Tag: Student loans in the United States

An idea I am behind..

The next big bubble that will burst, if the wholehousing market or government money printing & incessant borrowing leftist agenda, and forced anti-savings money policies, which the Europeans have adopted, doesn’t blow up on us yet again, will be the student loan bubble. There is another $1.2 trillion of tax payer liability, waiting to blow up as the economic policies of the nanny staters create even more unemployment for the people leaving college with massive debts. And when it goes, you can bet that it will be those of us that bailed the government, their friends and donors in the “Too big to fail” industries, and are now paying for the democrats to buy enough votes to give them more than even odds at retaining power and causing more misery for us all, that will foot the bill for that too.

So you can see why I live the idea of having colleges be partially responsible for giving out student loans. It would both act as a deterrent on the faster-than-inflation rise in higher education costs, and the idiotic admission policies that have turned everything but the hard science and engineering schools of practically all universities and colleges into indoctrination camps for the lefts idiotic ideas. That’s probably why nobody on the left would ever want to put a policy like this in place either, but it would definitely address the problems affecting the higher education establishment, and our country as a whole, all at once.

If a college or university lets an under qualified high risk of failure applicant in, usually over better qualified ones, and they fail, then having to pony up lets say 60% of what that student owes will act as the best deterrent against these stupid policies. Similarly, letting students attend college for a fortune to learn skills that will not qualify them to do anything but flip burgers, will wipe out all these fringe and useless degrees people pay an arm and a leg for, usually so they can party hard for however many years it takes to get a degree these years. I am sure the fluff schools, where most of the leftist indoctrination and monolithic thinking goes on these days, wouldn’t want something like this, ever. It would be the end of their goose that laid the golden egg era.

So, yeah none of the academic institutions now profiting of the incestuous relationships between the government mandated loans and their institutions, and even the leftists in government, would suffer from such a move, but the students and the tax payers that foot the bills when the students default, currently screwed over by these institutions and their buddies in government that like the deal because they get a lot of leftist indoctrinated drones that will vote for them, sure would.

Maybe that’s precisely why we will not get it ever. Right now the progtards are getting the best of all worlds in this exchange. The left has too much to lose, and they love doing things that make them rich and powerful, as long as they don’t have to foot the bill themselves.

Another bubble is about to pop

In this case we are talking about another subject we have bandied about here at Right Thinking, the student loan bubble, which president Obama just recently pretended to want to fix. From the article:

The largest bank in the United States will stop making student loans in a few weeks. JPMorgan Chase has sent a memorandum to colleges notifying them that the bank will stop making new student loans in October, according to Reuters. The official reason is quite bland. “We just don’t see this as a market that we can significantly grow,” Thasunda Duckett tells Reuters. Duckett is the chief executive for auto and student loans at Chase, which means she’s basically delivering the news that a large part of her business is getting closed down.

The move is eerily reminiscent of the subprime shutdown that happened in 2007. Each time a bank shuttered its subprime unit, the news was presented in much the same way that JPMorgan is spinning the end of its student lending. “It’s no longer sustainable and not the right place to allocate capital in the future,” HSBC Holdings Group Chief Executive Michael Geoghegan said in a statement the day HSBC shut down its subprime unit in 2007.

Oh shiz. This is going to screw a lot of people over. I am worried that as someone that did the right things I will still be the one tapped to pay for those that didn’t do the right things. That’s what Washington D.C. has become: the place where you can make others pay for your mistakes, after you humiliate them for not wanting to do just that.

Why the President’s College Plan Won’t Work

I’ve been thinking about the President’s recently announced plan to change the federal student loan program. Something about it bothered me and it took Alex’s post below to finally crystallize my objections.

It won’t work. Even if it works, it won’t work. It won’t work because Barack Obama, oddly enough for a Harvard man, misunderstands the nature of higher education and, not oddly at all for a Democrat, misunderstands the nature of the problem with student loans.

Here’s the plan:

The plan, which Obama rolled out as he opened a two-day campaign-style bus tour of college campuses, would create a rating system beginning in 2015 to evaluate colleges on tuition, the percentage of low-income students, graduation rates and debt of graduates.

Eventually, as an incentive for schools to make improvements in these areas, federal financial aid would be awarded based on those ratings. Obama said he could create the ratings system through executive action, but the plan to reallocate federal aid based on the ratings would require congressional approval.

In principle, this isn’t a bad idea. There are a lot of diploma mills out there that give out crap degrees and a lot of schools that really don’t care if your degree is useful or not as long as they get that sweet sweet federal money. So some form of accountability wouldn’t be a bad idea.

But in practice, it will fail. Badly.

Let’s put aside that such a system would inevitably be gamed by the colleges (most likely through grade inflation to bump up their graduation rates). Let’s put aside that rent-seeking universities will make sure that their school doesn’t get hit. Let’s put aside that this will only change how loans are allocated rather than the total amount — so the river of federal money will continue to flow. Let’s put aside that such rankings already exist in many publications. In fact, let’s put aside that the President’s plan is so dumb that even Kevin Drum can point out the flaws in it.

No, the bigger problem is that many people do not go to college to get an education. You can get a fantastic education if you want one. And for many specific professions — science, for example — you can learn a lot (although most of the necessary skills for me were learned in the lab and the library, not the classroom).

But most people go to school for credentialing: to get the bachelor’s degree that is a requirement for a steadily growing number of jobs that have little to do with education. Harvard could be giving out the worst “bang for buck” in America. But people would still line up to go because a degree from Harvard carries a cache in the business world that a degree from East Yachupetz Community College doesn’t (even though community colleges almost certainly give the best education bang per dollar). So let’s just say, for the sake of argument, that you use this system to cut down on student loans to Harvard in favor of schools that are more “efficient”. That won’t happen, of course, since Harvard has about three hundred friends on Capital Hill, but let’s pretend it does. What happens? Does Harvard care? They’ll have plenty of people who can pay. They have tens of billions in tax-free endowment to finance people who can’t. At worst, some people at the margins lose out on getting that ticket to the upper class that is an Ivy league diploma. Net benefit: nil.

Indeed, the exploding cost of education has nothing to do with education — faculty hires have been flat. It has been the result of growing administration and construction designed to make a university degree seem like a more impressive credential than it actually is.

The President has two more speeches to give on this subject but I doubt that he will address the real problem problem here which is that the federal government has slowly become the biggest predatory lender in the country. The simple fact is, as Matt Taibbi points out, we now have a system in which universities can charge what they want and the federal government will lock young people into massive loans for an eternity to pay for it. Loans that can not be discharged in bankruptcy but can tally up penalties and interest rapidly. Loans that are immune from Truth in Lending requirements. Loans that can destroy people’s lives by using powers that private lenders simply don’t have. Loans that make more profit for the federal government than they ever did for industry. The situation is so bad that even Taibbi is capable of seeing the truth:

Bottomless credit equals inflated prices equals more money for colleges and universities, more hidden taxes for the government to collect and, perhaps most important, a bigger and more dangerous debt bomb on the backs of the adult working population.

I believe that the federal loan system has poisoned the education system. It has allowed naive young people take out six figure loans for useless degrees. It has bypassed all the consumer protections we have out there. If a private industry did this, they would be in prison (well, maybe not, given how the Obama Administration has dealt with the crooks in the mortgage industry).

Don’t fix federal loans; end them. Let private lenders subject to the same laws as everyone else take over. Let universities loan money and scale their reimbursement to future earnings of their students. In short, give the lenders and the schools a financial interest in providing a useful and affordable education. Because right now all the interests are aligned toward screwing the students, the taxpayers and the professors in favor of university administrators, big education lobbyists and politicians.

The Next Bubble

You remember the housing bubble, yes? One version of that narrative goes like so: homeowners are better off financially than renters; therefore we decided it would benefit the economy to subsidize housing through cheap loans, mandates, low interest rates, etc. — the “ownership society”; this mainly served to inflate housing prices and saddle millions of Americans with unaffordable debts; in 2008, it blew up in our faces to the tune of trillions of dollars.

I said a while ago that I thought the next asset bubble would be green energy. I still think it will be a bubble, but I’m now convinced that higher education is the more imminent problem:

More than half of America’s recent college graduates are either unemployed or working in a job that doesn’t require a bachelor’s degree, the Associated Press reported this weekend.

By comparison, in December 2011, only a fifth of 16 to 19-year-old Americans couldn’t get work. Meanwhile, according to the OECD, just 18.4 percent of all Americans under the age of 25 were unemployed in 2010. By those measures, college grads are actually faring worse in the job market than the overall youth population. They’re also suffering terribly compared to the older college-educated populace, which has an unemployment rate of 4.2 percent.

So is a college education simply less valuable than in the past? In some respects, yes. According to the Census, the number of Americans under the age of 25 with at least a bachelor’s degree has grown 38 percent since 2000. Not nearly enough jobs have been created to accommodate them, which has resulted in falling wages for young college graduates in the past decade, as well as the employment problems we’re now seeing.

Here’s what’s left out of the analysis. The explosion in college degrees — an explosion which has made each college degree less valuable — has been heavily fueled by massive federal investment. The last three Presidents have made it a mission to make college more “affordable” through an ocean of subsidized loans and grants. The result has been a huge surge of new college students and, since loans have only driven tuition prices higher, a five-fold swelling of student debt to about a trillion dollars.

The analogy isn’t quite perfect. There’s no derivative industry in higher education creating a multi-trillion dollar market for bogus education (yet). But the government is making the same mistakes it made in the housing bubble, assuming that subsidized loans can drive prosperity. And just as subsidized cheap loans drove housing prices higher and put people into mortgages they couldn’t afford, the student debt push is driving college prices higher and putting people into educations they can’t afford. Only this time, we can’t blame Bank of America.

The reasoning behind the heavy push for higher education is just as sloppy as the push for home ownership. College graduates earn more than non-college graduates. Therefore, all we have to do is send everyone to college and everyone will have a good paying job, right?

Wrong. College graduates are paid more because some of the highest-paying professions — medicine, law, banking, engineering — require a college education. And, as the article notes, people who get degrees in those fields are doing fine. But most of the influx of students are not getting these kind of degrees. They are getting degrees in liberal arts and other professions which are not as in demand. You can imagine how the job interviews are going:

Employer: So it says here you have a Bachelor’s from Ohio State. What did you major in?

Unemployed: Women’s studies.

Employer: Uh, so do you have any marketable skills?

Unemployed: I can get angry really well.

Employer: We’ll let you know.

A real educational loan industry would not let this shit go on. They would not loan $35,000 to some dude getting a degree in puppetry. They would happily finance degrees in medicine or science, where the likelihood of future prosperity is good. But puppetry? Most of the liberal arts? I don’t think so.

And, yes, I’m seeing education in purely practical terms. I’m not saying that there isn’t value to someone getting a college degree and broadening their mind just for the sake of it. I am saying that I see little reason for the taxpayers to support it for everyone.

Just as our political class ignored the housing bubble until it was too late, we can expect our politicians not to do anything until the roof caves in and we’re facing tens or even hundreds of billions in loan defaults. Right now, both our Presidential candidates are trying to keep student loans cheap and subsidized, keeping the interest rates in the mid 3’s or so. Ironically, as Daniel de Vise points out, these two Nanny Staters are suddenly unwilling to act like parents and say, “No!” to young people. And that’s just for interest rates. It takes a lot more courage than either Barack Obama or Mitt Romney can muster to say, “Not everyone should go to college.”

But that’s what they should be saying. A lot of people getting college degrees would be better off getting more practical and technical education or job training than reading Das Kapital. A lot would be better off going to community or junior colleges, at least for the first couple of years.

The only alternative view that has gotten any attention is that of the Occupy crowd who want student loan forgiveness. If anything, this is more asinine. While student loan in aggregate is a concern, the typical student has $25,000 in debt when they graduate. While I think some have incurred that expense needlessly, that’s hardly crippling. It’s less than a loan for a nice car, and typically given on better terms. There are millions with bigger medical bills who muddle through. Spare me your sobs.

What we should be doing is making interest rates realistic, moving the loan industry back to the private sector and allowing student loans to be discharged in bankruptcy (the exemption of student loans from bankruptcy is a huge back-door subsidy). We should be capping loans or linking them, in some way, to potential earnings. But neither side wants to risk the wrath of young voters (or academia).

The final act in this drama, of course, will be finding someone — anyone — to blame other than the people who caused the problem. Thankfully, the Left is hard at work on that. For a while, for-profit colleges were the target, but they aren’t really fitting the bill. The recent meme has pointed to a slight decline in state contributions to higher ed as the reason for such high tuition and so much student debt. But the figure they use in their analysis is dollar per student. The absolute dollar amounts poured by states into higher education has fallen in recent years — Pennsylvania just cut higher ed funding by 25% and want to cut it by a similar amount this year. But overall, the last decade has seen these contributions remain steady or rise. The real factor is the explosion in the number of students (hence the drop in dollar per student) and an explosion in tuition, both driven by cheap subsidized loans.

Never forget that when people use the wrong number in an analysis, it’s because they don’t want to use the right one. The problem is not cheap GOP-controlled state governments, no matter how much Daily Kos wants it to be. The problem is a splurging federal government. We’re spending too much on college, we’re sending too many people to college and we’re building a bigger and bigger bubble. And the real victims, in the end, are the students, who are in debt and unable to find good jobs. And it will probably end the same way the housing bubble did — with huge bailouts for the politically powerful and ruinous debt for the masses.

How can this be seen as a good thing? And how can we keep listening to the people who are causing the problem?

Post Scriptum: I am informed by British friends that the UK is experiencing this problem too. The Labour government massively increased the number of students going to college. As a result, the degrees have become less valuable and there are a lot of unemployed college-educated Brits. The Cameron government tried to reign this in and provoked riots, which just demonstrates that the British haven’t learned anything about economics since Adam Smith died. I’d appreciate some confirmation of this.

Update: Please don’t tell me that the government is profiting student loans. It is … now. And mainly based on accounting gimmicks. Again, the analogy to the housing bubble is unavoidable.