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A Dysfunctional System That Bankrupts A Generation
By Wolf Richter www.testosteronepit.com
Tuition has done it again: up by 8.3% for universities and by 8.7% for community colleges, according to the College Board. Here in California, tuition increases are outright ridiculous. Much of it will be paid for with student loans (though grants, scholarships, other aid, and tax credits will cover some of it). Student loan debt will exceed $1 trillion by the end of the year—a stunning amount. But unlike other debt, it cannot be discharged in a bankruptcy.
The skyrocketing costs of higher education add to the strains already weighing down the middle class whose median household income has fallen 9.8% between December 2007 and June 2011 (Sentier Research) and whose real wages have declined 1.8% over last year (BLS) and around 9% since their peak in 1999.
We all support education; we want the next generation to be productive. So now, under increased pressure to "do something," the Obama administration has come up with a Band-Aid, which includes income-based payment limits and ultimate debt forgiveness in certain cases—an accelerated implementation of program improvements that would have taken effect in 2014. Looking forward, it is likely that more taxpayer funded relief is on the way.
But the system itself is dysfunctional. The cause: a misalignment of interests within the complex relationships between students, universities, the student-loan industry, and the federal government.
Universities are businesses, and businesses have the natural purpose to charge the maximum price the market will bear. But unlike Walmart or the shop down the street, universities operate in a system that has become devoid of market forces, and when they demand higher tuition, the whole system falls in line to support those increases:
- Students want an education, and they have to get it within the higher education system. When costs go up, they can't massively drop out; doing so would endanger their future. They can choose cheaper universities and community colleges, but they're all within the same system, and they're all doing the same thing: jacking up tuition and fees. And the very logical mechanism of "out-of-state tuition" ends up being a highly anti-competitive measure. So students fight tuition increases the only way they can: obtain more funding.
- The student loan industry profits from processing student loans and related government subsidies. Naturally, they encourage students to take on more debt. Risk would function as a natural brake for making loans. But in the student loan industry, there is little or no risk as the government guarantees the loans, and loans cannot be discharged in bankruptcy. Further, the amount of a student loan is a function of the cost of a particular school—which further reduces price competition between schools.
- The government, in constant need of voter support, will fund or guarantee whatever it takes to allow students to get their education. Any cutback would be perceived as a way to strangle the education of the next generation. The only option the government would have is limit what universities can charge, similar to the limits that the government imposes on Medicare providers, but that option is a non-starter.
As a consequence, university budgets have become huge. Administrator salaries, bonuses, benefits, golden parachutes, and pensions have shocked the public when they're exposed in the media. Programs that have little or nothing to do with education swallow up more and more money. And sure, everybody loves to have well-equipped labs. The beneficial forces of market discipline have been wrung out of the system. Instead, it has become a mechanism for automatic and unstoppable tuition increases, made worse by cutbacks in state funding. The ultimate but innocent and well-meaning enabler: the setup of government guaranteed student loans.
At fault is the system itself. Like our healthcare system, it needs to be restructured and opened up to competition or to effective checks and balances when competition isn't possible. Solutions won't be easy, but with $1 trillion in student loans outstanding, there isn't much room left before it will bankrupt an entire generation (while the healthcare system is on the way to bankrupting the nation).
And there are more government Band-Aids on the way: Obama's Refi, A Special Tax For People Who Can't Do Math
Wolf Richter www.testosteronepit.com
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So the government is going to step in and try to fix a problem that it created. Wonderful. And by the way, this student debt problem has been around for several years now. It's only getting attention because it has been allowed to grow so incredibly large.
Mark my words, this is a debt bomb that is just waiting to explode. Students graduating with such incredible debt loads (sometimes in the six figures) are entering a collapsing job market. This story does not end well for anyone involved ... neither the students nor the taxpayers.
This crap will end quickly when the next credit crunch comes. Parents and students are both unemployed and no credit results in unpaid tuition. No students.
At this pace, the US is going to be a nation of tootheless vagabonds roaming the dust-covered ruins of a once-powerful nation. And all the profit that was squeezed out of the American Dream will be absolutely worthless.
And all the profit that was squeezed out of the American Dream will be. . .
__dreamt elsewhere
by those not sleepwalking
and, ghostory, gone . . . only to reify their ever-increasing croesus and reappear, as Bankers once again, after having long-been many such vagabond's worst nightmare, left still playing rambo
Any time you have government guarantees anything its cost is guaranteed to soar. Case in point, health care, housing, tuition and so on. You wanna bankrupt yourself? You turn to government.
Wasn't that a Mitt Romney with his fatwah Vs. University Of Massatchussets ? Good Job. 18% of financing destroyed. Top resercher teams resolved - Harvard, MIT, Cambridge ... u name it.
Oh, wait - Bejing invests some money in the science - they want 25.000 PhDs and they're ready to pay for the projects. ( In the next 5 years ).
Top scientist in USA gets his first grant from NIH with 43 .... If he does not starve untill then, paying his bills ...
Used to be faster 30 yrs ago.
Harvard is a hedge fund, with a sideline education business. China's only way to "leap forward" is to steal everything it can. They do it to every country they get involved with. They won't matter from an innovation standpoint until our real scientists start going there. They couldn't invent the lightbulb had it not been handed to them.
Beijing is too enamored with stealing science and technology than creating it.
If they want creation, they should bring in the creator class and stop stealing
Stealing is a lot more cost effective. US did the same with Europe...I just wish the Chinese would freaking invent something as good as electricity or antibiotics after all this stealing. If they have invented anything lately, they must be keeping it secret. Since they steal from each other with as great an enthusiasm as from others, I guess they don't have much incentive to invent.
Students can't go bankrupt and clear the debt... that is obsene
Foxtrot them. Don't sign for the loan. Are you over 18? Are you mentally competent? Then it's your problem.
And how many banksters were held responsible for their bad decisions? And they were a lot older than fresh out of school youngsters not knowing much about money!
Banksters got richly rewarded for losing money
Losing other peoples money while getting very wealthy yourself? That is a degree for which I would take out a butt load of student loans.
MOMMY!! Tommy didn't pay taxes until he got caught! Why do I have to!! Waaaaa!
Suck it up Bitch. He's connected, and you're not.
DON'T TAKE THE LOAN IF YOU CAN'T PAY IT BACK.
I don't get why this hasn't happened. When do people stop feeding the giant money pit?
According to a study only 25% of the college grads of 2009 found a job that required a degree.
It's a lousy ROI especially considering the outrageous cost.
This is my solution, create an iTunes for education. Download all the interactive study materials and make education-app developers rich.
Why do we have 1000s of business schools and science departments around the country? We have 3 car companies. Why not duplicate the free market and have one giant university that provides cheap education? Or 3. Or 4.
Take the best of the best, create tech-geared courses.
It is one of the most inefficient ways of educating people. It's basically a boondoggle. Just ask the university presidents making $500,000 or more.
University of the people.
Education or training? My father instructed me that I was to get a B.A. for the purpose of gaining critical thinking skills and to expand my fund of knowledge, NOT to "get a job." Training or a higher post grad degree is for that. When people ask me if I use my degree, I comment, every day. Excuse me for thinking EDUCATION is just that, and not some monkey training program.
I'm grateful for my education. It makes it so much easier to swim among the ZH comments! Seriously, I lucked out. Great public school education and then lucked out because computers came of age same time I did. Basic logic courses were the best.
Oh, please! Give it a rest!
Either you received a sufficient K-12 education upon which to enter the workforce and prosper or else....
(*SHRUG*)
...or else your real complaint should be registered with your public school system!
Com'on... who are you kidding?! We all went to college; many (perhaps most) of us have grad school coursework and even grad degrees on top of that. We all know how much pure unadulterated bullshit is involved in getting a B.S., B.A., or advanced degree. Separate the meat from the fat and we can talk about the "need" for college - the need for a four year college degree at tens of thousands of dollars a year plus lost workforce earning opportunity costs!
Oh... and Swamp... there are these things called BOOKS...
These... er... BOOKS... can be found in libraries... FREE publc libraries...
These FREE public libraries also offer all sorts of college lectures on DVD and online... etc., etc.
What I'm trying to get at in my own snarky fashion is that the cost/benefit analysis of a college education is all off today. Students aren't getting their money's worth (or their parents and grandparents and the taxpayers money's worth) and socity is getting screwed as well.
This may be apples to oranges, but does anyone know the relationship of the number of jobs(%)"outsourced" to the % increase in tution over the last 30 years?
Jobs are outsourced only when someone in another country is able to do a better job for less money. When we all work harder in America, like our parents did after world war II, then jobs will come back to America.
Americans are lazy and feel entitled for the most part. It's very sad.
Jobs are outsourced when there exists a lax corruptible regulatory jurisdiction with lower corporate tax rates and a huge pool of disenfranchised subsistent labor to draw upon. Once a critical mass of an industry expatriates the rest are forced by the market to follow. Exports were 11% of our GDP per the World Bank while imports were 14% in 2009; time for the ghost of Smoot Hawley to make an appearance and balance our ridiculous trade deficit with China, which would serve to drive up government borrowing costs and rein in the federal sprawl.
http://www.census.gov/foreign-trade/balance/c5700.html
"...able to do a better job for less money...."
Under Dictator Porfirio Diaz's 40 year rule, practically all Mexican farmworkers were peasants (debt peons)(slaves). Their lands had been stolen, either long ago by Spanish conquistadors, or recently by Diaz's death squads, and given to Hacendados (rich Hacienda (Plantation) owners, most of whom were "mestizo", meaning they were descendants of Spanish conquistadors, bankers, merchants, etc.).
Naturally, the Hacendados did not have to pay the Mexican peasants hardly anything more than what it took to keep them alive. That kept Mexican sugar, corn, etc., cheap, making international customers happy, and keeping the Hacendados rich enough to send their children to the best European colleges.
One might conclude that Diaz's system was wonderful and that Mexican peasants (debt peons)(slaves) were "able to do a better job for less money".
Unless one were a Mexican peasant.
Eventually, the peasants rose up, under Emiliano Zapata and Pancho Villa.
And look how well that worked out for them...
For Villa and Zapata? Not so well. They got killed.
But so did Jesus, and so did almost all the top combatants in the Mexican Revolutionary Wars.
For the Mexican peasants? They gained freedom, and then lost a lot of it back, but I think a lot of them have gained a lot of it again, and ultimately Villa and Zapata helped enormously.
I agree with the entitlement portion of your comment. However I take issue with the "when someone in another country is able to do a better job for less money" portion. Only part of that statement is correct. When someone in another country can do it cheaper, your job is outsourced. I do not get better service on my Visa/MasterCard when I am trying to understand the accent and they can't understand me either. This is but one example.
CapitalistRock,
I came to America and took one of those jobs. Good gig while I had it. Looking for work again in a specialized field and surprise - last ten job offers are from Mumbai. It has nothing to do with working harder - all outsourcing. Do I want to move there for work? I might. If I had a family to move - maybe not.
Sorry that you have drunk the koolaid .....
It's outsourced because Mumbai offers customers a better deal. To compete, Americans can produce more for their current pay or get paid less. Unfortunately, just becasue the government has jacked up the price of education, health care and housing so much that the Americans net less after expenses doesn't mean people who employ Americans actually pay less for their labor.
China regulates: a corporation that sells in China has 5% of its workforce in China. The US needs to copy that regulation. College graduates are finding out the hard way via unemployment.
And now they are requiring companies to move their R&D there as well like GE Medical just did. Chinese government works for the benefit of the Chinese people (well for the CP members anyway but they throw some bones to the people to stay in power). US government works for banks and Israel.
You can require that US companies hire only US employees, but you will then find that retail prices rise significant;y and our standard of living falls significantly. Pick your poison.
Remind me, please, which way our standard of living is headed.
Different symptoms, same disease.
Dysfunctional generation bankrupts system, fixed it for ya,
In the 1800's it was all the rage to empty out the mental asylums and put the "patients" on a boat to America and was Far cheaper than keeping them In Care.
Their grandchildren went into politics and begat the Boomers (43-60),
who begat OWS.
Not in all cases of course but the evidence is clear.
NUTS.
From the very beginning (in Kindergarten) kids are forced to believe institutional education is more important than anything else in the world. More important than hands on education, on the job training, trial and error success/failure, etc... What do we expect once they've graduated and are kicked out on the street after 13 years of brainwashing? The first thing they're going to seek is institutional education promising them the world for only 50k! LOL...