The further to the left or the right you move, the more your lens on life distorts.

Monday, June 09, 2014

The College Loan Bubble

A while back, Barack Obama suggested that every young person in America should go the college, and further argued that he would put mechanisms in place to achieve that "goal." Never mind that not every young person wants or needs to go the college. Never mind that not every young person has the intellectual tools to succeed in college. Never mind that significant number of college degrees and programs (think: Gender Studies or Art History) are worthless in the private sector. Never mind that the money invested in a college degree may not show any reasonable ROI for many years. Never mind that many graduates emerge deeply in debt, hindering their ability to navigate the real world.

Obama's solution is two-fold: (1) a rating system for college (better to keep the federal government out of this, although the idea of unbiased ratings is a good one and already exists) and (2) increasing the availability of student loans (bad idea!). Over this past weekend, the administration floated a vaguely defined proposal to either forgive some portion of student debt or to limit the size of payments to some percentage of a person's annual income. In other words, stick taxpayers with the problem.

The Chicago Tribune Editorial Board
University officials love to complain that they don't get all the state and federal money they'd like. They don't complain, though, about the huge subsidies they get from governments via the subsidized tuition their increasingly indebted student bodies fork over. Scratch a whining provost and you find an executive in one of America's most secure, sclerotic and administratively top-heavy industries.

Some bright thinkers in that industry, such as law prof and higher ed author Glenn Harlan Reynolds at the University of Tennessee, offer innovative ideas that would complement Obama's push for more consumer info about colleges. In essence, Reynolds contends that if Muffy or Biff gets a loan, State U. collects tuition and fees but suffers little if Muffy flunks out and Biff can't land a job. Instead, Tom and Tess Taxpayer often bear a cost.

Reynolds thinks colleges that benefit from subsidized loan money should be liable for part of the debt if a student defaults: Schools would have incentives to accept applicants who have a reasonable chance of graduating — and to warn prospective and enrolled students, loudly, that college loan money isn't free.

For most of those who earn them, college degrees are, for reasons intellectual and pragmatic, huge pluses. We share Obama's desire to see that option as available as is practical and affordable.

But the current system, like the easy-mortgage incentives that helped create the Great Recession, artificially hypes demand — only to abandon many ex-students as collateral damage.
In many ways, the current structure of the loan program encourages colleges to increase tuition every year and add still more administrators to an already bloated bureaucracy. To reuse a phrase that was prevalent in 2008, colleges suffer no 'moral hazard' when loans are made. reports that "“Tuition is up 1,200 percent in 30 years."

If, as Glenn Reynolds suggests,"colleges that benefit from subsidized loan money should be liable for part of the debt if a student defaults" good things would happen and happen fast.

We're headed for a college loan bubble, in which millions of graduates (and drop outs) will be unable to repay their debt (sound familiar). No worries though, this whole thing is too big to fail and a shrinking number of taxpayers will ride to the rescue, yet again. Ugh!

UPDATE (6/10/2014):

A college education remains important for entry into many professions, but it appears that its importance is not what it once was. Google, a technological innovator and true 12st century company, has de-emphasized the college degree. Business Insider reports:
After years of looking at the data, Google has found that things like college GPAs and transcripts are almost worthless in hiring. Following these revelations, the company is hiring more and more people who never even went to college.

In an interview with The New York Times, Google's Senior Vice President for People Operations Laszlo Bock revealed that the number of degree-less hires has trended upwards as they've stopped asking for transcripts for everybody but the most recent graduates.

"What’s interesting is the proportion of people without any college education at Google has increased over time as well," Bock said. "So we have teams where you have 14 percent of the team made up of people who’ve never gone to college."
The College Loan Program is sometimes a fraud perpetrated on unsuspecting young people by both the federal government and the colleges they attend. How would you feel if you held $45,000 of college loan debt and lost out on a Google job to another person with no college degree at all?