News Section: Opinion
When College Becomes a Risky Investment
There was much talk this week about student loans and their subsidized interest rates. However, the more immediate problem in higher education might be its staggering inflation and inability to adapt to a rapidly-changing global economy.
Much is made of historical data that demonstrates a dramatic lifetime-earning advantage for college graduates; and that in our current economy, those with college degrees are twice as likely to be employed. But when the alarming unemployment and underemployment figures of recent college graduates are factored against increases in tuition and fees that have grossly outpaced normal inflation for more than three decades, it is time to start asking when a college education will no longer be a prudent financial investment.
Right now, one in two recent college grads are unemployed, while more than half of those who are working toil in jobs that do not require their degree. To make matters worse, median starting income with a bachelor’s degree has fallen 10 percent in just two years. Still, college costs continue to skyrocket, especially at public universities that are losing funding from battered state budgets. So across the workforce, people with college degrees are still fairing better, but it is important to note that those who have graduated most recently are arguably fairing the worst, when you consider not only their employment and earnings data, but the mountain of debt they've accumulated to get degrees that were considerably more expensive (even when adjusted for inflation) than those of college-educated workers in their 30's and 40's.
Much of the recent debate about higher-education has focused on access, and providing routes for as many young Americans as possible to attain a degree. But we should be looking more at total costs and the realistic opportunities for that investment to pay off, whether or not a prospective student is able to secure enough financing. Even at low interest rates, the costs and the amounts being borrowed to meet them are staggering. In the early 90's, less than half of college students were borrowing anything to finance their college education, while today, 2/3 of students are taking out loans. According to Federal Reserve data, the average amount borrowed has climbed to over $23,000 for a 4-year degree with a full 10 percent borrowing over $54,000. A few points on the rate of a Stafford loan are not going to have a major impact on those kind of numbers.
At the end of the day, the difference between subsidized student loan rates of 3.4 or 6.8 percent, even for a student who takes the maximum amount of federal student loans all four years, amounts to less than $20 in their monthly repayments, while costing taxpayers about $6 billion a year. If the government wants to do something to make college a better investment, it might take a closer look at its H1B visa policy that allows corporations to hire foreign workers here in the U.S. who will work for much less than comparable American professionals, under the guise of a lack of available qualified domestic labor. Students who have invested in engineering degrees – once one of the best paying and easily secured domestic jobs – have been particularly devalued by this bi-partisan giveaway to big business.
Another troubling indicator is the number of college students who are doubling down. Unable to find adequate employment with a bachelor's degree, they are enticed by promises of “standing out” among the flood of competition through advanced degrees. While this adds to their overall debt burden considerably, it does come with the relief of a temporary deferment of most loans while they're enrolled (though in most cases interest still accrues), allowing them to go back into fantasy mode, while more debt accrues and the now even larger challenge of repaying it is postponed until some future time when things will surely be better.
It's in this arena, where the growing number of low-overhead, “for-profit” universities have become particularity adept at separating struggling Americans from their money. Promises of increased earnings and marketability via an MBA through local campuses and online training, have led many graduates to buy into the idea that additional educational investments will pay for themselves. These institutions do not only target graduates, however. With a litany of easily-achieved (if largely worthless) degrees for the taking, they've found a niche in luring students without the grades to get into traditional secondary schools, as well as those willing to borrow heavily in order to bypass long waiting lists for community college programs in growth fields like nursing.
But for-profits aren't the only schools offering questionable returns on their investments. The soaring costs of education have dramatically impacted students at non-public universities – especially the less elite ones. Schools that do not receive public funding have traditionally cost more with the justification for the expense resting on the laurels of their academic reputation, and the associated promise that a degree embossed with their seal will pay dividends through higher earnings.
While this has been true at elite schools like those in the Ivy League, or others such as MIT and Stanford, the college landscape is littered with small, private institutions that are equally expensive without offering such clout – largely because their exclusivity is rooted almost entirely in how unaffordable they are, rather than fierce academic competition for admittance. These institutions are likely to be hardest hit by students and parents putting greater emphasis on value.
Interestingly, the percentage of students borrowing to pay for the non-elite private schools is much higher, suggesting that their exclusivity is wrought more in willingness to borrow than the ability to pay. Average debt for a four year degree at some elite schools like Princeton is less than $10,000, while it soars to over $50,000 at many lesser-known private colleges and universities. In other words, rich kids go to Harvard and get good jobs, while wanna-be rich kids go into hock.
While state institutions are generally more affordable because of government involvement in pricing, a combination of decreasing state funds and a movement to grow endowments through alumni gifts and other sources has made them increasingly autonomous – and pricey. The bottom line is that few, if any, institutions are positioned for quick adaptation when the lending market dries up – a perfect recipe for an epic bubble pop, especially now that there's more than $1 trillion in outstanding student loan debt in this country (more on that in Thursday's column).
Recent data released by the U.S. Department of Education shows an alarming increase in default rates on student loans. 8.8 percent of student loan borrowers who entered repayment in 2009 defaulted by the end of 2010. That's a 7 percent rise from borrowers entering repayment in 2008. Sound familiar? It should. Increased default rates are the canary in the coal mine for debt bubbles. It means that their securitization is less sound, which means less investors will want to participate, while those who do will expect a much more handsome return. Borrowed money begins to dry up at all levels from new loans to consolidations and re-fi's, while lenders have to get stiffer with deferments and other forbearance measures.
Without enough consumer savings available to maintain spending in that marketplace, while the institutions are saddled with too many fixed costs to make rapid overhead adjustments, we may literally see something once as unthinkable as the wave of mass foreclosures and home vacancies of recent years – the widespread shuttering of some of our oldest collegiate institutions – and of course, calls for a massive taxpayer bailout to prevent it. The result might be a lost generation of young Americans, the majority of whom never had a shot at higher education. Such an event would not only devastate American morale, it would further decimate our global competitiveness, as less and less of our workforce attain advanced skills.
Massive unemployment and a rapidly-declining standard of living might again make us competitive for the low-skilled manufacturing jobs we've lost to the third world. If certain forces are successful in the current effort to dismantle the social safety net, end collective bargaining, wipe out environmental protection and deregulate all industries, a 12-hour workday for sub-poverty-level wages might not seem that bad. I doubt this is the America most of us want for our children. Though if you were among the small minority of cash shoppers that increasingly scarce higher-education remained in reach of, such stark contrast in the social order might even seem like a good thing.
Meanwhile, we must face the dire economic realities of here and now. We are still short millions of jobs that were lost to the Great Recession, while offshoring and automation continue to make more and more occupations obsolete. Still, 150,000 new workers enter the workforce every month. Clearly, maintaining something close to full employment would be a major challenge under these circumstances even with an ideal higher-education system. Tomorrow's economy is surely the most uncertain one in modern history. Yet, just about everyone believes that the country with the most dynamic, diverse and highly-educated workforce will be best positioned to thrive at the top, while the ones with the largest class of dumb-downed grunts willing to labor under any conditions in exchange for three hots and a cot, will be able to catch the most crumbs from the bottom.
Leaders who think that having an increasingly educated society is a tool for success in the new economy are certainly on the right track. However, college degrees are not a silver bullet, and simply indebting young Americans up to their eyeballs in order for them to get a piece of paper, without making major structural changes elsewhere, will likely prove disastrous.
Consider what turning an entire generation of our best and brightest young people into indentured servants is already doing to our current economy. Rather than getting married, building houses, filling closets, buying cars and having children (who are themselves statistically much more likely to become educated and productive future members of society), they're eating off the dollar board while living at home with their parents, trying to imagine a day when they'll be able to afford even one of the luxuries their overpriced education was supposed to confer in spades.
In an economy that relies on each generation of consumers to replace the previous one and then some, that's not a good recipe for recovery – especially when so many of the previous generation (people in their mid 30's to late 40's) have largely been taken out of the economy by home foreclosures, drained 401k's, disappearing savings, decreased wages and just about every other way a person can be financially devalued. We can't keep relying on the wealth of retiring baby-boomers and fiat debt to be the only money consistently spent into the economy.
If colleges and universities continue to do the same things, the same ways, while expecting young Americans to make up the difference with mountains of debt, they will wake up one day very soon to find themselves obsolete. It will not take more than one generation of Americans beaten into poverty by an unmanageable debt load for an education that never came close to paying off as promised, for enough of the next one to say no thanks that the system is literally brought to its knees. If their hubris is great enough to imagine some sort of invincibility to such market forces, perhaps they'd better take a closer look at the dinosaur fossils in their Palaeontology departments.
Come back for Thursday's column which will explore the question: Should our economy be bracing for a student loan bubble?
additional sources used in this article:
THE FOR-PROFIT POSTSECONDARY SCHOOL SECTOR: NIMBLE CRITTERS OR AGILE PREDATORS? Deming, Goldin, Katz
Dennis Maley is a featured columnist and editor for The Bradenton Times. His column appears every Thursday and Sunday on our site and in our free Weekly Recap and Sunday Edition (click here to subscribe). An archive of Dennis' columns is available here. He can be reached at firstname.lastname@example.org. You can also follow Dennis on Facebook by clicking the badge below.
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