter.livejournal.com]

Source: http://www.washingtonpost.com/blogs/wonkblog/post/chart-of-the-day-college-tuition-is-out-of-control/2011/10/27/gIQABi4sMM_blog.html

In a nutshell, the tuition fees in the US universities have increased 4 times for the last quarter of a century, and the student loans have surpassed $1 trillion:



Much could be said about the curse of higher education: as soon as the student has graduated, he or she already has piled mountains of debt. The young educated Americans need more and more time to pay back to their creditors. And many of them never manage, and they sink down into a debt spiral.

The university tuition in the US has passed the 1 billion mark, which is more than all the debt on credit cards for all Americans. There are thousands, if not millions of personal stories of students who are paying hundreds of dollars every month, just to cover the interest on their loans. It is like paying a mortgage on an imaginary house that doesn't even exist in the material sense. Still, at least they have supposedly received something in return for their indebtedness - either education at Berkeley, or Harvard, or some of the other, more or less prestigious education institutions in the country. All financed through a private loan. Some of them even come back to teach in colleges or universities. And the wheel keeps turning.

Still, for each of those who manage to pay it all back, there are dozens who never find a proper job after graduation. And their number keeps growing. As well as the number of those who fail to serve their debts that they have piled during their studies. The share of 90+ day delinquency has increased from 9% to 11% for 2012.



The economists are warning of a danger for a new "balloon" coming up, one that could plunge the country in a new crisis. The education balloon could have much graver consequences than the real estate balloon, because, unlike the owners of real estate, students cannot just "return" their education. And whoever has interrupted their studies or has chosen a discipline that has yet to assert its place at the labour market, would virtually remain empty-handed.

More and more university graduates work as waiters and janitors. Some of them never even finish university - about 40% of them interrupt their studies. One-third of the debtors are over 40 years of age, and one in four households consisting of 35-45 year old high-education graduates are still paying back their student loans.

The average US student with a bachelor degree leaves the university with $ 27,000 of debt (if they manage to graduate at all). And those who study medicine, law, or who have chosen some elite private university, could end up with a 6-digit debt.

The problem is that the salary growth rates simply lag way behind the growth rate of student loans. The Economist reports that in 2007 the US university graduates earned salaries comparable to the 1979 levels, while in the meantime their education expenses have risen exponentially.

This is a disturbing trend, and sounds like financial enslavement of vast proportions. It is an enormous hindrance to the well-being of an entire society, because as we know, education and the youth potential is essential for the long-term growth of an economy, and hence the prosperity of a nation. And while many people are so focused and invested in other issues and seem to believe that the worst of the economic crisis is behind their backs, this mine field keeps getting wider and denser. And it is bound to explode at some point. And this time the consequences will be very profound.

I wish I had a solution to this problem. But, as I am obviously lacking the insights an American would have, I guess I am stuck at the "raising the issue" stage at this point.

Comments

[badlydrawnjeff.livejournal.com]

I wish I had a solution to this problem. But, as I am obviously lacking the insights an American would have, I guess I am stuck at the "raising the issue" stage at this point.

The bubble is largely in part due to the guarantee of loans by the government - loans that cannot be wiped away by bankruptcy, loans that are given away pretty freely. If a prospective student will pay anything for college (because, after all, college is believed to be essential for a good paying job), and the payment will be easily paid by the loan, a loan that will be guaranteed by the government, where's the incentive to keep costs down? That incentive is nowhere to be found.

We have two problems, at the end of the day. One is the loan issue, which is basically done by the government these days and thus lacks any actual risk. The other is the fact that we push students to go to college, regardless of whether they should. A lot of it is our obsession with international rankings in elementary, middle, and high school compared to our international peers, since it pushes a college prep-style curriculum, which means that going to a trade school is discouraged.

tl;dr, everything in education is a messy, terrible cluster of policy that needs to be nuked from orbit.

[nairiporter.livejournal.com]

Wouldn't the absence of government assistance in university loans create a situation where only a privileged segment of society would have access to higher education?

[badlydrawnjeff.livejournal.com]

It could, it might not. But you have universities like Harvard with eleven-figure endowments as well that might be forced to use that to get a broader group of students, or you'll have expanded possibilities for state colleges and universities.

The question for me is not whether this would limit who enters these colleges, but rather figuring out the state interest in pushing college above other options regardless of the student, and then hanging the taxpayers with the inevitable bill.

[nairiporter.livejournal.com]

OK, let me put the question this way. What policies do you think would amend the situation in a meaningful way, without creating the situation I mentioned above?

[badlydrawnjeff.livejournal.com]

What am I trying to amend, though? In my mind, the issue is not that people cannot afford school, but that people cannot afford school thanks to the spiraling costs thanks to government subsidized loans.

Remove the loan guarantees, and these colleges either have to lower their costs or die out. Yes, some elite institutions will still remain with sky-high tuitions, and that hasn't changed now. But there's no real price competition right now because anyone can get a subsidized, guaranteed loan.

[nairiporter.livejournal.com]

Got it. Remove the loan guarantees it is, then.

[johnny9fingers.livejournal.com]

For once I find myself pretty much in agreement with you, with some caveats, of course.

[peristaltor.livejournal.com]

Yep. I'm sad to admit I agree. Probably for all the wrong reasons, but I agree.

[mikeyxw.livejournal.com]

I'd layer something else on to of this. Loan guarantees are really more of an answer to how tuition has increased, not why.

State governments have been squeezed. This wasn't just because of the financial crisis, although that certainly is a huge factor. There are some other factors such as increased costs for criminal justice and pensions that are coming due. One place that has been cut is subsidies for public universities. Students today pay a higher percentage of their tuition than they have in the past, leading to higher tuition, this is a trend that predates the current recession.

Of course, since students can easily borrow money to cover the costs, this doesn't show up in students dropping out of college so much as we have students who are facing higher debts. This was simply the least painful way for states to find money to balance their budgets, it's not like college students vote in large numbers anyway. Guaranteed loans have enabled these costs to be passed on to students with less pain than they would have, making tuition the easiest source for more funds, there are some underlying trends that are pushing this however.

[brother-dour.livejournal.com]

One word: regulation (see my response to badlydrawnjeff, below, about what happened in Texas when tuition was deregulated)

[htpcl.livejournal.com]

What mechanism exactly compels universities to keep pumping up their tuition fees in response of this government involvement? I'm not an expert in finance, so could someone explain it to me?

[badlydrawnjeff.livejournal.com]

It takes the competition out of it. Since no one has to worry about costs (since they're all being paid for with loans), there's no reason to keep the prices low.

[htpcl.livejournal.com]

Is there a reason to keep them high? Is there a reason to have prices at all? ;-)

[badlydrawnjeff.livejournal.com]

It acts as a selector of sorts, it gives the degrees value, it makes students think a little bit about whether the investment of the time and money is worth it, etc.

[htpcl.livejournal.com]

Doesn't the prospect of getting hired after graduation do that for the students? "Should I pursue a Tarot cards study? Can I get a job in the Tarot card industry after I finish my studies?" -- I thought that should be the primary incentive for picking up a study, not its price. I thought anyone who wants to pursue a Tarot card study should be able to do it, even if it's costly and they don't have the money. But then again, this is me the Eastern European speaking, who has lived through decades of socialized education.

Are we sure this is not a cultural thing, rather than financial?

[peristaltor.livejournal.com]

It's not the government involvement in loans, but the government involvement in education. Back in the 80s most legislatures appended "escalator clauses" to the tuition of their state-run institutions, meaning the tuition would rise by a small percentage each year to off-set inflation. Over time, these small percentages have hit the monetary hockey stick. Unless checked, no one outside of the vaunted 1% will be able to send their kids to college.

Meanwhile, banks (who made very little money on student loans in the past) saw this trend at the same time that they saw all other revenue streams in trouble. They pushed the legislation that exempted student loans from bankruptcy proceedings, and since they own their legislators and regulators (more on this on a later post) they got it.

[badlydrawnjeff.livejournal.com]

Meanwhile, banks (who made very little money on student loans in the past) saw this trend at the same time that they saw all other revenue streams in trouble. They pushed the legislation that exempted student loans from bankruptcy proceedings, and since they own their legislators and regulators (more on this on a later post) they got it.

The latter idea that anyone is "owned" is rather silly, but the banks got out of the business. Only 7% of student loans are private (http://www.usnews.com/opinion/articles/2012/12/26/discharging-private-student-loans-is-counterproductive) these days, accounting for 15% of all loans out there (http://www.huffingtonpost.com/2012/08/14/private-student-loans-bankruptcy-law_n_1753462.html). The government is effectively crowding out this sector of the economy, and its resulting in absurdly expensive education.

[peristaltor.livejournal.com]

"Rather silly" refutes a vast body of evidence to the contrary. Working on a post as we type (and might get to it after The Wife™ and I shop).

[brother-dour.livejournal.com]

I blame the government for high tuition and fees, too. True story:

Before 2004, public Texas universities could not raise tuition and fees more than 0.75% a year without the Legislature's approval. In 2004, this law was dropped. Since then, tuition and fees in Texas public universities has increased 34%, while college enrollment has only increased about 12%... I'm sure this is all just coincidence, though.

[htpcl.livejournal.com]

So it's more a consequence of banks owning the legislation and hijacking the whole process and perverting it to suit their interests while being facilitated by sloppy government policies in education - rather than the very existence of loan guarantees itself?

And I can't wait for that post of yours.

[brother-dour.livejournal.com]

Hmmm, that sounds about right, yes.

[mikeyxw.livejournal.com]

You've got things out of order. The law that restricts student loans from discharge was passed in 1976, far before any escalator clauses from the 80's.

They were part of the Guaranteed Student Loan program, which was new at the time. Banks really didn't have much interest in loaning money to students, they were poor risks, being a bunch of drugged out hippies and all. The core of this program was that the government would guarantee the loans. Of course the government thought long and hard about giving money to a bunch of drugged out hippies and wanted some guarantees that when they outgrew that phase and became yuppies, they'd get their money... with interest.

This also kept the interest rates more like a mortgage than a credit card, which, all snark aside, enabled quite a few people to go to college and is probably a positive thing.

[peristaltor.livejournal.com]

That's okay, since the escalator clauses were a seventies thing too, a response to the stagflation of that era.

This also kept the interest rates more like a mortgage than a credit card, which, all snark aside, enabled quite a few people to go to college and is probably a positive thing.

Be careful with that assertion. Before the '80s, California colleges (in the UC system) were dirt cheap. The community colleges were free. This mean the assertion that "debt enables education" is wrong if lower-to-no-cost education were available.

[gunslnger.livejournal.com]

CA Community Colleges are still dirt cheap, and in fact free to low-income people. The problem there is one of perception. People don't want to settle for a community college, they want the prestige of a real college, even though the education is not really any worse, just more limited in scope.

[rowsdowerisms.livejournal.com]

Oh dhip we agree on something. At least sort of. I'd like to see bullshit schools like U of Phoenix be blacklisted from FAFSA.
Funny that whole bubble of tuition hikes has been highest in those lovely private sector inventions.