Student Debt is Challenging the Reason for Getting that Long Sought After College Degree
What has changed for many of the college educated is finding themselves in debt longer than their parents were after college, being penalized for having student debt when going to buy homes, cars, etc., and in the end having less wealth and a lower salary when compared to those without a college education.
One reader’s comment. “I’ve been meaning to write back, but a large number of days on the road takes precedence. I disagree about the relevance of my experience working endless shit jobs while living in crappy apartments and eating pb&j to pay back my loans. That said, I do respect your opinion, and I hope you continue to share your thoughts about how entirely fucked up our priorities are as a Nation when it comes to education.
As my father who is in his late sixties recently said to me “sorry your generation got screwed”, something I’m quite cognizant of as I lose twenty grand selling a home to pursue a career. In the meantime, time to bust some ass and take care of what is in our power to affect. Patrick “Ripping Off College Students Economic Future”
The argument for a college education has always been the earning potential the 4-year degree holder has as opposed to those without a 4-year college degree. As more and more students have trouble buying into the Middle Class with the degree they have earned because of the overwhelming debt, the value of a college education has come into question considering the debt load carried by college graduates. What has changed in the last decade is tuition increases outstripping the cost of healthcare, the decline in state support for colleges, and the increased use of credit cards, home equity, and retirement account borrowing to fund college education. What remains after the piece of paper is passed out at graduation day is debt remaining with the student into his thirties and sometimes well into their forties.
What we are seeing today has no precedence (precedent) in the history of education. The Cassandra’s of the world such as Dr. Elizabeth Warren warned of the “Coming Collapse of the Middle Class” with households not being able to get by or just barely scrapping by with a two earner income scenario. One illness or lost job could conceivably leave the family destitute unable to pay a student loan and also unable to discharge the student debt in bankruptcy. Student Loan Justice Org Alan Collinge speaks of his own as well as others battle with student loan debt. It is near to impossible to escape the long arm of student loan debt, which still makes a suitable profit even in default.
College debt has risen at twice the rate of mortgage and credit card debt since 2007. During that same period, the nation has gone through a dramatic economic shock leaving many without jobs or low paying jobs. Besides experiencing unemployment the population has also experienced housing value decreases, and loss of value in retirement funds. This loss of financial viability impacts students as the burden transfers from the host family to the student upon graduation The student lacks the ability to pay off the debt quickly, over time, or even discharge it through bankruptcy due to the lack of well paying jobs. Many turn to the fatal mistake of walking away from student loan debt.
“Labor market indicators give us some clues. Much has been made of the college wage premium, that is, the difference between incomes of college graduates versus non-college graduates. According to analyses of Census Bureau surveys, a bachelor’s degree recipient can expect to earn an average of $1 million more in lifetime income than a wage earner without a degree.
But behind that headline number is a more troubling trend. The growing gap between college graduates and others isn’t really due to rising starting wages for the average college graduate – it’s that the wages of those without a degree are falling rapidly. In fact, when accounting for inflation, young college graduates have found that starting wages are falling. “CFPB: Rohit Chopra Addresses Major Financial Issues tot the Federal Reserve Bank of St. Louis”
To repeat what Rohit Chopra testified to at the St. Louis Fed; the premium gained from a college education so many in Congress and economists have espoused as the biggest reason to get a college education has changed. The level of income gained has decreased in a similar manner as what has occurred with those lacking a college degree. While the $million dollar gap still exists between college grads and high school grads; the starting wages for college graduates has decreased when considering inflation and falling wages. Between 2000 and 2011, real wages for high school graduates dropped ~11% while it dropped ~5.4% for college graduates. So is there a Smillion gap in lifetime earnings if you get that college education? There still is; but, it is not worth as much as it was in previous decades. So what does this mean for future graduates?
~One in five households have student debt with the largest percentage, a record 44%, carried by Households under 35 years of age. Indeed the ratio of student debt to income has increased from 3.6% in 1989 to 21.9% in 2010 (PEW) for this same age group. In the chart, “Share of Outstanding Student Loan Debt Owed by Characteristics of the Household” the least wealthy bottom fourth or those whose net worth is less than $8,562 owed 58% of the outstanding student debt. “Households Owing Student Loan Debt at Record Levels”
The impact on the economy is only just starting to be felt as young college educated household are unable to spend on consumer goods and also that much desired goal “housing. Last year, Chairman Bernanke remarked: ‘lending to potential first-time homebuyers has dropped precipitously, even in parts of the country where unemployment rates and housing conditions are better than the national average. Indeed, the propensity of younger households – headed by adults aged 29 to 34 – to take out their first mortgage has been much lower recently than it was 10 years ago, a period well before the most recent run-up in home prices.’ Two weeks ago, Bernanke noted; student debt may be impacting the ability of many young people to buy their first home.”
With the decreased earnings of college graduates, the emergence of student loan debt in the 30 – 40 year old households (increasing from 1.1% student loan debt to household income in 1989 to 8.7% in 2010-PEW) who finished college 5 to 15 years earlier has become commonplace. Mind you, we are not talking about households with or chasing advanced degrees. These are households with two Bachelor’s degrees and debt totaling ~$52,000. The impact of a longer student loan debt cycle is seen by comparing those with student debt to those households without student debt; as Chopra remarked, 30 year olds with no history of student debt are more likely to have mortgage debt than those with student debt. A college education was supposed to increase the earning power of graduates as opposed to those without, surpassing the debt liability of the education and allowing graduates the ability to buy more in the economy. Not only has this changed, the impact on the housing market, as a “recent survey by the National Association of Realtors found 49 percent of respondents describe student debt as a ‘huge’ obstacle to affording a home.” Those with student loan debt have to put off for a longer period the purchase of a home.
Demos illustrated the impact of household student debt as compared to household with no student debt on household income in its study; “At What Cost; How Student Debt Reduces Lifetime Wealth.” The losses incurred from student debt outweigh the income increases. Again over time, the income of those without student debt surpass those with student debt.
And as Demos demonstrates also, those households with student loan debt suffer a similar fate in comparison to those with no student debt. The length of time taken to pay off student debt impacts the accumulation of asset compared to those households having no student debt. The impact only begins with students as it also ripples through a consumption led economy. “Average household debt fell from $105,000 in 2007 to $101,000 in 2010 (Pew Research Center, 2012). “Household Debt Levels” have declined because of a reduction in debt for residential real estate. In addition, debt tied to credit cards has also declined. Outstanding student loan debt has risen since 2007, and hence student debt as measured by the SCF has risen from 3% of total household debt in 2007 to 5% in 2010.”
The threat to a college student’s future is not Social Security or Medicare expenditures as Stanley Druckenmiller promotes in his Generation Equity College Campus Tours. The real threat to a college student obtaining that ticket to the middle class can be seen in uncontrolled and increasing college costs, decreasing state aid to colleges resulting in rising tuition and subsequent student debt , fewer well paying jobs, and decreased earnings after college. As shown by Demos in both graphs, those without student loan debt appear to come out financially better over the years. While average household debt decreased from 2007 to 2010, student loan debt has increased “If current borrowing patterns continue, student debt levels will reach $2 trillion in 2025 (PEW)” and more student loan defaults.
References:
– Prepared Remarks by Rohit Chopra Before the Federal Reserve Bank of St. Louis; http://www.consumerfinance.gov/newsroom/student-loan-ombudsman-rohit-chopra-before-the-federal-reserve-bank-of-st-louis/
– The Coming Collapse of The Middle Class; Dr. Elizabeth Warren; http://www.soyouthinkyoucaninvest.com/2009/04/elizabeth-warren-coming-collapse-of.html
– At What Cost; How Student Debt Reduces Lifetime Wealth; Demos, Robert Hilton Smith; http://www.demos.org/what-cost-how-student-debt-reduces-lifetime-wealth
– Student Loan Justice Organization; Alan Collinge; http://studentloanjustice.org/
– Households owing student loan debts at record levels http://www.pewresearch.org/fact-tank/2013/07/01/248455/
IMHO it all comes down to increasing income inequality as the elites take more and more of the economic pie there is a rising inability of families to educate their children which absent winning the lottery or having a special talent is the only chance children have of joining the elite or unfortunately even staying in the middle class. This is not accidental and can even be seen in the attacks being waged on public education through high school. It is also indicative of the last gasps of capitalism. Pigs get fat, hogs get slaughtered.
A superb post Bill.
For those it may help: Income-Based Repayment:
http://www.tgslc.org/borrowers/repay/ibr.cfm
Partial contents below:
How do I qualify?
You must meet certain criteria in order to qualify for IBR. You can use TG’s IBR calculator to help you determine if you may be eligible for this program. If it appears that you are eligible, the calculator will provide you an estimated monthly payment amount under IBR.
What kinds of loans are eligible for IBR?
IBR is only available for federal student loans, such as the Stafford, Grad PLUS, and certain Consolidation loans. It is not available for Parent PLUS loans, Consolidation loans that include Parent PLUS loans, non-federal student loans, or defaulted loans.
How long is the repayment term for loans under the IBR plan?
The repayment term for loans paid under the IBR plan may extend up to 25 years. Any outstanding principal and interest still owed after 25 years of qualifying payments will be forgiven and may be taxable.
Denis:
Thank you for putting that up. It is something I have consoled others on and have helped them apply for on several occasions. The IBR is a long range solution; but, it only forestalls default and does not solve the overall problem for students coming out of college with an average $26,000 of debt. We need to take a longer range view of financing college and find equitable solutions for it.
The answer to student loan debt and health care and crime and everything else is ultimately to be found in re-unionizing — AND NOTHING ELSE.
The “elite”, the 1% are not conspiring to get rich off the McDonald’s workers’ backs. They are just taking advantage of the market mechanism available to them. We’d do the same in their place.
The only MECHANICALLY WORKABLE re-unionizing — or just plain unionizing — mechanism that can end the race to the bottom (and does so everywhere around the world it is in use — for over half a century) is legally mandated, centralized bargaining — wherein everyone working the same occupation (e.g., retail clerk) in the same geo locale (whole country for airlines) works under one commonly negotiated contract. When are we going to start talking up the (mechanical) possibility (and workability) of this widely used (e.g., French Canada) institution people?
The Teamsters Union has its own private version: its National Master Agreement. For a year (before my back quit on me) I was a simple Gimble’s department store furniture warehouseman — pushing and shoving furniture — a member of local 804 (Ron Carey, local president). Some years back I head they had raised their defined defined retirement benefit from $3300 a month to $3600 (the union owns the securities so the retirement fund can’t go “out of business”).
These days I am reading how regional airline pilots (about half of airline pilots) spend a quarter million dollars (a lot of which is building up hours in rentals) and ten years to get to poverty level jobs. A couple of years back, major Northwest airline squished a billion dollars in givebacks out of its flight crews only to turn around a year later and gave a billion dollars in bonuses to 1000 execs.
Why can’t the Dems toast the crazy Repubs at the polls? Because they never offer anything anybody can get worked up about. Just push the SIMPLE, SALABLE labor market remedies (including $15 an hour minimum wage) watch the Dems take over (supermarket workers and airline employees would kill for centralized bargaining).
50% of the workforce wants to be in unions now. Imagine their enthusiasm for a perfect labor market bargaining system brought to us by post WWII continental industrialists (not Marx) to keep labor from going on a “race to the top.”
******************
Great post here too. I am saving it for future reference.
Denis:
Our representatives are not populists. This is the government of TBTF, investment firms, and the Koch Brothers.
College should be affordable for everyone that qualifies to go. It was in the 60’s and it can be now. We should be educating our youth. A longer range view of financing is not the solution. A college education should not have to be financed. The paybacks are the benefits that we, as a society, gain from an educated population.
Jerry:
I would agree with that statement and us older folk need more successful taxpayers to float this country going into the future.
run75441,
IBR comes with a potentially nasty kicker: 25 years out, when the debt is forgiven, the IRS expects you to pay tax on the forgiven part. Hopefully we will get the country straightened out before then. 🙂
Denis:
There is one other way. Disqualify them from ever receiving the loan. For example if they become disabled, go to prison, etc. .
thanks Run
it was crossing my mind while some folks here at AB were talking about the Fed’s failure to end the recession (high unemployment) with jawboning or actual interest policy… that they were not considering the effect of student debt.
add this to mortgage fraud (by the banks) and the driving down of wages
and it’s a little hard to see how cutting interest is going to stimulate the economy.
come to think of it, it’s hard to see how cutting interest gives us retirees who depend on interest an incentive to go out and spend.
coberly:
The cost of going to college has increased at a faster rate than the cost of healthcare (Alan Collinge). Most nonprofit schools have little incentive to rein in the raising cost of an education. What has happened is Direct Loans (government lending) has started to assess colleges for the level of default. If the college has a certain level of default, the college becomes ineligible for government student loan funding. It does not take care of the rising cost.
Denis
just to be sure
say i buy a chair for 500 dollars. i make payments. after paying 300 dollars, the seller says “since you are such a good person, i have decided to sell the chair to you for only 300 dollars.
now you are saying IRS comes in and demands i pay taxes on the 200 dollar “gift”?
this is sick.
i paid 300 dollars for the chair. no gift was involved. the internal negotiations (and timing) of the final price is literally nobody’s business buy mine and the seller.
i suppose next that if I, the seller of chairs, sell a chair for 300 dollars, the IRS will come in and tell me i could have sold that chair for 500 dollars, and demand i pay tax on the 500 dollar “income.”
critter
even in the sixties college was pretty much a cattle drive and when i taught in the seventies it was even more so. the kids new it. they hated it. but they had no where else to go.
college stopped being about freeing the human soul a long time ago. it became a way to keep the kids off the street (not “unemployed) and a way to save the companies the cost of training their workers.
i like the idea of college… the way it was in the fairy tale days of yore. i am not so sure it is the right thing for everyone. and when either it IS the right thing for everyone, or it goes back to being the right thing for those who a particularly suited to the academic life (and not good for much else), then we can find a way to pay for it.
meanwhile i won’t beat up the kids and insist they must stay in school or die. which is what we have today.
they need “somewhere else to go.”
Coberly,
Tell it to the judge. 🙁
People who get some bank mortgage forgiveness under some program (forget) get socked by the IRS the same way.
Come to think of it, unless you make your whole income by gambling, the IRS is not interested in how much you lost in 6 days at the casino, but only the one day you won.
Denis:
Yes it “may” show up as income; however, it may be taxable at the 15% level which is far less than the debilitating debt payments on a monthly basis. The IRS Is pretty good about waiting for their money which is a fraction of the total loan.
Coberly,
I never meant to suggest that college was for everyone.
I went through college in the 60’s and early 70’s, including several years of graduate school and never accumulated one cent in educational debt. No way I could do that today.
Most Universities are state entities. Perhaps state mandated price controls are the answer along with getting THE BANKERS out of the equation.
Dennis, I agree with your statement that forgiveness of debt is income, but I thought you could offset legal gambling losses against gambling winnings even if you have a day job–admittedly you can not offset those losses against non gambling income.
Critter
and i didn’t really mean to suggest that college should NOT be for everyone. but it would have to be a radically different place from the ones i went to if it wasn’t just going to be a cattle drive and warehousing at high cost to the cattle.
i’m just trying to suggest that the panic to “go to college” may need to be reconsidered:
if it doesn’t lead to a good job, it may not be worth “it” to many or most people. if those same people can otherwise get a good job, “college” might be a good place to learn stuff that enhances quality of life. whatever that is.
when i was there for every kid who enjoyed “academics” of one kind or another, there were ten who would have been happier bucking hay… if only the money was good.
i don’t think “the man with the hoe” is the ideal we as a society ought to be striving for, but we as consumers of education under the current state of things might want to think carefully before demanding our “right” to go to college and be treated bad, getting an “education” we don’t want, for a job that won’t exist.
thing i’m struggling to say is the economics of the situation is begiining to look like medicare: pay or die.
“medical care” not “medicare.”
Terry,
No; I studied the subject pretty thoroughly when I thought I was going to make money playing poker on line (after 3 years it looks like that is finally in sight — nothing to move out of the neighborhood with :-)), and the bad news seems pretty universally understood — if damnable.
There is much more to education than simply getting a job.
Denis, Unfortunately, it has always been a purely theoretical issue for me because I have never won enough to have it reported to the IRS anyway. And Jerry, I agree that there is an awful lot more to education than getting a job and would point to being interested and engaged in this blog as one of them. That does not mean that one needs to go to college to be interested or engaged in this blog, but I am guessing that the majority of regular readers/posters are college educated and that reading/posting is not part of their jobs.
I see on Raw Story a Detroit Free Press article concerning Michigan Universities giving out a plan for deferred tuition. A “go now pay later NO INTEREST” plan.
Mike:
I had not seen the Detroit story; but, the interest rate is only part of the problem. Jason Delisle of the New America Foundation, Jason Richwine of Heritage and the CBO’s Douglas Elmendorf have all advocated for the Fair Market Valuation of student loans. Fair Market Valuation is a methodology used to assess capital investments which I have used for the return on equipment or plant. It uses cost of money and risk as the primary assessment of the investment. This would make sense for this type of investment as customer demand could fall, recessions could hit, a company could go bankrupt, or a new innovation could make the investment obsolete.
Student loans are not in the same category of risk as the Jasons and Elmendorf wish to assess them. Student loans make money for the lenders even in default and as high as a $1.20 return on $1.00 loaned. A student loan is like a roach motel, you can check -in with your signature; but, you can not easily check out for at least the next 25 years. Student Loans make more money in default than in payment. Lenders see no reason to offer a solution and neither do those in Congress who support banks.
http://www.alliancebernstein.com/CmsObjectCDC/PDF/AB_CDC_PRWhycantJohnny.pdf
This article with survey results from a large investment manager is clearly serving the interests of the manager, which is trying to convince parents to save more, but there are some disturbing findings:
“Yet, among parents planning to contribute to their childrens education, the amount the typical parent plans to save for college is likely to cover 23% of their childrens undergraduate expenses. . .
“Nearly all parents surveyed (95%) intend to help their kids pay for college, and 41% plan to cover all of their childrens college expenses.. . .
“Of those who intend to fund at least some of their childrens higher education, most have spent more money on entertainment and/or discretionary purchases in the past year than they have saved for their childrens college costs. Specifically:
• 58% have spent more on eating out or ordering take-out;
• 49% have spent more on vacations;
• 38% have spent more on consumer electronics. . . .
“Almost three-quarters of parents (74%) admit they could be saving significantly more for their childrens education if they limited money spent on traveling, entertainment, electronics and impulse purchases. Two-thirds acknowledge that by reducing their discretionary spending on items such as toys, clothes and entertainment for their children, they would be able to save much more for their college educations.”
Jed:
I do not have much time to comment; but as “we” (except for PT who lives in another economic dimension) all know the household median income has been stagnant or falling for most citizens with only those in the upper 10% (>$180,000) of income seeing an increase. The richest 1% in income were saved by Bush’s 2001/2003 tax cuts as 31% of the total cut was skewed heavily to them. Median Household Income is ~$50,000 now? How much could they save? There are a couple of studies out there which I have read and have to find so I will answer more tomorrow.
Run75441: THANX, I didn’t know that. I look at the problem as INTEREST PAID being the benefits to society of having an educated populace, thus the reason for getting THE BANKERS out of the situation. As YOU have correctly stated BANKERS&CONGRESS will never go for that kind of thinking.
Run –
should’ve included this in the snippets I cut/paste:
“Parents participating in the poll had at least one child under the age of 18 who they identified as likely to attend college and household incomes of $50,000 or more. . . .
“The majority of parents surveyed accurately estimated or overestimated current public and private college costs, and many had a good handle on the rate at which these costs are increasing.”
These are not median household income earners and they weren’t blindsided by the cost of college.
As to your question of “how much could they save?” read my comment again – they spend money on discretionary items. So, since they view their spending as fungible, by advocating that the wealthy via higher taxation to subsidize higher education costs, you’re essentially asking the wealthy to finance peoples vacations, home theater systems, and Olive Garden meals.
Jed:
~$50,000 is Household median income.
Jared Bernstein (EPI at the time) wrote this: “What we need to get by” (A basic standard of living costs $48,778 and nearly a third of families fall short). http://www.epi.org/publication/bp224/ July 2008
– On average nationwide, working families with two parents and two children require an income of $48,778 to meet the family budget. In major urban areas, expenses for this four-person family range from $42,106 in Oklahoma City to $71,913 in Nassau/Suffolk, N.Y.; families in small towns and rural areas start from a low of $35,733 in Marshall County, Miss. to $73,345 in Nantucket and Dukes Counties, Mass.
– Much of the regional variation in family budgets is pushed by price differences in just a few items: housing, health care, and child care.
– Young families, families with a low degree of education, and minority families face substantially greater difficulties meeting the economic standards set out by these budgets.
– Over three times as many families fall below family budget thresholds as fall below the official poverty line.
I do not see much room in this plus it varies according to where you live.
To your claim of my asking the wealthy to subsidize education for others, my answer is nonsense. The 99 percenters subsidized the 1 percenters with the 2001/2003/2006 tax breaks to a tune a $trillion or enough to payoff the $1 trillion in student debt. The study you cite, even you admitted it may have flaws in it. The 1 percenters saw their incomes drop in 2002 and from then on, their incomes only grew while everyone else saw cuts in income or stagnation. Main street pulled the 1 percenters fat out of the fire in 2008 when Wall Street collapsed. Who are you kidding about subsidies.
I know that $50,000 is median income. If you do a survey and restrict it to those with household incomes of $50,000 or more, your survey population, by definition has a higher median income than the national median.
So even if I concede that the wealthy received $1 tn as a result of lower tax rates than what they would have paid if tax rates hadn’t been changed, how is that a subsidy to them from the middle class? Neither middle class tax rates nor interest rates increased, so where is the subsidy?
And how exactly did main street save 1%-ers in 2008? TARP was paid off by Wall Street; the conservative paragon, Bill Maher was arguing on his show just a few weeks ago that sometimes bailouts work. Again, neither middle class tax rates nor interest rates increased. That conservative paragon Paul Krugman has been arguing for years that fiscal policy needed to be even looser than it has been.
Jed:
Ok, so what on the $60,000 for people with kids at 18! The EPI study I cited suggests it takes ~$49,000 to get by in 2008. The amount varies by region of the US. I can tell you with confidence, one can qualify for the CHIP Medical Program for children under 18 in New Jersey with an income of ~$80,000 which would suggest you need more to get by in NJ. Those costs did not stagnant.
And if you made $60,000 annually and had 1 child, you could possibly get by; but with two going to college it gets a tad more difficult. FAFSA does not give you much of an allowance with two in college as I well found out. Than have one graduate and another start.
Seriously Jed? Interest rates did not increase. I do not remember Direct Loan student loan interest rates dropping to a level close to the Fed rates neither do I remember credit card rates dropping from 18% for most people. If you were a part of the layoffs or the buy out, one did not get a job at the same salary. If you were fortunate enough to keep a job, increases and bonuses went to zip. Income dropped for the middle classes or stagnated.
Tarp was paid off, well bully for them as they should have never needed it. Main Street did pay Jed. Participation Rate pre-collapse was ~66% and what is it today? 63%. One could say much of this is due to baby-boomers retiring. Not true totally as those in their sixties are working longer. In any case that is a 4% difference in the percentage of the non-Institution Civilian Population in the Civilian Labor Force. Knock 1% off for retirees, etc. and you still have in excess of 4.5 million who are sitting around. We did not even look at U3 yet. That is how Main Street paid.
Median household income for families with children under 18 years is around $60,000.
http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ACS_12_1YR_S1903&prodType=table
85 Billion per month QE IS what paid off TARP, money is fungible. QE buys T-Bills. T-Bills are an instrument of TREASURY DEBT=TAXPAYER DEBT. Once QE ends then Wallstreet will bleed out and die. Toxic assets are rat poison.
Its insurance, folks. AIG insured the whole ball of wax and they don’t have the hundreds of trillions of dollars to cover it. The Fed is trying to hold up but the presses are running low on ink.
@M. Jed I don’t think you understand how quickly the price of college (all types) has increased over the years. See this graph:
http://gunsandbullets.files.wordpress.com/2010/06/total-college-costs-as-a-percentage-of-household-income.png
I can probably dig up a more credible source if pressed to, but this graph is by and large accurate.
Your claims may have been true 30 years ago, but inflation has overwhelmed the middle class wrt higher education.
There are also a plethora of other costs that have inflated well faster than the CPI, while middle income has stagnated. (ie healthcare, energy, housing), that have eaten away at disposable income.
Any claims that today, a typical middle income family can afford to pay the average cost of college for even one child, are simply false.
Jed
i think you may be missing the point, which i took to be that college is no longer worth the cost in terms of expected higher lifetime earnings.
i personally don’t think it was ever worth the cost for at least many “students” who were not given useful guidance and ended up dropping out either entirely or for long enough times that the low wages they earned while “in school” never really made up for the higher wages they might have earned if they weren’t chasing the chimera of “education.”
oddly enough, i “believe in” education, but not the factory system i saw as student and teacher. And given the “stay in school or die” propaganda vs the reality, I think we need to recognize that it’s not a bargain, and serves only to mask what is really a much, much higher unemployment problem.
put simply, time was when “education” was part of “national defense” (the national defense education act).
now we don’t need educated citizens because india and china are doing such a good job of educating theirs. so we shift the cost of education from “the government” to “the students” on the idea that it’s such a good deal for them. only it isn’t.
so there is an example of lower taxes being paid for by the poor.
jed’s basic fallacy… the fallacy of the rich
is that “it’s our money. we earned it. paying taxes is a kind of theft.”
this is a fallacy because the rich “earned” their money thanks to the “community of workers and government” they find themselves in… i do not overlook their own contribution, at least that of the honest rich.
but they could not earn so much if the people were poor… as they are becoming. and they won’t earn so much if the government is not honest, or concerned about “the general welfare” as they seem determined to make it… to save taxes, of course.
i did not notice the rich suffering when “the government” paid for educating the people.
Alan,
I had a guest post on AB a few years ago about discretionary income: http://angrybearblog.strategydemo.com/2007/11/m-jed-looks-at-findings-on.html
As one would expect, higher income households have more. But what was interesting about the findings: (1) more families had discretionary income, and (2) the gap was narrowing between non-high income households and high income households, where the ratio was 2.7x for data collected in 2006 vs more than 3x in 2003/2004 and 1997/1998.
coberly,
if the cost of educating people was going up at the same rate as “the cost of education”, I’d be more inclined to agree with you. but what you have at higher education institutions is akin to an arms race of who can provide the most attractive athletic centers, living spaces, dining halls, and uniqueness (and of questionable educational value) course offerings. And you’ve got a proliferation of administrators who add nothing to the mission of educating students. You’ve also got a proliferation of students majoring in social sciences relative to STEM fields.
On top of that you’ve got a higher education industry that has become just as rentier and corporatist as the worst of the nightmares of the Occupy Wall Street crowd that charges rack rates to foreign students and the wealthy seeking brand approval while lobbying legislators (and alumni) for increased gov’t subsidies (and endowment) to bridge the gap between the rack rate and what is reasonable for the masses to actually pay, highers cheap but plentiful labor in the form of adjunct professors, while maintaining plush and well compensated jobs for the “C-suite” administrators.
As for affordability and higher lifetime earnings – from a pure economic theory view of the world, the price/cost of any investment will increase until it reaches an equilibrium with the next best alternative. As a head of one of these institutions it seems economically rational to raise tuition until you reached an equilibrium point between “investing in education” and “investing in the next best alternative”
jed
this being a blog i am going to beat up on you for a moment. don’t take it personally. as far as i can tell you are a reasonably fair and reasonably intelligent person. but you represent a class of people (that’s a mathematical class not a class war class) who think only in terms of cash at the cash register exchanges… a fairly primitive, if not law of the jungle… person to person transaction with no understanding of the big picture or long run… and no interest in it. after all the average lion does not concern himself with the effect on the environment of eating too many zebras. nor does the average bull concern himself with the consequences to his race of killing all of his rivals.
what “the rich” do not understand is that in what they call a capitalist or free enterprise economy money inevitably drifts into the hands of those who, naturally, are called “the rich.” they don’t understand that if the money stays in those hands the circumstances that allowed them to become rich disappear. their ability to make money depends ultimately on a reasonably healthy population of “poor” (that means the poor are not desperately poor… even if only in their own imaginations)… and a reasonably honest and well functioning government. this means that part of the money they “earn” must be returned to the “general welfare”, not by the free enterprise mechanism, but by “taxes.”
the poor cannot pay taxes because they don’t have the money. so it is up to the “rich” to provide the money that keeps the free enterprise system healthy. not paying (a reasonable level of) taxes is like trying to save money by not changing the oil in your Mercedes.
But the rich can no more understand this than that bull can understand that if he makes the rules, his life will become poorer and shorter.
i am all for the rich. i am even all for paying them generously for the work we need them to do. i am not all for letting them make the rules.
nor, to be fair, am i all for letting MItt’s 47 percenters make the rules…. they are not 47% of workers, maybe not even two percent, but they do see themselves as victims and don’t want to be responsible for themselves…. to be fair they are not capable of the latter, but we need them, and decency requires that we teach them to be useful, or take care of them if we can’t. nor i am all for letting the professors make the rules. they get things like “regressive tax” stuck in their brains and can’t think their way out of the verbal traps they lay for themselves….
so, i ramble. point here is: if you can, try to think outside your own particular box. if you can’t, well hope that “checks and balances” will save you. it’s not looking good from here.
Jed
re your last comment re colleges as rentiers… i couldn’t agree with you more.
also about the “purely economic” inevitability of it all.
that’s why i argue against pure economics.
and also against pure states… i went to school in a time when the economics of education was closer to pure state than to pure economics. it was still a cattle drive.
i am trying to argue here that people need to take a breath, step back, and try to think through what’s going on without stopping at their favorite “words to live by.”
@Jed I will look at your article now, but any supposed increase in discretionary income that a study might find with median income households would be explainable by the fact that instead of purchasing items like college educations (as was done in the past), families are now borrowing up to their eyeballs instead. That is in no way a good thing.
But regardless of your claim, the fact is that the cost of college has risen as I stated previously, such that NO median income household would be able to afford that cost today without taking out major student loans to do so.
The colleges have taken massive advantage of this student loan cash cow to the great harm of their students. To fail to acknowledge this is to grossly neglect the public/community responsibilities and duties that come with being a college president.
coberly, I’ll take your criticism with what I assume were good intentions and I generally enjoy our back & forth.
I will point out that “fresh water” economic thinking in the comment section here is under represented. Maybe that’s what the community of commenters here prefer. But there’s no shortage of commenters who agree with the premise of most of the original posts here, so for me to caveat every comment with acknowledging validity of aspects to the original post seems a little overkill.
Jed:
You could always write a post and present it to Dan. I am sure he would present it on Angry Bear. Ball is in your court to do the Fresh Water economics. Put up . . . By the way, you owe Alan an answer.
Run,
As noted above, I’ve written posts before (in fact, I think through “cactus”, I was the first guest poster at AB). AB identifies as “left of center” and that’s fine by me; I no longer seek front page representation. Most of the guest posts I’ve written were either in direct response to extended discussions, required a format larger than a comment (if memory serves, comments used to get cut off after too many characters) or presentation of factual results, like the Discretionary Income post, that were also relevant to then-current discussion topics.
As for owing Alan an answer, the Conference Board defines discretionary income as income that is above median expenditure levels for similar households; so his first assertion is wrong. As for his second point, without being overly crass, who cares? No median income family can pay cash for a house either and the return on investment for education has been much higher than return on home ownership (even pre-crisis). As for his third point, I agree. Student loan availability has been taken advantage of by colleges in the rate at which they’ve grown tuition, which is why increasing student loan availability and/or government subsidies is a fruitless exercise, as the universities will capture all of the increase with very little of the benefit impacting the intended recipients.
@Jed My first assertion, that a median household cannot afford to pay the cost of an average college education is not wrong. Citing increasing disposable income does not make this so.
My second assertion, that any increase in disposable income is likely due to a (much larger) increase in debt, like student loan debt you apparently agree with, but ask “Who Cares?” and cite a high ROI resulting from going to college. I’m glad you point to this often cited claim.
First, the ROI claims cited by you and elsewhere are logically fallacious. Just because you poll a group of people,and find higher earnings among the college educated group does not prove causality. We could poll the same group and find that those who had sailing lessons, or polo lessons would have far higher earnings, I suspect, than the college educated group. Should I rush out and invest in sailing or Polo Lessons, then? Of course not!
While I suspect that there is an earnings benefit associated with college education, I think on average it isn’t nearly as high as cheerleaders like the College Board would have us believe.
Who cares? about twenty million households (or more) who are saddled with unmanageable, predatory student loan debt for which they did not benefit financially, and from schools that greatly overcharged for the experience.
Another group that cares- or at least should care about the inflation that the lending system has enabled (generally) are moderately wealthy families who must pay out of pocket, full boat, for their kids to go to college. While someone making $50,000 per month (like a college president, for example) may be able to write that check, a family “eeking by” on, say only $15,000 per month may or may not be able to write that check. Some of the best conversations I have had have been with people in this demographic, actually.
If there is to be a lending system going forward, the government must exercise real, heartfelt diligence in matching loan limits to actual value (in some fashion). The most obvious and natural way to achieve this is by returning the standard consumer protections, like bankruptcy protections, to the debt.
Only in this way will we see a stabilization of the lending system (which is about to be rejected by the public btw), a rationalization of college prices, and at least enough oversight from the government necessary to kick out the obviously horrible schools from the lending program.
maybe I had numbers misaligned.
i agree with your first assertion as cited in your most recent comment – tuitions have increased at a rate substantially greater than inflation such that a median family cannot finance a average college education out of their income stream. That does not make it “unaffordable”. The average tuition and fees at a public 4 year college is around $9,000, or for all four years, about 15% more than the average price of a new car.
The second assertion, that increased student debt loads have increased disposable income for the median family is specious on several fronts: (a) the percentage of 18-24 year olds in college has never been above 50%, so the median family has never had to put their children through college, (b) if increased disposable income came as a result of a preference shift between using debt versus income/liquid assets and as a result current spend decreased then that’s a choice made by the individual – the only way debt is a problem is if these families increased their debt load and still are spending the same amount as previously.
As for, ” twenty million households (or more) who are saddled with unmanageable, predatory student loan debt for which they did not benefit financially, and from schools that greatly overcharged for the experience. ” explain to me how this is the fault of the school. These are adults that are signing the loan documents, right? Parents co-signing for their adult children? This is predatory how exactly? Exploding offers? Teaser rates? Fine print?
As for the families earning $180,000 annually not being able to write a check for tuition – fine they can’t pay out of their annual income. But you’re basically asking for subsidies for the top 5% of household incomes. And if these people can’t afford to save $40,000 per child off of that income, then there’s something seriously wrong with their lifestyle, which goes back to the article I posted above – they’re probably spending too much on leisure and entertainment, so spare me the sob story.
And if you want to see usurious rates attached to student loans, reinstating bankruptcy protection is a great way to start. Lenders kind of like to be paid back for their loans. If they fear they can’t get paid back, they kind of like to have collateral they can repossess. It’s a little difficult to repossess an education, even if the education is in basket weaving or beer funneling, so the lenders will charge a rate commensurate with the risk of increased bankruptcies.
You say:
“…I agree with your first assertion as cited in your most recent comment – tuitions have increased at a rate substantially greater than inflation such that a median family cannot finance a average college education out of their income stream. That does not make it “unaffordable”. The average tuition and fees at a public 4 year college is around $9,000, or for all four years, about 15% more than the average price of a new car.”
>>First of all, “affordability” is a slick word, easily stretched to fit almost any situation. Turn the cost of college into a loan, stretch out repayment over long enough term, and anyone can “afford” it. The truth, however, is that over the course of repayment, the borrower finds it necessary to sacrifice important resources, like savings, like retirement, healthcare, and other critical items…and looking at savings rates, and their decline over the years, and other relevant data, its clear that this is happening. Not to mention, the “buy now, pay later” mentality has enabled the colleges to jack their tuitions like never before seen.
Second, your “new car” analysis is faulty. you fail to add in the cost of room and board. Neglecting board, the cost of housing is about $5000 per yer at the low end. Moreover, the average time to graduate is now about 5 years, not four. So we are talking about a REAL cost of something like double what you claim.
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The second assertion, that increased student debt loads have increased disposable income for the median family is specious on several fronts: (a) the percentage of 18-24 year olds in college has never been above 50%, so the median family has never had to put their children through college, (b) if increased disposable income came as a result of a preference shift between using debt versus income/liquid assets and as a result current spend decreased then that’s a choice made by the individual – the only way debt is a problem is if these families increased their debt load and still are spending the same amount as previously.
>>By your own logic, the median family’s disposable income is not directly applicable here, since only half are putting kids through college. As such, the half of median families that ARE putting kids through college may well have far less disposable income than those that aren’t…they may well be bringing the average down. So when throwing around words like “specious”, I think your claim is at least as culpable as mine. Come back when you have more relevant data, and I’m happy to engage further on this important question.
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As for, ” twenty million households (or more) who are saddled with unmanageable, predatory student loan debt for which they did not benefit financially, and from schools that greatly overcharged for the experience. ” explain to me how this is the fault of the school. These are adults that are signing the loan documents, right? Parents co-signing for their adult children? This is predatory how exactly? Exploding offers? Teaser rates? Fine print?
>>Let’s cut the bullshit. First of all, It is the COLLEGES, NOT THE STUDENTS OR THEIR FAMILIES who are raising prices. Second- and more importantly- the students are ALMOST NEVER told that these loan instruments have no bankruptcy protections, no statutes of limitations, and they are NEVER told the true default rates for the loans. Nor are they made aware of the uniquely predatory financial incentives that make defaults more profitable than healthy loans for the lending side.
To piggy back on your “new car” analogy: suppose you buy a brand new car, and two blocks from the dealership, as you are driving your new car, you cause a serious accident because the car has no brakes. You go back to the dealership, and the salesman says “sorry buddy. This car doesn’t come with brakes. You should have read the manual before buying it.” How would you feel? Suppose, further, that you found out later that the dealership had actually taken out an insurance policy AGAINST you, that paid them handsomely in the event of an accident. Would you suck it up, and keep making your car payments? No. You wouldn’t. You’d be on the phone with the State Attorney General’s office within minutes, I suspect, and would not rest until you got your money back, and the dealership recompensed you for the trouble, or even went to jail.
With every new revelation of corruption, with ever tuition hike, the colleges are looking more and more like car salesmen, I would say. Be careful, because community respect is the only thing that you people really have going for you. Lose that, and you lose everything, friend.
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As for the families earning $180,000 annually not being able to write a check for tuition – fine they can’t pay out of their annual income. But you’re basically asking for subsidies for the top 5% of household incomes. And if these people can’t afford to save $40,000 per child off of that income, then there’s something seriously wrong with their lifestyle, which goes back to the article I posted above – they’re probably spending too much on leisure and entertainment, so spare me the sob story.
>>No sob story here. I’ve lived off about $1000/month in donations for over four years, now. I’ve no sob story to tell on behalf of the moderately wealthy. But you asked “Who Cares?”, and I’m tellling you. It’s not just the poor people and the middle class, anymore.
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And if you want to see usurious rates attached to student loans, reinstating bankruptcy protection is a great way to start. Lenders kind of like to be paid back for their loans. If they fear they can’t get paid back, they kind of like to have collateral they can repossess. It’s a little difficult to repossess an education, even if the education is in basket weaving or beer funneling, so the lenders will charge a rate commensurate with the risk of increased bankruptcies.
>>Do you work for a college, or a bank? This fear-mongering, threatening rhetoric is precisely the same garbage spewed by the banking lobbyists. My answer…GOOD. Let the private lenders jack use the return of bankruptcy protections as a cheap excuse to jack their interest rates. BETTER YET, let them pull out of the market ALTOGETHER. That would force the colleges to lower their prices to rational levels. That is how the “invisible hand” can and should work. Adam Smith himself would be the first to assert that bankruptcy protections are a critical, and even essential free-market mechanism that must be in place to have a good faithed, rationally prices, stable, functional lending system. Take it away, and (as we are seeing now), things go bad. Keep it away, and as we will see in the near future, things will get much, much worse.
As an aside: I was at USC during the LA RIOTS. I know what happens when a community turns against something as a result of injustice (whether real of perceived). While the entire area burned to the ground (the destruction rate among businesses in nearly every neighborhood was about 95%), the university remained, almost magically, untouched. It was really quite incredible to see, actually. This is different. The universities get no pass on this one. In fact, I’d say they are #1 on the shitlist for many. Don’t think for a moment that you are innoculated against the will of the people. You aren’t.