The Higher Education Reality

By Michael Becker

Getting a college education!  Everybody knows that you just can’t be successful without one.  College graduates make about a million dollars more over their working life than non-college grads.  And so on.

That’s the higher education pitch.  And today, that pitch has the same smell of the line realtors were pitching in 2005 at the height of the real estate bubble:  “Home prices will never go down, they’re not making any more land!”  And you can look for a similar result with higher education.

There are a number of issues revolving around higher education today.

• The idea that everyone is entitled to a college education;
• The fact that K-12 produces “graduates” who can’t functionally read, write or think;
• The fact that administrative cost at the college level has grown like a marijuana plant over the last 20 years;
• The fact that the cost of a degree has grown exponentially faster than the CPI since 1979;
• The fact that colleges have become reeducation camps for “victims’ rights” advocates.
• The fact that colleges now have departments and schools for subjects that, 30 years ago, were elective classes and for which there is no employment market.

That list just scratches the surface and I’ll be writing about those issues as time passes.  Today though, we’re going to take a look at student loans.  For the uninitiated, here’s a very quick primer on the subject.  Student financial aid is much more detailed and complicated that this brief note, but it will at least give those who’ve not dealt with the subject a foundation.

Financial aid consists of four basic parts:

• Scholarships.  Scholarships are based on a wide variety of things, from athletic ability to academic ability to ethnicity; some are related to work, etc.  They are very competitive and do not require repayment.
• Grants.  Grants, like scholarships, do not have to be paid back.  The most common is the Federal Pell Grant that is awarded by the US Department of Education based on economic criteria only.  There are also grants at the state level that have similar qualifying criteria.
• Stafford Loans.  These student loans must be paid back after graduation.  They are granted based on economic criteria, carry a very low interest rate and do not accrue interest while the student is in school.  Repayment typically starts six months after the student leaves school.
• Non-Stafford Loans.  These must also be repaid after graduation, the interest rates are higher than Stafford and they accrue interest while the student is in school though no payments are required until six months after graduation.
• The common denominators with student loans are that there is no credit criteria, the loans are unsecured and they are not dischargeable in bankruptcy.

Remember, this is not a complete list and the rules will fill at least 10 volumes like the NYC telephone book.

The problem with student loans is that the outstanding balance, just over one trillion dollars.  People owe more on student loans than on credit cards or auto loans, and unlike those loans, student loans require no credit qualification and, unlike an auto loan, there is no collateral.  Student loans are made by private lenders but the lenders have absolutely zero risk because the federal government actually guarantees repayment of the loans.  If you default on a student loan, it is put into collection with folks that make Al Capone look like Mother Theresa, you cannot discharge the loan in a bankruptcy and the federal government will confiscate your tax refunds and your social security payments.

Here’s where we’re at today.

Banks wrote off $3 billion in student loan debt the first two months of 2013, and an estimated 850,000 former students have defaulted on loans, but that is just a snapshot of the big picture of debt that is drowning many college graduates.

According to FICO, a credit-reporting agency, the average college student with debt owes $27,253, a whopping 58 percent increase in the last seven years. And for the first time in history, the amount owed and delinquency rate for student loans exceed that of credit cards.

That’s just the tip of the iceberg.

Factor in that about 60% of college graduates are either unemployed or “underemployed”, holding a job that doesn’t require a college degree, and you got a disaster waiting to happen.

The current default rate on student loans is over 10% and when you factor in that only about half of student loans currently require payments to be made (students are still in school) that makes the real default rate about one in five.

If you default on a student loan you’ve taken yourself out of the credit markets for, at best, a very long time.  Not only will a student loan default deny you a mortgage, the repayment plan will have payments so high your debt ratio will knock you out of any kind of prime loan opportunity.

Recent college graduates are increasingly out of the housing market.

Traditionally first-timers have accounted for around 40 percent of purchases in the resale market. But in May, according to the National Association of Realtors, they were just 28 percent, down from 29 percent in April and 34 percent a year ago.

Big deal? Yes. If predominantly young, first-time purchasers are not entering the home ownership pipeline at anywhere near their traditional rate, at some point the system begins to choke. Owners of modest-priced starter homes find it more difficult to sell and move up. …

Where are these previously dependable first-time homebuyers in their late 20s and early 30s? A new national study released last week offers important clues: A lot of them are carrying such heavy debts from student loans that they’re postponing buying houses.

It’s not going to get any better any time soon.

Bulging student-loan balances aren’t short term issues, either. The institute’s study found that the average payoff time is 21 years, ranging from 17 years for those who attended college but did not get a degree to 23 years for those with graduate degrees.

Worse yet, student loans are exhibiting high default rates — currently about
13.4 percent. That depresses credit scores and makes it more difficult to qualify …

Total outstanding student debt now exceeds $1.1 trillion. Debt loads for recent graduates average just under $27,000, but an estimated 13 percent of outstanding balances range from $54,000 to $100,000.

Student loan balances are going up at an alarming rate because college tuition costs are soaring.  The Federal Student Aid (FSA) system is nothing more than a free money spigot for college administrators.  Look at a chart that shows the growth in FSA since 1979 and it runs exactly parallel with the increased cost of college.  Administrators make sure they suck up every dime of available aid and they don’t have to worry about paying it back, their ill served students are on that hook.

I’ll be writing on how to fix the system, but the bottom line on this subject is simple: don’t believe anything you read in the media.  Lower interest rates will not affect the default rate nor will it take graduates out of the debtors’ prison where university administrators and bureaucrats from the Department of Education have consigned them.

Here’s what the cost of college looks like vs. the CPI…