“Education – At What Cost?”

Sydney M. Williams

Thought of the Day

“Education – At What Cost?”

May 2, 2012

Bloated bureaucracies in Washington and state capitals have been emulated in our nation’s schools, both public and private, and in our colleges and universities. The problems within the world of education are different, but have the same parentage – a belief that money was inexhaustible, low interest rates would prevail forever and that economies would never stop growing.

Reality has been quite different. The market value of all college endowments lost $87 billion (21%) during 2008. A recent Rutgers University study reported that 53% of all Americans with a bachelor’s degree under the age of 25 are unemployed or underemployed. In addition, graduates leave college $25,250 in debt. A college education, by itself, does not assure financial success, though average earnings and employment statistics for college graduates are significantly better than for high school graduates. Nevertheless and not surprisingly, delinquency and default rates on student loans are rising.

Tuition costs have tripled since the 1980s, “outpacing both inflation and family income” over the past three decades, according to a February 3rd article in the New York Times. Those costs are known by every parent of a college-age child. Moody Analytics claims the rate of increase in college tuition far exceeded real estate appreciation during the housing bubble. The rapid rise in endowments over the same time did nothing to alleviate tuition costs, even though endowment income, as a percent of total college revenue, rose from 2 percent in 1978 to 15 percent in 2007. Because of a growing dependency on endowment income for operational expenses, there are those who argue endowments accentuate the problem, especially during periods of market weakness. (If endowment income were used exclusively for capital projects this would not be the case.)

At times, it feels as though the whole nation drank the same kool-aid. When politicians assured us that our futures would be free from worries about Medicare and Social Security we believed them. When union bosses promised unending benefits, no one did the math. And when our youth was assured that a college education was the ticket to prosperity, they never questioned the guaranty. Representative Hansen Clarke (D-Michigan), in extolling his bill, the Student Loan Forgiveness Act of 2012, said he wants to re-instate an implied social contract that says, “if you study hard and work hard, you’ll have a steady middle-class income and stable career.” If only. If wishes were horses, beggars would ride. How far we have traveled from Jean-Jacques Rousseau! Rousseau, in his Social Contract, was writing of the basic tenets of freedom, the rule of law and safeguarding property rights – not entitlements focusing on equality of outcomes.

A slow-growing economy with few job opportunities, a world which has become far more competitive and graduates who have grown up in a culture of entitlement are not the only problems facing the young. High school graduates are entering the workforce virtually uneducated. Too many high school seniors leave illiterate and innumerate. Their teachers are more focused on their own benefits than on producing productive citizens. The level of student debt and its rapid proliferation is becoming a serious problem. The Federal Reserve places total student debt at $870 billion, while the Consumer Financial Protection Bureau claims the total amount is over $1 trillion, factoring in the capitalization of interest. Student loans, as a category, are now larger than car and credit card loans. While they constitute less than 10% of mortgage debt, they are the only segment of consumer debt that is still expanding, and the debt belongs principally to the young.

Two pieces of legislation are being considered. One would be a Bill to forestall a scheduled increase in the interest rate on new, federally subsidized Stafford loans for undergraduate student loans issued after July 1, 2012 from 3.4% to 6.8%. Interest rates for existing loans would not change. Nevertheless, the increase would affect an estimated 7 million loans. (There are about 37 million loans outstanding.) The second Bill, alluded to above, would make it easier to discharge student debt and would cap government loans at 3.4%. The Bill is being sponsored and supported by MoveOn.org, which should give pause to any fiscally responsible person.

While both Mr. Obama and Mr. Romney support the roll-back of the rate increase, there are consequences to such a decision. Government subsidies lower interest rates. Lower priced loans increase demand for college seats, ergo it becomes easier to raise tuition. Laws of supply and demand are universal. Government loan subsidies do have a cost, but it is one borne by the taxpayer and so suffused throughout the population. And, it is of course another form of redistribution. Capping interest rates and making it easier to walk away from debt creates practical, as well as moral, hazards. The consequence will be the exiting of the business by the few private lenders that still exist. Other than things like police and defense, government has not been at its most efficient when placed in a monopoly position – think the U.S. Post Office. Of course government does have the ultimate “rich uncle” to fall back on – the taxpayer, but that is what makes this so frightening.

But whatever the cause, the rise in tuitions at both public and private colleges has been exorbitant. The problem is that the increase over the past generation has greatly exceeded the increase in income and the increase in inflation and even appreciation in equity markets. Colleges just are not as affordable as they were thirty years ago. It is hard to see that we are producing a better educated, more competitive young person than we did years ago. Costs have made the process less democratic, not more so. I don’t pretend to have an answer, but I suspect there are layers of management in universities and colleges that would cause the most profligate politician in Washington, Sacramento, Albany and Springfield to blush. In fact, a book written by the headmaster of Columbia Grammar School in New York, Dr. Richard J. Soghoian, Mind the Gap, addresses some of these issues in a coherent, plain-spoken way. It should be read, not just by educators, but by anybody concerned with how bloated bureaucracies can imperil any enterprise.

Looking for sensible answers in an election year is like seeking an honest man in Washington – they’re nowhere to be found. The President, appealing to the students who helped propel him to office in 2008, offers his “hair of the dog” solution, extend the 3.4% interest rate on federal student loans for another year. The problem is the debt. It’s sinking us. The solution is not making debt easier to handle. We must encourage thrift. When, as a child, I over-stuffed on jelly donuts, my mother’s response was a spoonful of Pepto-Bismol, not another donut.

Richard Fisher, President of the Dallas Fed, speaking at the Milken Conference, made essentially the same point, in a different context, when speaking on the role of the Fed and that of Congress. “The more we do in terms of accommodation…we give Congress a pass. We’re basically saying …Congress, you better eat your vegetables and if you don’t we have a big plate of monetary cookies we’re going to give you. It cannot be sustained.” Congress and the President have foresworn vegetables in favor of cookies as far as the economy is concerned. Now Mr. Obama is urging the same prescription for student loans.

College is a great experience, one I wish everybody could have, but that is just not possible, nor is it desired. As a society, we need workers in all aspects of our communities. No community needs a stock broker or a hedge fund manager. Every community, however, needs an electrician, plumber, shopkeeper and barber. And every job should command respect and dignity. In part, college years are ones of growing up, maturing. If one has the money, $55,000 seems a fair price. It amounts to about $250.00 per day. For that a student gets room and board and access to some of the best minds our country has. The trouble is the average American makes less than that. College is just is not affordable. Lowering interest rates is not going to change that fact. Nor is skipping out on one’s obligation a lesson we should be teaching. Today, only the top one percent could afford to have two or more children in college at the same time, while paying full freight, and even for some of them it would be a push

Unless something is done, it will only get worse. Let’s put those costs in perspective. For thirty years college tuitions have risen at a compounded rate of 6.8%. If costs continue at that rate, that would mean, if one is fortunate enough to have a child accepted at one of the elite schools, tuition that is $55,000 today will be $106,000 in ten years.

It may be that this is a good time to consider alternatives, one of which would be bringing back the draft. Young people need both time and discipline, and should be afforded both the obligation and the opportunity to serve their country. It would give them time to grow and mature, ensuring that they would make far more productive use of their college years, if they entered a couple of years older.

The benefits of college, like any other investment, must be measured against its costs. It’s time to get serious.