College Choice

The candidates tried to explain
How to lessen America's pain
From tuition and fees
That pay for degrees
Of commercially dubious gain.

Said Obama: "I'd like to enhance
Federal aid, be it loans or Pell grants;
Though I'm hopelessly lost
On containing the cost,
At least I will get you financed."

Said Romney: "The government's never
Very good, but the market is clever;
So you're out on your own
To get your own loan,
Where-, how-, from whom- for what-ever."

Said neither: "On loans, I will let it
Be decided by factors of credit,
So that those who can show
That they're getting to know
Something useful are those who will get it."

The US Presidential election is two weeks away and the final debate is this evening, but so far both candidates have gotten away without putting forth an effective plan to address the looming higher education crisis. We have a vicious cycle of ballooning student debt to pay for rapidly rising costs of education which, in all to many cases, does not prepare the graduates for a gainful career, and hence offers no hope of repaying those mountainous loans. Both President Obama and Governor Romney would do well to take a page from the book of my friend Jay Hallen, who proposed in the National Review that the provision and pricing of student loans should be based on the likelihood of repayment, as is the case with any other type of loan. This would have the effect of directing student loans to where the economy most needs them, i.e., toward programs that prepare students with the skills that employers most need.

Back to School

An earnest young lady named Esther
Was beginning her freshman semester,
And her greatest concern,
In preparing to learn,
Was that school would financially test 'er.

Everybody complains about the high cost of a college education, but nobody does anything about it. Now, at least, one man has put forward a microeconomic explanation. Kenneth Gould lays out an intriguing price discrimination argument in the American Enterprise Institute's online magazine.*

Gould's point is that the financial aid system allows the providers (colleges) to learn how much the consumers (students) are willing and able to pay, and thus practice first-degree price discrimination using financial aid to set different prices for the same service (education).

First degree price discrimination occurs when normal markets are interfered with and producers are allowed to learn exactly what each consumer is willing and able to pay for the good or service. Using this data, all the producers set individual prices for each consumer, eliminating competition and forcing the consumers that are willing and able to pay a higher price to pay it. In this pricing scheme, those who are willing and able to pay only a lower price get a break. ... As it turns out, this seemingly humane aim has a fundamental flaw — the same flaw that afflicts all non-market based systems: When producers no longer need to compete, production costs always rise faster than they otherwise would.

*Note to reader: the word "intriguing", when used in this space, refers to an argument with which the writer potentially agrees but must regard skeptically on political grounds.

School of Hard Truths

Said a grad whose finances were played out,
And whose face could not help but betray doubt:
"The lessons I learn
May improve what I earn,
But not at the prices I paid out."

College: can't afford it, can't live without it. That appears to be the message of mounting data on debt and employment. On the one hand, the New York Fed's latest Quarterly Report on Household Debt and Credit shows that, while the overall delinquency rate of US consumer debt improved from 9.3% to 9.0% in the second quarter, the student debt delinquency rate has worsened from 8.7% to 8.9%. These numbers are part of a trend; says the New York Fed: "Since the peak in household debt in 2008Q3, student loan debt has increased by $303 billion, while other forms of debt fell a combined $1.6 trillion." Clearly, student debt is on an unsustainable path.

On the other hand, there is clearly value (at some level) in higher education. The Wall Street Journal reports that the Brookings Institution recently surveyed US metropolitan areas, looking for the gap between the average level of education sought by employers vs. the average level of education attained by the population. The survey found that a lower "education gap" was associated with areas whose housing markets had best weathered the downturn. Moreover, Brookings found that, in 2011, for every unemployed worker with a college degree, there 5.6 openings requiring such a degree; for every unemployed worker with only a high school degree, there were only 1.6 openings.

It is evident then that a college education confers a great advantage in the job market, but is it worth any price?
Hat tip to Kelly Evans of CNBC for alerting us to the New York Fed consumer debt report.

A Matter of Degree

Asked a socially relevant chronicle:
"Is a college degree economical?
Well, the lifetime return
On the extra you earn
Is substantial, but not astronomical."

Dr. Goose had occasion to visit Loyola University of Maryland as part of an adult entourage in an orientation program for incoming freshmen. Loyola impressed with many outstanding qualities, beginning with its president, the Rev. Brian Linnane, SJ, a clear-thinking, no-nonsense advocate of cura personalis – "Care of the whole person."

I also had occasion to note that the cost of one year at this fine institution has reached $57,000, as has that of many private universities. While listening to a presentation on financial aid, I did a back-of-the-napkin calculation and found that, in order to yield a 4% return on the four-year investment in education over a 40-year time horizon, a graduate would have to earn $11,000 a year more than they would have with only a high school diploma. Those who strive for an 8% return would have to earn an additional $19,000 a year. Studies show that such incremental earning power is within the reach of the typical college graduate, but probably not those who indulge in "coasting", against which Father Linnane inveighed ominously.

Student Loan Blues

"Though college, I felt, was a sure thing,
As of now, unless gold I'm unearthing,
To pay off my loan,
I'll have to postpone
My homebuying, wedding and birthing."

An entire generation is blocked from building a life while in the thrall of its towering college debts, writes Sue Shellenbarger in The Wall Street Journal. Student loans, which reached $1 trillion last year according to the Consumer Financial Protection Bureau, may ofter eat up half of a young graduate's income, particularly if they have had to settle for a lower-paying job than they expected. Like the killer who won't die in a horror film, student loans can not only prevent one's qualifying for a home mortgage or car loan, but cannot be extinguished in a bankruptcy.

What can young people do to avoid such an unhappy fate? There are no panaceas, but some sensible suggestions would include:

• Approaching college with the goal of building valuable, employable skills by which to enable one to pay the loans down faster; 
• Taking price into account while shopping for schools, with a willingness to consider the lowest priced option;
• Accepting federal or state loans (preferably subsidized) before private ones.

Student Loan Bubble

When Millicent borrowed for college, she
Was taken aback by the knowledge she
Could have them remit
As much for French Lit
As for Health Information Technology.

The Wall Street Journal's Real Time Economics reports that surging federal student loans are confounding the general trend of consumer debt reduction. Thanks to our highly leveraged collegians, overall consumer debt increased by $18 billion (+0.7%) in January. As Dr. Goose and many others have warned previously, the rise in student debt, coupled with rising unemployment among young people, is an explosive trend. One step that could deflate this student loan bubble would be to introduce some form of credit underwriting to the process. Linking the availability of loans to the likelihood of a program of study to produce employable skills would help to restrain excess lending and direct young people into viable careers.

Leveraging One's Education

A student had trouble believing
That the newspaper wasn't deceiving
In ascribing a sign
Of reversing decline
To his borr'wing to learn basket weaving.

Citing the latest Federal Reserve statistics that show consumer debt up in December, the Wall Street Journal sees "a sign that the credit freeze is thawing." Indeed, household debt rose at a seasonally adjusted 9.3% annual rate, following a 9.9% rise in November. But - is this a good thing? Two considerations rate mention. First: we're trying to exit a huge financial crisis brought about by excessive borrowing, so any conclusions based on consumer debt trends should at least consider what an optimal level of borrowing would be, and whether we are still above it. Second, the largest component of December's increased consumer debt comprised student loans, which is certainly a bad thing. Student loans have been growing faster than they can be repaid, in part because federal and state programs will fund unlimited amounts with no credit underwriting; there is no assessment of the likelihood of the student and program of study generating sufficient loan repayment in the future. This must change.