Student Loans Are A Drag On The Economy
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Is calculus ten times more expensive to teach than it was thirty years ago? Is Shakespeare? Supply is totally inelastic, because it's almost impossible to get a new college accredited (for profit schools all started with an already accredited school and expand them). Same with demand - not having a college degree puts you on a lower track that's almost impossible to break out of, and the connections, etc. mean that MOOC's aren't a good substitute for undergraduate education, while the professions all require specialized schooling afterwards.
So where does all the money go? At a non profit university it goes to faceless, non-teaching administrators to play the school prestige game, and maybe a little research.
A generation is broke because they're not paying for education, they're paying for education that can't be unbundled from empire-building.
So some people wring their hands, say "can't be helped", and walk away. But I believe that the causes that you and others have noted are more prominent.
Understatement of the year. At my institution administrator hiring has been on the rise for the last ten years and funding for professors and new hires has been declining. Our institution also has a huge surplus of unallocated funds (literally just sitting around) that they refuse to devote to education or research.
The principal got so high because higher education has turned into a market, and the people they hire to run schools are business people. All they care about are profits.
Empire-building is correct though in the sense that public institutions are the ones raising their tuition costs by so much (78%!), and a big reason for this is do to college's building new infrastructure, which often times they have no need for. Take SF State University who I used to work for, they built a brand new gymnasium and a brand-new library at a cost of over a billion dollars for a student population in which 78% are commuter students who hold down part-time jobs and spend no time on campus. It just doesn't make financial sense. That said, faculty costs are still the primary problem and why community colleges get the taxpayer a much better bang for the buck. See http://www2.ed.gov/about/bdscomm/list/hiedfuture/reports/dic...
1) Spending on non-faculty salaries have gone through the roof with the exponential growth of well paid but educationally marginal deanlets, deanlings, and administrators.
2) Although total salaries for the tenured professoriat hasn't necessarily exploded, salary per classroom-student hour has as tenured professors have seen their teaching requirements fall, and as large lectures are increasingly taught by poorly paid adjuncts.
A generation ago a 3-3 or 4-4 was typical for a tenured liberal arts or social sciences professor, and most freshmen seminars were taught by full faculty. Today many teach 2/2 or even 2/1, and they might well be all be graduate / upper class seminars and supervising student research.
http://www.npr.org/blogs/money/2014/02/26/283018555/episode-...
One of the most interesting points is that colleges are in a unique inverted position when it comes to price vs. demand. Cutting their tuition price would actually decrease the perceived value of the degree, and thus lower the demand for their product.
You can grind your teeth at the rest of the podcast where the administrators claim a lot of this cost is building amenities and facilities that students now expect out of a high-tier college like all-single dorms, a myriad of cafeteria options, and 24/7/365 library and IT staffing. I'll go back to my lawnchair now.
Even if you accept this as true (which is interesting but is also a bit of a stretch), it certainly doesn't explain why tuition consistently rises at a rate several times that of inflation. The latter items certainly do.
Customers (students) have been allowed easy access to student loans, which makes them less picky about price differentials and closes the loop. Closing the loop allows it to accelerate beyond the scope of inflation.
I've seen a fair number of universities in the U.S. and other similarly developed countries, and one of the most striking differences I've noticed is that U.S. university physical plants tend to be really nice — super well-maintained and frequently renovated, "deluxe" feeling — whereas even top-tier universities in other countries often feel a bit threadworn and sometimes even kind of run-down, even if they have beautiful old buildings. The latter function perfectly well as universities, mind you, but the impression is that they're being pretty careful with their maintenance budget....
Currently, if you have no income you are harassed to get into the payment by income program but that program requires you to make payments on previous loan payment program to become fully qualified for that lower payment plan.
So guess what happens? Congress in their wisdom limited said plan to one try. That is right most of the people on that default list could have been avoided if the limit income plan was implemented properly.
The college premium skyrocketed over the last three decades. B.A.s now out-earn high school grads by 70-80%. College graduation, in contrast, barely rose. In econospeak, the supply of college graduates looks bizarrely price-inelastic.
Over the last two months, I've read virtually everything ever written on this puzzle. All of the compelling stories converge on a single factor I've emphasized for years: The return to trying to get a degree is far lower than the return to successfully getting a degree. Why? Because marginal students routinely fail to graduate. The single best paper on this theme: "The Education Risk Premium" by Janice Eberly and Kartik Athreya.
http://econlog.econlib.org/archives/2014/02/why_the_college....
For various reasons, I've been saying for a year or so now that "we're not going to educate our way out of this mess". Education helps, yes, but it's also pretty distinctly limited, and I'm seeing increasing evidence that there's only so much potential among most students. Though there are notable exceptions: see "Stand and Deliver".
More of my own take:
http://www.reddit.com/r/dredmorbius/comments/1y5aq0/the_coll...
No wonder I see people train overseas and then just get a license here.
How is health care ever going to be affordable in this country if the doctors and dentists have to carry so much debt?
If a dentist can make back nearly half a million then something needs to be done about the cost of dentristry, something doesn't add up.
I have to go to the dental college because I do not have insurance, it is impossible to go to a dentist without insurance these days. I usually am seated among many other people at the college who actually have insurance, it is just their deductible is far too high unless they go to the dental school for work.
The market is slowly working around this constraint by allowing nurses to train and take on some of the responsibilities that were previously subject to the artificial labor scarcity.
Unfortunately this only represents about ~1/3 of the problem with our medical industry by market share. The other two thirds come from drug price overruns (US drug buyers pay twice as much as single-payer countries which have much more size = bargaining power) and the medical insurance industry (a textbook case of "costs of competition" dramatically exceeding the benefits in a measurable way).
As an infuriating elaboration on your point, the United States has a huge single payer in Medicare that is by law prevented from effectively negotiating drug price.
Well, I wish it was insanity. It's actually cold and calculated exploitation. This is why we need campaign finance reform. Under the current system, politicians don't have the freedom to reject bribe money even if they want to. What a mess.
Medicaid IS allow to negotiate and has federally mandated discounts. Medicaid covers more people in the US than ANY of the Canadian provinces who do negotiate. What does that tell you?
> the manufacturer’s “average sales price” means ... sales to all purchasers ... in the United States ... divided by the total number of such units
So it looks like the ASP is fixed to the shit price that results from fragmented bargaining by US companies. A 23% discount on a 100% markup = drug companies laughing all the way to the bank.
As for Medicaid, I'm not familiar enough to answer. Do they get decent prices or is there similar corruption at play?
The top 3 insurers (who negotiate these prices) in the US cover nearly 100 M people. Medicare gets those discounts included as well.
As for Medicaid, it often pays the lowest price of all purchasers in the US. For many doctors, Medicaid reimburses them so little, they lose money on drugs. That's why many doctors don't want to take Medicaid patients.
There was some manipulation of the ASP back in the early 2000's, but those companies were charged under the False Claims Act and paid a pretty significant penalty. I don't think there is widespread manipulation at this point.
More of a relative hit than a CS type for sure.
No wonder people go to India or Eastern Europe to get their teeth replaced.
Anesthetized basic dentistry adds more to our quality of life than much of the modern "healthcare" industry.
http://en.wikipedia.org/wiki/Trigeminal_neuralgia
Apparently, Salman Khan has this. Painful :(
When people say "Is there a doctor on the plane?" after someone has a hear attack they aren't looking for dentists or audiologists are they?
Heck why even send people for education, why not go overseas for dental work (I bet it already happens).
Heck, I was born overseas and go back to visit twice a year. That's when I get my health-related stuff done. Not only is it ridiculously cheap (sometimes even fully covered by my parent's insurance, even though I'm almost 30), but it's also very high quality.
Healthcare in the US is an absolute joke. It makes me sad.
I've found that many people are surprised when they discover that dentists in the USA are medical doctors and have a similar education.
This was about to happen.
America's problem is that we treat our political parties like our favorite sports team, and the parties themselves react accordingly favoring electoral dominance over policy achievements. Case: health-care -- polling shows that most Americans are in favor of the sort of things that the Affordable Care Act basically accomplishes (universal coverage, everybody pays something, subsidization for poorer people). When it's framed as Obamacare or a Democratic Party program, the numbers change to reflect the partisan divide.
It's still stupid, but it's not the same thing as not wanting it.
Couldn't we all go to school if we each paid a little bit for it and you just had to show up?
BTW, road maintenance costs are mostly due to heavy vehicles such as trucks (and weather). Cars cause negligible damage. So though truckers complain about high taxes, they're actually still paying less than a "fair" amount. So says my transportation professor, anyway.
It doesn't automatically follow that a bolus of tertiary eduction has to result in that much debt.
Now that doesn't mean the college system isn't flawed or unfair. I think that it is. But some of the discussion should be on how we tell young adults to best navigate their way through the system, as it exists at present. Picking your dream school, a "good" school, whatever, should not be independent of some analysis on what the return on investment is. For students that can do that, there are still opportunities out there... I say that because I've made decisions where I got in but didn't go to my dream school. It sucks. But the extra value from the quality of the education didn't seem worth $100k in debt once I get on the job market.
I'm not sure how you go about adequately informing students about a major life decision they are making.
Certainly not all, by a long shot. Here in Australia, you get a couple of grand to help you out when you have a baby, helping cover various initial costs, purchasing prams or whatever.
A friend of mine mentioned that he'd heard his 17-year-old daughter talking with her friends about having a baby because then you get that baby money. They saw it as a huge windfall and don't understand that all that money and more is needed to set yourself up for a child, nor that a child significantly changes your lifestyle and activity choices, especially for someone around 20.
It's not to say that everyone at that age has no forethought, but as a demographic, they're not good at long-term planning.
Anecdotes ahead, proceed with caution: Very average PA public school; had a "home ec" course, in which we did hilariously outdated calculations on things like interest vs compound interest. Not a single mention of what I'd call "practical economics"; e.g. actually balancing a real budget (which, FWIW, I've heard is becoming more a thing in certain districts), calculating the costs of goals, and perhaps touching on long term financial planning. When I first had to handle retirement fund options; you could have handed me a live squid for all I knew what to do with it. I got _lucky_. I had parents who filled in many of the gaps, and were willing to be a resource as I got older, as well as some more informed friends; but I worry about how people with less might have gotten by.
Oh, you mean the people who the banks gave giant loans to that it turned out nobody could afford and put everyone into foreclosure? Or their kids, who signed their life away to bankruptcy-proof loans on a degree they never finished, and can't get a job good enough to pay it back?
Have you seen what passes for a parent?
Yes, let's have those people teach their kids personal financial management.
You have to have a rich relative available to cosign for all those private loans--federal loans for dependents are capped at about $5,000/year, and independents get about $10,000/year. The total lifetime amount is capped at about $60,000, which is why I'm sometimes skeptical of "I have $200,000 in student loan debt! I'm so poor and oppressed!" stories. It's very likely that these people are just fine because their family will eventually bail them out no matter how many bad choices they make--they're legally obligate to. Student loan companies don't loan money to people without collateral.
1) State funding (public tax dollars)
2) Student tuition
3) Research Grants
4) Alumni donations
State funding is down, research grants are down, and alumni donations are down. The autonomous costs of a university don't decline, so that loss in revenue needs to be made up elsewhere, thus it comes from student tuition.
It isn't black and white.
If you go to an in-state community college and then matriculate to an in-state university in my state the total cost of college is (~$4500 for 2 years of CC living at home + ~$25000 for 2 years of closest to home in-state school) ~$30000 + the cost of living at home.
Meanwhile people continue to whine about sending their kids to school in places where they wrack up that much in debt per academic year before accounting for housing and travel expenses.
If you don't want to be in debt and you aren't rich or dirt poor make reasonable decisions and stop whining. If you can afford to replace your mini-van with a Prius, you can probably afford to send your child to college, especially if you save the difference during the CC years.
The real issue is that people feel entitled to the best schools and will so make absurd decisions to enable it regardless of what their child is studying or how well they actually do in college.
And all of the above said, I do agree that college is increasing in price more than it should. I think it's because research and lifestyle costs are getting pushed into tuition combined with state legislatures who don't want to support colleges in their state budgets that are really doing it. This has many pernicious effects, like transforming the college meal plan into a clone of your closest mall's food court.
I'm not sure how CC's get over the stigma attached to them, but it really needs to happen. They are good value.
This is basic stuff, people. If everyone is going to college, everyone should know this.
But that isn't what is happening in this situation. If Candidate A attends 2 years of community college and then transfers those credits to State College, his resume will still say "Bachelor's Degree - State College" the same as Candidate B who attended State College for a full 4 years.
It doesn't have anything to do with job candidates, it is purely the psychological aspect of not attending a big state uni for your first two years in college.
> This is basic stuff, people. If everyone is going to college, everyone should know this.
I'm not sure if this is snark, but is it really basic stuff for people coming out of college to know about rent seeking? I guess in an ideal world...
> Because when there are fewer jobs than candidates, artificial distinctions are used to judge them
In my community college, there were a number of professors with incredibly low standards for academic work. However, I tend to think this is a reflection on the level of preparedness of students coming out of high school.
The issue is, and maybe it is sad that it is this way, but it is probably better for people to end up with 1/10th of the education at 1/2 of the price and end up with less debt overall due to what they end up doing with their degrees.
And if you apply yourself, you'll learn no matter where you go. Heck, you'll find plenty on YC who advocate skipping school entirely, so community is a step up from that.
I can't really recommend community college for STEM, since at least in my original state, you had to start as a freshman at university even if you had an associate's degree in science that was "guaranteed" to transfer for credit. (The engineering department's justification was "we'll accept your credits, but you still have to take everything over again.") It's a good way to get screwed, and community colleges offer very few second year science and math classes. (The liberal arts people had much less difficulty transferring.)
However, I did learn my calculus and sciences very well because I had excellent teachers that I could ask questions of if I needed to. My physics professor had been teaching for over four decades--and with a small class size of around ~20, I had plenty of opportunity to absorb the material and understand it completely. As a result, I now find myself tutoring my buddy at a $60,000/year private tech college, because my knowledge of the subjects is sound and the quality of the teaching at his school is completely terrible. Interestingly, the homework assignments and test questions are near identical in terms of subject matter covered and difficulty--the main difference is that the private tech college curves, which my professors at my community college were explicitly forbidden from doing.
>>The real issue is that people feel entitled to the best schools and will so make absurd decisions to enable it
Nonsense. People want to send their kids to the best schools because the best schools are the gatekeepers to the upper class. Someone who graduates from an Ivy League school gets to build a network with affluent alumni and has a high chance of landing a job that pays six-figures right off the bat. Someone who goes to a merely good state school though? There is a very good chance they won't even find a job after graduation.
You can't underestimate the psychological value people put on attending even just good colleges in your state, even when doing so isn't financially sound.
For state schools there are lots of people at the margin - IE they don't do well enough to really reap a benefit from their degree.
Maybe getting good grades at a public won't get you 6 figures in your first job, but in most fields you aren't going to get that from an Ivy League, either.
But if you do well or choose a good major your in state school will be fine - you'll get a job, and it'll pay alright.
This is 3 or 4 times as true if you're planning on being something like a Nurse or a Teacher and less true if you're planning on being a hedge fund manager, but frankly if I were a student I'd be happy for the future hedge fund managers of the world to go somewhere else.
And that's a tech degree, mind. I get the feeling you really have no idea how hard it is to find a livable-wage job if aren't in tech or cleaning bedpans. The idea that fundamentally irrational people - teenagers! - should be expected to make decisions to actively limit their upside based on a downside risk they literally cannot contextualize is a failure to understand humans.
The real problem is that we enable them with low expectations. Give students high expectations and teach them how to evaluate their options instead of giving them tripe, rule of thumb, and aspiration without realism or planning.
(Also, I do know people who've gotten 4 year degrees and then done things like become correction officers or pharmacy technicians (which don't require degrees).)
That said, there is something to be said for luck. And paying for entry isn't the only way to make connections. It's just the most disgusting, and part of the reason people think certain things resemble giant fraternities.
I went from $50k a year to likely over $120k (that is in negotiation) in the span of 1 1/2 years of hard effort &learning.
I too racked up lots of debt from school, about $200k total. I am forced to focus on money because of this. I made the decision to go all in on developing my career & making the decisions I deferred until after grad school.
I did. A "stellar mind" would also probably understand how much insane luck it took to get where I am with my rolodex, too.
Absolutely not the case
So if I graduate anything from an Ivy League I'm getting a 6 figure job? No. Especially when fresh out of the school.
This is an idealization of schools in detriment of personal effort.
After some years of experience SCHOOL DOESN'T MATTER It doesn't. Really
A better school certainly helps in that initial step but it is more clear than ever it's not worth it
Are they the only employers? Also, if you have to go to school X (outside of the state) and then come back, well, there are better choices, no?
There are always places that won't hire you because of your school, that's usually a red flag.
The point is that there are many more places who will hire you simply because you have an Ivy League degree than there are places who won't even consider you because you are Ivy League. Whereas the exact opposite is true for local schools and community colleges.
Heck, forget the USA. Having a degree from a place like Harvard will pretty much guarantee you at least an interview anywhere in the world.
If this is the case then these people need to quit whining. It's their choice - this is like saying that you need to mortgage your house to join a yacht or country club so you can make connections. Some people just have to work harder than others to make it, life isn't fair cry me a river. Many people from cheaper institutions are better at making connections because they excel in the personality and charm dept (thus they have the advantage). Is that fair? Many poorer people make it big because they are smarter or luckier... Is that fair? Your argument just shows how blatantly ridiculous this is.
People are complaining that education is so expensive and yet they are going to the most expensive school is ridiculous. This is like complaining that your Mercedes was too expensive when you could have bought a more reliable and efficient car for less money.
You'd do well to recognize that your own complex set of circumstances has very little to do with the people who things did not work out well for.
p.s. The main fear of "why would students want to take our 40-60K$ on-campus program if we offer the same degree online for a fraction of the price" is being put to a test here. So far I didn't see evidence that the number of on campus GA Tech graduate students decline, but I don't know for sure, time will tell.
Future will tell if this model works (I realy hope it does), but if one university can do it, others can as well.
I know tuition and books have skyrocketed but at the same time I know people who spent student loan money on flat screen televisions, computers, spring break trips, and used cars.
http://healthland.time.com/2012/08/02/are-college-kids-blowi...
> When I asked my stepson, who graduated last winter, if he knew of kids using their student loans for non-school-related purchases
Might as well ask your stepson if he knew anyone doing drugs instead of going to class. It's a drug pandemic! Do you know anyone who has cheated on a test? It's a cheating pandemic! Do you know anyone that sleeps around? Promiscuousness pandemic!
People love to gossip, and they love telling stories about outliers. Asking directly for stories that stand out is about the worst kind of "informal" research you can get.
Hell, it's almost a surprise that college tuition hasn't grown at an even faster pace. In ten years this is going to become a serious national issue and I think you'll see the federal government step in to cap the tuition increases. It's gonna happen.
It's not clear to me that 'a degree is usually worth the cost' but even if it were the case that going to college were the optimal decision for each individual who chooses to go, this locally optimal decision doesn't mean that it's good that 'more students than ever before are attending college'.
A college credential could have a positive NPV for each person thinking of getting one, but still be negative for the group overall. For each individual it's rational to participate in the credentials arms race only because if they don't, but everyone else does, they will be at a disadvantage.
(I acknowledge that many people get more from a college degree than just credentials.)
That is the question journalists should be asking.
Rates are also fixed with no possibility to refinance. you have to make other decisions, like buying a house and borrowing extra to pay off your student loan. this could have other repercussions and is not very "free market."
but in the end, the degree itself is supposed to be worth about a million in lifetime earnings. for professional degrees it is multiple millions. maybe it is all worth it anyway and the price of education is still too low.
Consider that a tenured prof makes about 120k and teaches only 2 courses per semester, 2 semesters per year, while an undergraduate might have 6 courses per semester and pay 6-10k. My faculty had 2400 undergraduate students and while some classes in first year had 100 students, most were 20-30 students per class.
Cannot drink but everything else is legal.
Why choose to study in New York? I imagine one could train to be a dentist for ~30% of that cost (including living expenses) in Central Europe or in India. Perhaps you'd need to do an extra exam before being licensed to practice back home, but avoiding that doesn't seem worth a > $200k premium.
LOL
You (America) have a government that offers discount loans - i.e. loans with poor prospects/low interests rates - in the hope of driving a higher allocation of capital to education than would occur in a pure private lending market (i.e. the government takes risks with the taxpayers' money that private lendors would not take with their own.) (Also, might be worth noting the psychological effect of borrowing from the government - I think people tend to feel safer doing this than borrowing from an obviously competitive private firm. If you read the article, the casual attitude of student debtors to defaulting on their loans shows this - the government has no teeth. The private firm goes bankrupt if it doesn't get a return on investment. The government just devalues the dollar if it gets in a tight spot.)
The justification here would be that the positive externalities of education are high, and an equilibrium capital allocation following purely upfront costs would be suboptimal.
However because humans are humans, the availability of below-market price loans means that people are willing to spend more on education than they would if they were forced to pay a market price. And again, because humans and humans, colleges, which in America have little government oversight as to pricing, raise their pricing. Why? Because people will still pay it. For whatever reason, colleges are able to bank on their prestige and identity, on the promise of access to important social circles, and so pure pressure for price is diluted.
Forget all the shit about increasing salaries for professors, or construction frenzies. Basically the final equilibrium price for a college is the price that they can get away with charging. And this price happens to be far higher than it would be in a purely private education market. Because students can gamble with taxpayers' money. And the universities can sense that there's cash on the ground - and if they don't rush for it, another will just take it. This is why your institutions glorify the most profligate administrators - the ones with the most grandiose investment schemes, the ones who can create an appearance of money well spent - because the best administrators help draw in as much cash as possible.
So the result is that what started as an incentive to encourage education actually creates a toxic market with widespread debt defaults. Instead of more education, you just wind up enriching university administrators (definitely) and professors (maybe) and creating way more university facilities than private demand would have ever warranted. So congratulations: as a country, you've just spent XX billion building a shitload of luxurious dubiously-useful education infrastructure. Because as a country, you shoulder the cost - through your government's wasteful allocation of capital.
Congratulations. The whole country just gave a shitload of money for nothing to university administrators and contractors. You wanted to push capital into educations, but instead you got rich universities. Well done eh?
See, this is why America's model of mixed-capitalism is so poisonous. If you want to give cheap loans for education, you need to control prices at the institutions where they're valid. Though even that doesn't work - you'll find state-controlled institutions in countries that practice this still constantly pushing for the maximum tuition increase every single year, using every excuse they can.
The better solution is probably no public loans or grants whatsoever. Though that doesn't address the positive externality of education (which I do believe in.)
> Because as a country, you shoulder the cost - through your government's wasteful allocation of capital.
The US Government made $41.3 billion in profit on student loans last year.
http://www.usatoday.com/story/news/nation/2014/02/10/federal...
1) Is that the most money they could have made with these loans? Are they getting a market return on investment? If not, then they're wasting the country's money. It doesn't matter if it's still "profitable." A lot of shit investments still make money - just less than they could have if they were better invested.
2) Are the loans profitable at market rates? Then why have students taken on seemingly such high debtloads? Ah, because everyone knows that with governments, unlike private lendors, you get this:
>"I think they should break even, but it's just wrong that they are making money on it."
>"This is obscene. The government should not be making $66 billion in profits off the backs of our students,"
>Warren and eight other U.S. senators committed to wring government profits out of student loans and address the $1.2 trillion in outstanding student loan debt they say is crushing families and putting a strain on the economy.
>"It's time to end the practice of profiting from young people who are trying to get an education and refinance existing loans."
Great, look forward to any at-market performance of your loans being shredded through political pressure. Another way of saying that your government just threw away your money.
First I argued that the government was making bad loans. The respondent replied that they were making profit (implying they were good loans.) Then I noted that that doesn't necessarily mean the government made the most profit possible with the loans - I didn't say that was definite, just possible.
And then I showed how political pressure is mounting for even this meagre profit to be slashed to cost price. Because that's the great thing about borrowing from the government. If enough people do it, you can bank on political pressure to hamstring any honest attempt to get a market return. So you wind up with a distorted allocation of capital to this market (student loans.)
PS. If anyone remembers, this is exact same mistake which drove the 2008 recession - the American government's junk home loan program. Exact same high ideals - help people get into homes! - exact same result - people went for bigger homes than they would have otherwise - savvy hedge fund managers smelled the free money and pounced. And we all know how that turned out.
PPS. If you're interested, check out: http://mises.org/books/economics_in_one_lesson_hazlitt.pdf (pages 25-32).
"CBO’s calculations of subsidy costs for student loans follow the procedures specified in the Federal Credit Reform Act of 1990 (FCRA). Under FCRA, the discounted present value of expected income from federal student loans made during the 2014–2024 period is projected to exceed the discounted present value of the government’s costs. (Present value is a single number that expresses a flow of current and future income or payments in terms of an equivalent lump sum received or paid today; the present value depends on the rate of interest—known as the discount rate—that is used to translate future cash flows into current dollars.) Credit programs that produce net income rather than net outlays are said to have “negative subsidy rates,” which result in negative outlays. The original subsidy calculation for a set of loans or loan guarantees may be increased or decreased by a “credit subsidy reestimate” in subsequent years, on the basis of updated valuations of the present-value costs of the cash flows associated with the outstanding loans and loan guarantees.
FCRA accounting, however, does not consider some costs borne by the government. In particular, it omits the risk taxpayers face because federal receipts from interest and principal payments on student loans tend to be low when economic and financial conditions are poor and resources therefore are more valuable.
Fair-value accounting methods account for such risk and, as a result, the program’s savings are less (or its costs are greater) under fair-value accounting than they are under FCRA’s rules."
On page 63 of: http://www.cbo.gov/sites/default/files/cbofiles/attachments/...
See also: http://www.cbo.gov/sites/default/files/cbofiles/attachments/... (Fair Value Accounting for for Federal Credit Programs) and http://www.cbo.gov/sites/default/files/cbofiles/attachments/... (Fair-Value Estimates of the Cost of Federal Credit Programs in 2013)
This is not nearly the full extent of the problem, just look at the housing market. Through credit, banks have been able to completely erode the concept of ownership and turn it into just another form of renting (except for those rare few with fuck-you money that we all dream of being)
1. Every loan is subsidized by virtue of any bank being able to effectively conjure money out of thin air. Giving out a loans would normally affect the backing of the depositor's accounts, but they have absolutely no concern due to FDIC insurance. So the only checks on how much a bank will loan out are the reserve requirement, and how accurately their own accounting model reflects what could go wrong (eg a massive drop in housing prices making all of that on-paper "collateral" worth less).
2. Overly strong enforcement of collateral, through both modern tracking technologies and a government that facilitates efficient repossession of property as if the debtor does not actually own it.
3. AFAIK student loan debt is not even discharageable in bankruptcy. (It is amazingly automatically discharged at time of death, but presumably private creditors are paid by the government when this happens, yet another subsidy).
4. The ridiculous overemphasis on credit scores, and how people are indoctrinated to constantly worry about them, and believe they will fail at life if they do not suck up to the rating companies.
5. People have been led to believe that failing to pay back a (good-faith-taken) loan is immoral, and that debts are absolute. Bankruptcy has been made to seem like a game-over death-equivalent where you've fallen off the path of a respectable life.
The systematic overemphasis on credit over assets has made it so that most people have a high monthly burn rate. Of course they take on more debt on non-capital expenses like new cars and further the cycle - they're no longer in control of their life, so they might as well enjoy what they can. Which then makes it so they always have to be working a full time job (and squirreling away a tiny amount with the idea of maybe not having to work when they're old and achy).
But this is happening concurrently with massive ongoing efficiency gains, so many of these jobs actually no longer need to be done! Due to a wider advertising/logistics reach, there are fewer market winners, thus less competition so companies have more surplus resources to employ these unnecessary people, who just end up being a detriment to the functioning of the organization. So with the current trends, we've got a future where robots are producing everything, but all the humans are essentially doing busywork (while completely stressed out as they believe they're not) just for access to the basic necessities of life.
EDIT - sorry, just checked it out, and yes it does. incredible :D this is it's way of supporting college education, by making money off of it?
Harvard could double its price, and still have no trouble filling every available seat. Same goes for the rest of the Ivy League, and also MIT, Stanford, Caltech, and other top non-public schools. How do your theories explain their costs being so much lower than what the market would bear?
Furthermore, these schools have been increasingly replacing loans with grants. Stanford has gone so far as to waive tuition for students whose families have income under $100k, and to also waive room and board for those whose families make under $60k. If you theories were correct, wouldn't Stanford be telling those students to get loans? That would make more money for Stanford.
Many of these top tier universities have endowments large enough that they don't need to collect tuition from the students. In fact, many of these universities allow free or reduced tuitions for low income students. (http://www.admissionsconsultants.com/college/ivy_league_fina...)
Here is the list of endowment per student: http://www.statisticbrain.com/college-endowment-rankings/
Here's the top 5 (per student) University Endowment / Student Endowment Total Enrollment
1 Princeton University $1,857,040 $14.05 billion 7,567
2 Yale University $1,436,384 $16.65 billion 11,593
3 Harvard University $1,304,492 $27.56 billion 21,125
4 Franklin W. Olin College of Engineering $1,096,595 $335.6 million 306
5 Pomona College $942,490 $1.46 billion 1,548
The motivation for alumni to contribute to the endowment after graduation is that the value of their degree is correlated to the ranking/reputation of the university. By contributing to the university, you not only help the university by help yourself.
So the economics for top tier universities are not similar to the rest of the colleges.
All those schools could surely fill their seats entirely if they doubled price tomorrow. But there would be a social backlash. They still consistently raise prices faster than inflation.
How many of Stanford's class of 2018 qualifies for that free room-and-board because the families are in the bottom half of families? Since financial aid is just price-discrimination, Stanford isn't leaving that much money on the table.
But most people have a hard time saying no to a fancier car, house, and more holidays.
Alternatively, if you can get as much money out of your rich students/the government as possible, that's more money for grants for superstars from poor backgrounds.
The problem isn't with fields like comp sci or history where people don't need a degree to work as professionals. The problem is with institutions with guilds like like American Bar Association and American Medical Association. You need a license to practice, and almost everyone only gets that after spending over $100,000 on accredited schools. (Are there exceptions?)
Soooo ... the price of education in every OTHER field will go down, but not med schools or law schools or other schools which prepare you for licensing.
I am a firm believer that basic medical insurance and education should be collectively bargained by the government. And we do - most libertarians and republican fiscal conservatives are clamoring for vouchers over public schools. But vouchers are the same kind of sigle payer system they find so distatesful in medical insurance. It's really funny, really! American political views, like many others, are influenced more by media rhetoric and culture than logic.
Basic education and medical safety nets are something everyone in civilized society has come to expect. I think this should extend to basic courses online such as MOOCs on history and other "core" curricula. The government should switch from subsidizing community colleges with professors teaching 50 students at a time and slowly shift to subsidizing online universities and MOOC initiatives. Colleges subsidized by the government should be required to invert their classroom and prepare students to learn online, instead of spending so much $$ on traditional formats from 100 years ago.
On the other hand how many doctors and lawyers do we need? We don't know. The market needs to determine this. If the government subsidizes THESE professions, it will distort the market.
Probably not. It is entirely possible that the shitload of money did improve standards of education and did benefit students, just not proportionally to the actual amount of money spent.
All of the above is incorrect.
(a) Student loans in the US are mostly not from the government in the first place, they are from private investors or banks that the schools have made deals with. The USG role is guaranteeing them.
(b) Generally, in classical capitalism, firms will go bankrupt if they don't get adequate returns on investment - but this situation has been distorted by the government guarantees. They get reimbursed if the debtor defaults, and carry on. By exploiting this subsidy they make big profits, that's why they're in it.
(c) I don't know about student-loan-borrower attitudes, but their debt and enforcement of it are not casual. The GSLs are not dischargeable in bankruptcy, so they are basically a lifelong burden unless paid off. And defaulters are subject to wage garnishment and other onerous court judgments.
As always with such schemes, there is an ongoing push to implement them in as complicated and opaque a fashion as possible, to try and hide the naked fact of what is going on. So no one will admit "we take money from taxpayers and make loans no sane private investor would ever consider," they'll just talk about FDCRP-approved rates this and Fannie Mae-that and fiduciary-backed iron bond multiplexing high-yield 7.5% rederived blahblahblah.
Same bullshit that happens when bank deposits are federally insured.
Your information is several years out of date. Prior to July 2010, the bulk of student loans were made through the Federal Family Education Loan Program (FFELP) which were as you describe. But that program was eliminated in the Health Care and Education Reconciliation Act of 2010. Since then all Stafford, Perkins, and PLUS loans (i.e. the lion's share of all student loans) are made directly by the federal government.
Only non-program student loans are no made by private banks, and they are not government guaranteed -- though they are still non-dischargeable in bankruptcy. Such loans only accounted for only around 5% of the total borrowed last year.
In addition, many of the loans issued privately prior to July 2010 made their way into the government's hands during the financial crisis, so that of all outstanding student loan debt around 85% of it is currently held by the government.
Refs: http://www.asa.org/policy/resources/stats/ http://febp.newamerica.net/background-analysis/federal-stude... http://files.consumerfinance.gov/f/201207_cfpb_Reports_Priva...
I must, however, take issue with your last sentence. That is, I agree education has benefits, but the current school/college system is hardly at all about education and mostly about potlatch: burning away some of the best years of your life in an attempt to obtain relative status. Sure, a college degree might improve your chances of getting a good job, but in most occupations that only means you got the job at someone else's expense; it's a negative sum game.
Proposed practical solution: outside fields like law and medicine (where college actually provides necessary training, albeit in a very inefficient way), make it illegal for hiring to discriminate on the basis of college degree.
http://www.econtalk.org/archives/2014/02/calomiris_and_h.htm...
Tuitions went up in the US because the govt has progressively withdrawn subsidies.
Student loans amounts grew to match. Also, student loan writing was privatized, and collections have been given real teeth.
I work in higher ed at a "public" university, which is quickly becoming a private institution, meaning that the admin is planning to be 100% tuition supported within a few years. So now we're "competing" for the best (highest tuition paying) students.
This is exactly the kind of bubble (price inflation running ahead of real value) that occurs when public goods are privatized.
What public goods are being privatized? Student loans? Universities?
Diploma Mills like University of Phoenix and a million other clones started flourishing as gov student loans became widely available. That is what you're competing with.
tl;dr - The better solution is probably no public loans or grants whatsoever.
1. People who cannot afford it are choosing very expensive universities.
2. The government is giving money away like candy, there is a definite bubble here because this money will be defaulted on. I know a professor at an art school who says his students easily get $150k to go study art. Many won't even get a degree with that money. Getting a degree or being on a path to get a degree in x years is not a requirement of getting the money. He says that these students will graduate and be lucky to go on to make $25-30k a year. That is pretty rough. This also drives tuition way up because schools know they can just charge more and the thanks to the govt. students and money will still funnel in by the truckload.
3. Students with student loan money live like rock stars. These are teenagers here. They suddenly have a bunch of money. do you thing that they are carefully considering that every dollar they spend will have to be paid back with interest? Teenagers... I have seen this over and over again personally. Luxury apartments, nice cars, buying, spending... "A part time job? are you kidding? who has time for that, I've got to focus on my party life.. Errrr studies".
How typical, someone complaining that education is so expensive and yet they are going to the most expensive school. This is ridiculous. This is like complaining that your Mercedes was too expensive when you could have bought a more reliable and efficient car for less money.
The article states that the average year at college today costs $18,497, yet this guy is going to rack up $400k in dept over 6 years? by my math that is $111k. This guy is spending 4 times the average and crying foul.
I personally know a dentist who worked part time all through school, he went to community college, state university, private grad/dental university and has the same diploma that this guy will have on his wall... The difference - the guy I know only had $40k in debt upon exiting school. He paid it off in two years (by the time he was 26). I'd say he did things the right way.