The student loan crisis will dwarf the housing market crash.
mikekarnj.com
mikekarnj.com
If your loan repayments are $700 a month when you graduate, they will be $700 a month for the next ten years. There is no mechanism by which they'll suddenly jump to $3,000.
Even for degrees which you wouldn't expect great things from -- like, say, English -- the value of the degree exceeds the price by huge amounts. The NPV of a bachelor's degree in English is about a million bucks. You still come out ahead with virtually any college/loan combination possible, as long as you find a job with it, and unemployment among college graduates is still at ~4.5%.
There are a few degrees which are exceptionally bad decisions, but they are the exceptions rather than the rule. One example is culinary school, particularly the ones which will load you with the federal max of loans so that you can get a $12 an hour job as a line cook. There is one glaring sore thumb in the data for master's degrees, too.
If folks are interested, I'll blog about this in a few weeks. I did a project for a client looking at government data and a few other sources to try to get numbers on the worth of degrees by majors. The work is 99% over but, clients being clients, there are some more steps it has to go through before they want to launch it publicly.
I think most people got mortgages because it was a sure thing investment that appreciates over time. That didn't hold true.
I'm arguing that a college education doesn't exactly equate to a higher salary these days.
Even if diploma-wielding programmers can command high salaries in boom times, they have a tougher time getting jobs when there are unemployed programmers with degrees applying for the same jobs during a recession.
Degrees clearly are great revenue producing machines for the portion of the workforce currently unemployed with degrees. I remember a few years ago, "The housing market can't crash, it's impossible, it's the only safe investment vehicle after all of those silly tech stocks".
In fact, it looks like the unemployment rate for college-educated workers is falling:
http://blogs.reuters.com/great-debate/2010/07/28/high-unempl...
The unemployment rate for degree-holders in the US is currently 4.5%, compared to 10.5% overall. The bulk of the unemployed are in blue-collar sectors and among those who have graduated with a high school diploma or less. We can argue about what is or isn't an "acceptable rate" of unemployment, but typically for America it's been 4-5% unemployment. That even in this Great Recession, degree-holding citizen unemployment sits within the "acceptable" range, tells you that there is tons of value to getting better educated in this country at this time, and even in this climate.
then do you think that there will be a crash in this area, and if so, how bad do you think it will be?
i imagine it wouldn't sneak up on us like the housing crash because of the nature of the loans, but that it could lead to a longer, lingering problem kicked off by the housing crash.
* Discount rate of 6% (we're talking about an asset with a 40-year lifespan and zero terminal value).
* $25K in annual school costs.
* $25K in annual opportunity costs. (May be conservative for people who are college material but didn't get a degree.)
* Four years to complete the degree. Which is very aggressive.
* $23K earnings differential. (The current average.)
* Forty years of post-degree work.
In this model, you get to breakeven 26 years after you start school. So, to the current high-school senior: assuming the job market in 2036 looks pretty much like it does now, treat these projections as solid.
It gets worse. If you assume a more realistic graduation timeframe of six years, the value is -$18K after 40 years. Of course, you can keep working; you'll hit breakeven after 54 years (at age 72).
See sheet two for my assumptions:
https://spreadsheets.google.com/ccc?key=0AjzB7A88UMCBdGVrUUN...
Your figure matches about what it costs to go to a private school, but, from my experience, public schools are also more likely to give scholarships [2]. Even still, no one is forced to go to a private school.
[1]: http://www.collegeboard.com/student/pay/add-it-up/4494.html
[2]: I went to a private school my first year. It was around $30k/yr, but I was also given a scholarship that cut that price to around $18k/yr. Most of the people I met on campus also received scholarships of some sort as well.
The public schools I applied to that weren't rolling-admission 5th year of highschool types ended up costing the same in the end, because they didn't give need-based aid, and their merit scholarships were not large for people who don't play sports.
Merit scholarships are easy to achieve, given that you are exceptional. But if you are middle class and not especially proficient, I do agree that you have one of the hardest college experiences in america.
Also, if we were to put opportunity cost into the calculations (because you could work/work more if not going to school), it would quickly approach the $25K figure.
[1]http://www.collegeboard.com/student/pay/add-it-up/4494.html
A median of $9k is still less than half of what the GP used, and my cost of tuition is a lot closer to the average than the $25k the GP used.
Also, if we were to put opportunity cost into the calculations (because you could work/work more if not going to school), it would quickly approach the $25K figure.
Which the GP already did.
So run those numbers assuming school costs of 15K, opportunity costs of 5k, 23K earnings differential, and student loan costs of 3.5% tax deductable.
PS: A friend of mine worked his way through school making 7.50$ an hour as a cook at without student loans. He worked 80hours a week in the summer and 40 hours a week during school and graduated in 4.5 years. He also lived in a trailer with his wife and child and got an internship his senior year at 13$ an hour it was a major pay raise.
You're right about summer jobs, but the vast majority of summer jobs pay less than 1/4 of what you'd get working the full year (plus you have to do a job search for a three-month job, versus a job-search for a multi-year job). Outside of law school summer associates, I don't know of anyone for whom summer jobs routinely mean a raise.
I like your friend's story! But imagine if, after four years, he had credible evidence that he could work extremely hard, plus tens of thousands of dollars in savings. A good situation to be in if he wants to start a business.
Google "college dropout rates". Consensus figures seem to be around 40% of enrollees don't have a degree 6 years later.
It's something the feds and various boards are really interested in.
That's not valid.
If you found data that said, for example, 30% of college graduates took longer than 6 years to earn their undergraduate degrees, then I would agree with you.
If it's less than 10%, then the using 6 years as a cutoff would be a very good rule of thumb estimate.
Maybe the reason why the 6 year cutoff is so often used is because someone already crunched the numbers and found it was good enough?
No. I provided a counterexample that falsifies an implicit assumption of the 6-year cutoff model of the college dropout rate. If you measure your dropout rate as the percentage of students who have not graduated within 6 years of enrollment, it is provably true that your measurement is an overestimate of the true value.
"Maybe the reason why the 6 year cutoff is so often used is because someone already crunched the numbers and found it was good enough?"
If someone had already crunched the numbers, the appropriate correction factor to apply to the 6-year measurement would be well-known and, instead of reporting the 6-year cutoff value, a distribution-corrected 6-year cutoff value would have been reported instead. If nobody crunched the numbers to find out what the characteristics of the distribution's tail are, then the methodology is sloppy. If a correction factor was applied but not explicitly mentioned where the value is reported, then the reporting is sloppy. Either way, a reasonable person is justified in regarding the reported value as merely an upper bound on the dropout rate and rejecting the assertion that it is an accurate measurement of the true value.
No, no, no, no. This penalizes the people who pay back their loans far too much. Who wouldn't just go into bankruptcy if they couldn't pay back the loan? Unlike other loans, the bank can't take your degree back. Interest rates will go up for everyone as it becomes a riskier loan. Suddenly people who had fully intended to pay the loan back will be crushed under higher interest rates.
While this would definitely limit access to post secondary education, it might also have the benefit of causing people to a more honest evaluation of their education options.
If your theory is true, it should apply to all unsecured creditors---especially credit cards. Why isn't it common practice to incur tens of thousands of dollars in credit card debt during college and then declare bankruptcy the day after graduation? Credit cards aren't secured debt---Chase has no legal right to repossess your Xbox. The answer is because this is the real world and that's not how the bankruptcy code works.
Also, there are some programs where people who work for the government can get loans forgiven after a set amount a years. Maybe a similar thing (through tax breaks) could be implemented to help employers pay student loans with the student.
But the best solution is by far reduction of tuition. I'm glad I went to school in Florida, tuition was very low for a state that isn't very egalitarian usually. Education is something I feel they are doing much better than others. I now live in Canada and I see American students come here because the out of country rates are cheaper than their in state rates. And I'm all for free markets and all but the reality is, education is far from a free market. Highly subsidized and yet they still charge crazy rates for tuition. Harvard is now cheaper than some states schools, that's ridiculous.
Which schools would those be? And are you using out-of-state numbers?
I meant it a tongue-in-cheek.
There are for at least some reasons. There are both student loan forbearance, deferrment, and forgiveness programs available. Deferrments seem relatively easy to get (I have one currently while I attend grad school).
Forgiveness programs seem very stringent and limited, but they do exist for certain forms of public service and for extreme hardship. There are deferrment and forbearance programs for temporary hardship though and income based repayment plans.
http://www.finaid.org/loans/ has more details.
Think about cars. Car dealerships know almost anyone coming in the door can get approved, but only if they hold prices down at a reasonable level. Beyond that level, the banks won't loan the money because the loan isn't guaranteed to be paid back. There's no such mechanism in education, because loans can't be discharged and they're guaranteed by the government, so there's no reason for schools to sell their education for a reasonable price.
My brother had a credit card number stolen 3 times, so he cancelled the card. BANG! 750 to 690.
So he said, well, if I reopen the card, will that fix things?
"Oh, god, don't do that! That'll be an even bigger hit!"
Now that I look at my plan, it looks rather evil. But I will publish it anyway, for the sake of discussion.
This wouldn't work. They can't repossess the knowledge in your head, or the fact that you did EARN a degree, even if you don't HAVE one. Employers are mainly interested in what people know and can do, not how their finances have been in the past (though that may come into play for questions of trust).
The pursuit of profit is a common theme in all of the documentaries I have listed, which is what ultimately led to the predicament we are in today.
That tells me that the author doesn't have the slightest understanding of economics. That being the case, there's no sense reading about his economic predictions.
UPDATE: I think I overstated that. What I really should say is...
The author appears to be of the class that believes that if something is done profitably, it must necessarily be bad. While it's true that many evil things are driven by greed, it's equally true that a pursuit of profits leads one to provide the goods and services that society values the most. Since the opening of the article seems to ignore the latter aspect, I don't expect that any economic analysis it might engage in will have any depth.
Meaning that instead of building a brand that people trust and will bring in wealth for years, they are using tricks to swindle people and make a lot of money in the here and now. Like what the mortgage companies did before the recession.
A house is an asset. A unique asset at that, the only kind you can live in (other than your car). An underwater house, despite the term, becomes illiquid. You literally can not sell it. If you become unemployed you can not move to find work without walking away and trashing your credit.
A drop in house prices affects everyone. The student loan crisis affects very few and even fewer who make a meaningful contribution to the economy.
An underreported aspect of the housing crash was the end of the house as a magic ATM machine. People were spending vast amounts of HELOC money during the boom. Literally doubling their mortgages by pulling out cash against their house. With the crash that has stopped and the economy has ground to a halt.
What market would a student loan crash take down? Are people flipping degrees somewhere? If people feel a degree isn't worth it they'll go to a state school or transfer in from a community college. At worst schools will be forced to drop tuitions.
The post mentions student loan debts in the billions, subprime losses alone are in the trillions. That's the money out in the open. There's even more money off the books as banks don't have to report a loss until they sell REO property. There's a shadow inventory of foreclosed homes right now that matches the houses you'll find on the MLS.
The student loan crisis will in no way shape or form "dwarf" the housing market crash.
That's what happens when you mix unlimited government subsidies into what used to be a free-market system.
Three years ago they thought people wouldn't walk away from underwater mortgages either.
2-year Universities: Who made up the rule that we have to attend college for 4 years?
Tertiary education does take a hell of a long time in the US. In my field, and in my generation, most UK students got their PhDs around 24-25 years of age; for the US students it was more like 27-28. Yes, if that is a real effect that would definitely be a problem.
I can think of two factors that may be affecting this (I have no data):
1. The level of the student arriving at college. Yes you can probably get a professional degree in 2 years with no holiday breaks, provided your college doesn't have to teach you basics.
2. The fact that US colleges cost so much money potentially create a vicious cycle - you need a job to pay for college, which means you need enough spare hours in which to work, which means you have to space out your courses, which means you need more money etc etc.
I would be certainly interested in views from US graduates as to why they feel it takes so long.
What I'd like to see is major Universities taking some of the ideas used in technical colleges: goal (job/career) oriented degrees, focus on actual experience, and for the love of all things sacred don't require (for example) CS majors to take dance appreciation and psychology. Students could shave a year or two off the time it takes them to graduate, and in doing so save themselves a lot of money. All without harming the "integrity" of the degree.
Specifically, I found that the networking (meeting those outside your potential field) and ability to see things from other perspectives was invaluable in my college experience. This breaks down the "siloing" effect that I see a lot of talented CS majors have problems with, an effect that is consequently ruining the business world. Taking off the blinders once in awhile is a good thing, regardless how seemingly useless that Drama 101 class is. It's all what you make of it...
There are alway value to an education, in anything. The question is if it is really worth learning about?
Beside, people can learn to appreciate basket-weaving and dance appreciation in their own time. All they need to do is get rid of their TV and get a hobby. People don't need an overly expensive course to do that.
Do you really believe that a liberal arts education is worth $62,000 tuition + 2 years of lost wages (roughly another $140,000)? Particularly when, to borrow a phrase from Good Will Hunting, that liberal arts education is available to anyone for about $4.25 in late fees at the public library?
http://cs.nyu.edu/webapps/content/academic/undergrad/majors
http://webcache.googleusercontent.com/search?q=cache:CS5fT5z...
For one thing, NYU trades on their name as well as their education, that's a big chunk of the money you're talking about.
But the more poignant question to me is whether you're getting less out of the liberal arts classes than you are out of the CS classes. I'm not sure that's clear, you can learn engineering anywhere, but 80% of the people I've ever worked with can't write for crap.
If college is just an exercise in signalling, why bother with classes at all?
Why not just replace classes with final exams, give out the paper, host a few networking events and save billions of dollars?
Personally, I value large chunks of the education I got in college, and think the majority of it had some value. I dunno how that value compares to the cost, and I've never seriously considered graduate school of any kind because the (tuition + lost earning) changes a bunch once you have a job.
I was mostly commenting that I thought a lot of the liberal arts education was just as valuable as the technology education, provided that I actually learned the tech so I could get a job. I learned a lot about music, literature and history that I'll have for my whole life, and that I really wouldn't have gotten off my duff to learn on my own.
What do you think made me so anti-college?
Only for some values of "computer science". There is a lot of very tough math involved and having a teacher will save you ages.
It's terrible, and eats a lot of time. Essentially, your professors can't completely count on what professors of pre-req classes have taught you, and often have to review some things. This problem is compounded when the school admits community college students, whose classes inevitably never match up well to the University courses, so they wind up trailing.
I've also been in classes where a class that was NOT a pre-req SHOULD have been a pre-req; for example, I took a class in sensors, and learned a lot about filters in the process. A huge component of using electronic sensors is filter design, so it was a very appropriate class to learn about filters in. After that, I took quite a few classes that used filters, but didn't require any pre-existing filter courses, so the professor would have to (briefly) teach filters again every time.
Maybe what I want is more tests as pre-requisites rather than only full fledged courses (my alma mater had an English test that could be taken in lieu of one mandatory course)
The programs were not quite equivalent. US Ph.D. programs have traditionally included more courses and include a comprehensive examination in addition to a dissertation. A US Ph.D. candidate must demonstrate a broader understanding of the field and cannot just jump into thesis work upon starting their Ph.D. program.
Sure, they may not be identical but they were teleologically equivalent. Newly minted PhDs from both countries proceeded to compete for the same jobs on a seemingly equal footing.
1. Housing market debt dwarfs higher education debt in notional value. >14 Trillion vs 830B.
2. Most mortgages are non-recourse, meaning you can walk away. Most education loans are not. So people can't just leave banks on the hook without much more severe penalties.
When a homeowner walks away from a 600k mortgage on a house only worth 500k in the market, he/she is implicitly trading credit for 100k in cash. For some people that trade becomes much bigger 900k loan on a now 500k house. A lot of people will trade credit for 400k.
If walking away from an education loan was easy(which it isn't), I'm selling my credit for the value of my loan outstanding. That number tends to be a lot smaller, and most college-grads don't find it worth losing your credit for it.
* edit for readability
The end result is that you'll be beholden to a bank for a good sized portion of your life (as if having a mortgage or rent isn't enough to hold you down).
Smart societies have free education, and their schools may not be always as good as those that you pay for with half of your life or so but they're adequate enough.
The main reason why education should be free is because education not being free creates an inequality between people born rich and people born poor, the poor will end up getting their education but pay for that with a significant portion of their time later on, the rich don't care.
If you know of another way to get government-subsidized, interest-deferred or interest-free loans to spend four years of your life professionally learning, and that have generous deferment provisions after you're done with those four years of professional learning, let me know. I'd love to access that money.
"Smart societies have free education, and their schools may not be always as good as those that you pay for with half of your life or so but they're adequate enough."
I would like you to name those smart societies with free education and world-class universities. Notice the Shanghai Jiao Tong University list of schools: http://www.arwu.org/ARWU2009.jsp .
The problem with "free" education is that a) it isn't really free -- someone is paying; b) as with so many "free" things, you get what you pay for to some extent; and c) people without any skin in the game aren't likely to value their "free" education as much. Any society you manage to name with a nominally free university education is going to suffer from some or all of those problems.
(Note: the above isn't to say American universities are optimal, or that they don't have problems: they do. But the solutions are not to proclaim that everything should be free, as if there is no such as opportunity cost, or that free from the student's perspective is equivalent to free from society's perspective.)
France comes to mind:
http://en.wikipedia.org/wiki/Education_in_France
Not 100% free but the stipend more than makes up for the very low tuition fee. There are also private schools and universities in France, they charge considerably more.
... and France's first university on the Shanghai Jiao Tong list: about 40. And it goes down from there, probably in large part because its universities are underfunded, like most of Europe's.
Free from the students perspective is actually a net gain for society because a better educated general public benefits everybody, not just the students.
The question is what happens on the margins and whether there are enough university slots for everyone who wants to go. In the U.S., there basically are, especially when one takes into the community college -> four year path. From what I understand, in most of Europe this is a continual problem.
I think your example does more to prove my point than disprove it.
http://www.arwu.org/ARWU2009.jsp
Given the size of the respective economies of France and the US it is actually surprising to see them in the top 40, I would never have expected that, if tuition were the secret then they should have been near position 100 or lower.
The first 39 slots are divided between the US, Japan, England, Canada and Switzerland.
I got bored and dropped out. I had absolutely no trouble finding a job. Not having a degree has not come up at all, even when working for a big corporation that does extensive background checks.
So I am not buying that college must be expensive, or that there is no way to get a job without completing college. Sure, some people are rejected from some jobs for not having a degree, and some people spend a lot of money on college for no real reason. Overspending on college is no different than overspending on anything else.
(Example: I just bought a $900 vacuum cleaner. That doesn't mean that if you don't have $900 you can't clean your house. It just means that I overspent.)
That was my whole point. College doesn't have to be expensive, in fact it can be free or nearly so.
> I had absolutely no trouble finding a job. Not having a degree has not come up at all, even when working for a big corporation that does extensive background checks.
That's good :) My impression from friends is that having a degree would have been a big plus, not just for getting the job but also for the compensation.
> Overspending on college is no different than overspending on anything else.
That's true too. But we - TrueTech Canada Inc - spent a good bit of money getting some our employees that were seriously in debt out of it, and we helped a few that were still in school to avoid going in to debt. I was quite surprised to see kids that young saddled with such huge debts, $35K in one case.
> (Example: I just bought a $900 vacuum cleaner. That doesn't mean that if you don't have $900 you can't clean your house. It just means that I overspent.)
Sounds like you have some industrial cleaning power there :)
people have always wanted to fatten their wallet. always will.
they just noticed 50-70 years ago that people who know more have fatter wallets.
My past experiences felt so accelerated and like the goal is to cram material in the smallest available time frame - thus making enjoying the material difficult.
In theory, universities are not for-profit.
Is there something about an engineering school education that is inherently more expensive than a liberal arts education?
recall, though, that we're dealing with a market. the schools will charge what they can get away with for a liberal arts degree. if folks purchasing liberal arts degrees could do the math to realize they're getting a bad deal, they'd stop paying so much for them and the prices would drop. conveniently for universities, prospective psych majors don't spend a lot of time thinking about their expected lifetime earnings and how much their degree will change those earnings.
His answer to the problem is less education. That seems like a problem to me.
The reason we had affordable state school was that education was a good for society as a whole. America, as a whole benefits from having well-educated people.
The state schools we had were affordable for both the student and the states. Why is that no longer the case? The article misses this question entirely.
"Over the next five years, about $1.4 trillion in commercial real estate loans will reach the end of their terms and require new financing"
Elizabeth Warren Warns About Commercial Real Estate Crisis, 'Downward Spiral' For Small Businesses, Local Banks http://www.huffingtonpost.com/2010/02/11/commercial-real-est...