Student Debt Payback Far Worse Than Believed
wsj.com
wsj.com
I certainly don't think students should be living and studying in squalor or unsafe conditions but I wonder how much of the increased costs in education are a result of the kind of spending that goes into some of these facilities. Have universities, particularly public universities, always spent this lavishly on their campuses or is this a more recent thing?
And have any studies been done on how much of the increased costs are due to increased administration numbers and nicer buildings?
Part of this is economics. It's easy to build and subsidize accommodation knowing that you can make the subsidy back on private hire conference guests if you're an Oxford or Cambridge. Less so if you're Bath or Coventry.
Students who used to have reasonable, subsidized accommodation now have a choice between the relatively unregulated and unsubsidized private rental market and these overpriced palaces with flat screen TVs etc.
All TVs are flatscreen. The TV license costs more than a TV.
I'm sure the new student accomodation is overpriced, but that's market effects not the presence of TVs. The real culprit is the government trying to run universities as profit centres. The policy isn't "joined-up": we're probably going to see further crackdowns on student visas at the same time as European funding is withdrawn. I'm waiting for the first redbrick university to go bankrupt..
When was the last time you saw a CRT?
"All of those trends add to the cost of college, but not by that much. At most, about a quarter of the increase in college tuition since 2000 can be attributed to rising faculty salaries, improved amenities and administrative bloat. By comparison, the decline in state support accounts for about three-quarters of the rising cost of college."
a) they've increased their spending on amenities and salaries by about 25%
b) they're taking in less money than before (apparently they're receiving 3x less money than they are increasing the budget? So budget increase is 25% of extra costs while funding decrease is 75%?)
I suppose it depends what metric we should be judging by. If university generates measurable value for the public (it probably does; having lots of smart people walking around isn't necessarily a bad thing), the next question is "how much money must be spent per unit of said public good?" Of course, no one can really agree on the goal of university or any metrics by which to judge (other than you have to go if you care about your future!), so it's kind of fubar.
I'd be willing to bet that they could get away with spending less money. I've been saying this for a while, but sooner or later student debt will lead to a major re-balancing of balance sheets. I'm a big believer in learning for free via the internet; if you have internet access, you've got everything you need to learn anything and contact anybody. Let the university system die a natural death and let's massively lower the cost and expand the reach of education.
At my university, 'working effectively in groups' usually meant one smart kid at the computer in the computer lab doing all the work while 7 other kids swarmed around them and copying what they did as close as possible without triggering the 'plagiarizing' senses of the teacher.
I worked alone (in the same computer lab) so I could actually learn and internalize what I was taught, but I'd look around and that was a common sight.
A university is not required (and in fact, I'd argue that classwork and grades isn't a good structure for it) in order to figure out how to be effective in a group. Working a single job in fast food taught me more about working in a group than any group project at school or the 'Small Group Communications' class I was required to take for my major.
Have lab space then, have the government pay for it and schedule times for people who want to use it. Should not be limited to a university's chosen student body; it should be open to anyone that wants to learn.
You get much more than that and it gets superfluous. US universities are superfluous to the point of wastefulness.
I still say defund them and let them figure it out or shut down. But yes, I understand why this sounds extreme, particularly if you don't share my views of college being a super shit deal for most people (and universities--peddling such shit deals and responding to criticism with moral indignation--are no better than timeshare salesmen).
In many university courses the tuition you pay is to access the network of alumni, faculty. These are(still) vital for Phd to collaborate and MBAs to find work. I am not sure the internet is actually even a partially workable substitute for this important aspect.
anything, that is, which doesn't need a lab. So much for physics, chemistry, biology, everything that depends on them...
Doable? Maybe. Effective for the general population? Unlikely.
Am self taught at computing too.
How much does music school cost btw? Probably way more than most violinists make right? Going into debt for education is a crap deal, that's what I'm saying. You can get the same result cheaper.
My brother's just finished at Columbia, and he was living in a slum apartment in NYC. Not nice at all.
Has someone got pics of these amazing college facilities?
I studied in the UK
It seems to me (anecdata), that shortly after tuition fees were introduced (1998/1999), the trend for better (and correspondingly more expensive) student accommodation began, kicking off development of purpose-build accommodation.
There's some interesting numbers in a real-estate report from GVA [2], which shows a reduction in university-owned student halls, and an increase in privately-owned purpose-built student halls.
[1] https://en.wikipedia.org/wiki/The_Young_Ones_(TV_series)
[2] http://www.gva.co.uk/research/student-housing-market-overvie... [PDF]
Some of my friends in London were indeed living like in The Young Ones.
nice facilities are easy to see and judge.
There is also an argument that the accommodation has a direct impact on students' education: if students are worrying about dodgy landlords, ongoing issues with heating or mould or leaking pipes, then they'd lose potential study-time in having to address the issues, have less mental capacity to channel to their education, and have an environment less suited to studying.
So good quality accommodation is a net asset for educational services, but in some places the cost is substantially higher than the private-sector rental market.
My dorm was modelled on a Swedish prison, had a single plug socket per room, and two toilets between 20 of us. The kitchen was barely big enough for 6 people, and couldn't support more than 4 people cooking at once.
That wretched hall was demolished and replaced by something a lot nicer - because when students are paying thousands of pounds per year, they expect something a little more salubrious for their cash.
The same was true of teaching. I remember a bunch of us complaining about the poor quality of lectures from one particular professor. The head of our department was genuinely shocked when I said "I don't think I'm receiving value for money". Students were now expecting a guarantee of quality for the debt they accumulated.
Better facilities cost money - but capitalism demands that students (as rational consumers) should seek value for money. If you have a choice between UCLA and NYU - it makes sense for your to spend your money on something that is attractive to you.
A truly rational student might forgo comfort in exchange for excellent teaching. But I suspect the majority will spend their money on something which looks nice, rather than is actually effective.
The flip side of this is that student loans are guaranteed by the federal government, and when tuition goes up, so does loan availability. If financing is guaranteed no matter the cost, then no one should be shocked when customers lose their price sensitivity.
It's also important to keep in mind that the graduates coming out of college in the time period mentioned have entered the most challenging job market for new job seekers in 70 years. It's hardly fair to expect them to be able to live up to promises they made in the mid 2000s when everyone running the economy promised it was in great shape, while those same people were building the house of cards that collapsed on the millenial generation. There's lots of blame to go around, but very little of it should land on the students who took out these loans.
What you want and what you can afford can be two very different things. Just because you can get a big loan does not mean you can afford it. For myself, the purpose of going to college was to get a piece of paper to get my first software development job. I didn't care if the college looked nice, offered all sorts of amenities, etc. I went to a local state university and commuted.
Too many people have been brainwashed into going college for the non-education part of the 'college experience' without understanding the long-term implications of coming out of school with an enormous debt load. Continuing to allow 17-21 year old kids to sign up for these loans is just a scam.
This is not true. Federal student loans have an annual cap and overall cap, anything above that has to be financed with private student loans, which are not guaranteed by the government and have much higher interest rates. They are generally co-signed for by a parent, who is on the hook if the student cant pay.
edit: this is further broken down into subsidized and unsubsidized loans (the former the government pays the interest on while you are in school, the latter they dont): https://studentaid.ed.gov/sa/types/loans/subsidized-unsubsid...
The highest-paid public employee in 39 US states is either a football or men's basketball coach
http://www.businessinsider.com/us-states-highest-paid-public...
But it doesn't say how much their salaries are compared to the overall budget or how much the team facilities cost.
Football at any SEC school or basketball at Duke generate a significant amount of money for the school—sometimes in the hundreds of millions. This revenue may subsidizes other sports programs entirely.
http://www.cheatsheet.com/sports/the-5-most-valuable-college...
If schools want to generate revenue from their sports programs, then winning is very important. What's the key to winning? Hiring the best coaches.
Edit: There is a Forbes article with more information and teams, I just hate linking to Forbes.
Is there a waiting list?
When you are interested in an apartment you apply for it, and if you are the one with most points you get it. It's all very structured.
Almost all of the building budget has been paid for through our endowment and donations from wealthy families so all the building activity hasn't really touched our bottom line at all. However, year after year the state has cut our funding which has directly led to the rise in tuition. The University already runs as lean as possible with staff-our total compensation is a joke (even factoring in generous retirement bonuses) because of this many years long death by a thousand cuts that the federal and state government has pushed on us. EVERYONE has to justify their jobs every year-and this includes faculty. If a faculty member isn't publishing, teaching, and doing community outreach on behalf of the University they won't be getting tenured.
Also, that money would, in theory, be available for scholarships or other programs if it wasn't being wasted on unnecessary things.
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Total operating revenues in 2016 were $4.8B (up 6%):
- $1.7B endowment disbursement (36% of revenues, up 7%)
- $1.0B tuition/room/board revenue (21% of revenues, up 7%)
- $0.6B federal funding (11% of revenues, up 3%)
- $0.3B non-federal funding (5% of revenues, up 9%)
- $0.4B donations for 2016 use (9% of revenues)
- $0.8B other revenue (17% of revenues)
---
Total operating costs in 2016 were $4.7B (up 5%):
- $2.3B in salaries and wages (50% of costs, up 6%)
- $2.0B in services, space & occupancy, depreciation, equipment (42% of costs)
- $0.2B in interest payments (5% of costs)
- $0.1B in scholarships (3 % of costs)
Harvard used 4% of its endowment to fund operations, up 7% from 2015. In normal years, the endowment fund would see returns that would cover the 4% withdrawal, but in 2016 the fund lost $626m for a -2.0% investment return (3% below benchmark of +1.0%). Real estate returned +13.8%, but public equity returned -10.2% (4.1% below benchmark) and natural resources returned -10.2% (11.6% below benchmark).
Over 50% of the real estate investment portfolio is "direct investment" - the actual purchase and management of property, as opposed to indirect investment in real estate funds. This direct investment returned 20.2% in 2016, probably one of the most lucrative asset classes for HMC. You can be sure that the university will be making a lot more land purchases in the Cambridge area in the near future...
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This is all to say that purchasing real estate is a huge source of returns for colleges like Harvard, and that building facilities and updating old ones will continue as colleges look to increase the value of their purchased land. Salaries and wages at 50% of cost seem slightly high for a largely human asset-based company (compare with 48% for Facebook, 46% for HCA Holdings the largest hospital conglomerate) and will probably continue to be trimmed if returns on the rest of the endowment portfolio don't increase.
[1] http://finance.harvard.edu/files/fad/files/harvard_ar_11_120...
UMD would like to disagree. The facilities look nice on the outside, but on the inside they just stick two students into a space smaller than the average apartment living room. Bathrooms are floor shared, no kitchen appliances, laundry is in another building. No AC. $700 per-student. The commercial housing right next to the college, which is the highest cost/quality in the area, is $1400 for two bedroom, bathroom, kitchen, balcony, a full gym, pool, laundry, its a nice living.
I remember reading shortly after the start of the Great Recession how student debt was going to be the next big ball to drop. I wonder how far we are from that.
Four-year colleges are far to expensive to use it to figure out what you want to do. I think it would be much more valuable to try and find internships/shadowing opportunities with different businesses and people. That's what I would do, if I were going to do everything again.
For those who do want to go straight to college, taking random classes at a community college is the right way to go. Typography, Geology, Pre-law—use those classes to get an idea for what you want to study.
I think this is a huge disservice and if I ever have kids I'm going to stress that they do NOT have to go to college right after HS or ever. How many people waste a Bachelor's degree because they were forced to pick a major when they were 18?
Terrible things will happen with a young overburdened workforce slaving away for their debt. Politicians are already trying to figure out how to squeeze more social security taxes out of them.
This is bad for the economy, likely to cause extreme class warfare and social upheaval.
These people will have to work. No sabbaticals to find themselves, or time off to spend with a newborn. They'll have to put up with every pointy haired boss and dysfunctional workplace they encounter (at least until they can find another job).
Every day of their lives will boost the GDP. (But it sure sucks for them that their culture didn't steer them down a smarter road when they were 18 and didn't know better).
Economies go great when people are spending money. If a large part of your discretionary income goes to paying off student loans instead of spending on other things, and you put off buying a house or having children due to financial insecurity caused by student loans, then the economy suffers.
https://blog.dol.gov/2016/11/03/spending-habits-generation
https://medium.com/generations-of-spending/meager-spending-a...
Those of the silent generation are what can be most accurately described as frugal spendors.
Again, this tendency is rooted in their surroundings as they grew and developed within the society around them that was facing hard and desperate times.
My own assertions:
(1) GDP measures production. If debtors are incentived to produce more, GDP rises.
(2) The spending of debtors doesn't fall. It is just directed toward different sectors (education and financial products instead of housing, etc.).
(3) Every dollar lost by a debtor is a dollar earned by a creditor. These dollars don't disappear from the system. And even if creditors tend to churn money less than debtors, inflation targeting by the Fed should fully counter any changes in the aggregate velocity of money.
Now, it's possible you're right and I'm wrong. But I think it takes a much more sophisticated (and justified) argument than what you are asserting.
Regarding (3): The money does not disappear, but what is done with it? Already excess money in the hands of the 1% is just going into real estate, the stock market and stupid VC companies. All this is not particularly good for the real economy.
This is of course different from personal experience, where exchanges are essentially one-sided, not two-sided. An individual can exchange money for property. But a closed economy cannot.
What it means, then?
Depending on the policy of the Fed (or other issuer of fiat currency), the money supply may be increasing or decreasing at the same time.
The 'other issue of fiat currency' sounds mysterious.
(Of course, a well functioning government will compensate for that in monetary policy. The US gov just stopped being capable of that by around 2008, it is progressing on recovering some control, but still has very little.)
Quantitative easing was tried, and didn't work. There was nobody to lend money to, so velocity felt in proportion to the new money printed and the whole thing turned into just a hidden bank subside. It may work if coupled with the correct fiscal policy (AKA a temporary universal income), but nobody on the US government has the power to do that.
Interest on reserves is a fringe monetary instrument that is getting support from economists out of desperation. The leading theory is that it doesn't work at all, the fringe theory that everybody is hoping to be right is that it can work if the government restricts the use of paper money. AFAIK, nobody has any idea on what unexpected effects can come from doing it for any long period.
Interest rates are not the only tool, but the US government has already spent all of the orthodox tools. In fact, I do think the lest one to stop working was quantitative easing.
Production is dependent on demand of consumables in the U.S.
2 & 3 are the similar (the same?) point. The poorer one is, or the earlier in life they are (students) the greater % of their income is spent on consumables. I don't think money sloshing around financial services has as direct an impact on the things that most impact production.
Important because, as you mentioned, there is a very large difference in marginal propensity to consume between 'hand-to-mouth' consumers and savers - this affects the velocity of money and GDP. Debatable because at the zero-lower bound, how much effect the Fed really have is very much in question (see: excess reserves at https://goo.gl/NQG2O5).
I personally would disagree - money funneled to creditors rather than in the hands of consumers is more harmful to the economy than the reverse, but is that money passed to capitalists (low consumption) or used for business investment (high investment)? That being said, consumption is about 70% of GDP.
It's reasonable to think that in time much of it will get paid back but there are other kinds of investments that would perform better, and hence the economy would have been better off had these loans not been made and the money were spent on something else.
Also to your comment about sabbaticals and other less productive activities, is that really the common case? I believe that underemployment via career choices and local demand for skills would be more common.
Looks like a huge boost to an economy. Besides, let's not forget that economies are made of people.
I studied in Austria so I'm not too familiar with how student loans in the US work, but as far as I know the Income Based Repayment program limits your monthly payments to a given percentage of your income. You can't discharge those debts, but an upper bound on the monthly payments doesn't sound too bad either.
this is already the reality for many americans. eventually they'll riot
I think this might be a matter of framing -- "failed to pay down at least $1 on their debt" might include students with a deferment who are planning on having the debt forgiven. That is, for better or worse, public policy of the United States; it seems weird to conflate that with default.
For example, if you have a Perkins Loan, you can defer during a period of service at any employer where 10+ years would get you loan forgiveness. That list is... rather expansive?
https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancell...
Would I expect people graduating from e.g. a teaching college to largely make principle-decreasing loan payments given that this is our policy? No, I would not; it would require that they receive terrible financial advice.
Unless the conflation is deliberate, intended to suggest that the folks pursuing those deferments and forgivenesses are as parasitic as the deadbeats.
They can get out from under the loan in 10 years, we still have to pay for it.
It is failed policy to allow college to get to expensive due to inflation of prices through loose lending. IMO, that is the real bubble.
I would love to get the story behind this. The cynic in me wants to say it was an Excel screw-up.
The school I was going to closed the new branch I was going to after one quarter. They paid for most of that, and offered a tuition-free ride at the main campus across the country. Suddenly my ~$100,000 college bill was about $25,000. Graduated 2009, fully repaid December 2014.
The correct way to do this is to first consolidate your loan under your own name, so your parent, loved ones, or whomever the co-signer won't be ones trapped with the debt.
However, in order to place the loan under your own name, you'd have to first make consecutive payments to show you are able to pay off the loan w/o the co-signer. This means you'd need to have a job with steady income first; something difficult to do for the debt-laden grads in the first place.
"After identifying an error in the code that generates repayment rates, the Department fixed the error and recalculated all repayment rates and replaced the previously published repayment rate data values with revised values. The error was a technical one in the coding that caused undercounting of some borrowers who had not reduced their balances, and therefore inflated repayment rates for almost all schools. This revision includes all repayment rate data values in all of the merged data files and all versions of repayment rates including repayment rates for each repayment rate cohort, the 1-, 3-, 5-, 7-year repayment rates, and all repayment rates disaggregated by demographic category (e.g. first-generation status, gender, etc.). The relative difference—that is, whether schools fall above, about, or below average— is modest; over 90 percent of institutions on the College Scorecard tool do not change categories from the previously published to the new rates. However, in some cases, the nominal differences are significant."
1: Cap interest rates, especially for private loans. Education pays itself back several times over to society when people have good jobs and disposable income.
2: Federal student loans should not be serviced by private corporations. Way too many redundant services add unnecessary cost and nobody in society benefits from this system but the loan companies. If I have a federal loan I should pay the federal government. Simple as that.
3: Expand the earned income tax credit to subsidize apprenticeships. Whether you're a welder or a programmer, it would be a lot easier for your employer to get a wage subsidy and train you into the role, instead of gambling on each prospective employee to be "the best" without them leaving in a few years to a higher paying job so they can pay off their student loans.
My only concern is the people like me who have loans - not too much but a lot - who are capable of paying them back and see those who got useless degrees with 6 figure debt being bailed out. What will the reaction be? If the Obama Administration's history with Wall St is any indication, it won't be pretty.
I started working as a software engineer back in 2001. It was a no-brainer to steer to higher-paying areas (from Perl to Java, and then to software engineering in banking, then to quant finance). I didn't get my diploma until 2014 (when I thought it would be a good idea to eventually get a PhD).
For all these years and career steering, I've been asked about my degree _once_. When applying at a position in a huge telecom company, not even my first (or second) choice. The rest of employers were happily ignoring the lack of degree.
Ironically, I was never good in managing personal finances. However, if someone told me back when I was 18 that I had to spend tens of thousands dollars to get my degree, only to get zero work experience and start with a junior position, repaying my debt for many years — I would have laughed in their faces.
Edit: My point is not is to argue that degrees are worthwhile or today's system is best. I'm just trying to convey 'what the fuss is about.' Most people seek degrees to get past gatekeepers at employers. And most employers use these gatekeepers to save time and effort.
I am not saying that high education is without its merits. But for me, it is a luxury good, or a path to academia, not a prerequisite to a nice job and a house in suburbs.
Others (a majority apparently) do not really have the choice, the risk (of ditching uni) is too much for them to take and there is considerable pressure in some societies on young people to go to college to prove their "worthiness". Hence the fuss.
I wish I could just stay at home, learn scala and start trading crypto, but I won't have any safety net to rely on in case of failure, specially where I come from (developing african country).
You are right about the safety net. For me, it was the fact that I always can get back to a relatively boring and stable job of Java (or whatever) software engineer, if things went wrong. And I often had to. But the key point is that you do not need 4 years of education to become a Java software engineer. In 2017, it is way easier than in 2001, thanks to GitHub (the fact of Java being still around is the incredible stroke of luck, of course — but I had to change the horse midway, as I had started with Perl, and Perl is much deader these days).
Instead you have to retake your finals on a whiteboard during the interview.
Proactivity counts. Relying on paths carved by other people isn't always a good idea.
"Quit school and become software engineer" is good advice for probably about 1-3% of the population. Granted the alternative shouldn't be dropping $200k on a humanities degree, but what is your "no brainer" solution for everyone else? A degree has long been a pathway to the middle class / white collar work.
I'd imagine other trades have similar avenues of employment as well. Maybe if we stop trying to convince people that a 4 year college is the only prestigious career path (even 2 years of community college + 2 years of a 4 year gets a stink eye sometimes!) they'll stop trying to force themselves into inescapable debt.
this isn't rocket science. people keep more money after their essential bills = people spending more money
the alternative is that we let this debt continue until the students eventually riot or kill themselves-- to be clear, i believe this is the most likely outcome
If the government gives a big subsidy to people who made what I consider to be a serious financial mistake by buying an outrageously overpriced luxury good, why don't I get a subsidy too? I'm left with no debt, but also no outrageously overpriced luxury.
I didn't go to UW or UofT, but I'm sure their total cost is ± 30k at most.
So I'm just curious how students manage to have loans of around 35k/yr.
As this WSJ piece from December on the matter of the GAO estimating $108 billion in writedowns (probably a low figure, as they admit their accounting on the matter is crap) puts it:
"To help pay for ObamaCare, Democrats simultaneously federalized the student loan market and projected fictitious savings, all while adding more than $1.2 trillion to the federal balance sheet... then cited the government “savings” to peddle the fallacy that the feds make money off student loans—a pretext they then used to sweeten debt forgiveness plans that have helped keep default rates artificially low."
http://www.wsj.com/articles/obamas-giant-student-loan-con-14...
https://www2.ed.gov/about/overview/budget/budget14/justifica...
In FY 2016: 100-112% https://www2.ed.gov/about/overview/budget/budget16/justifica...