More Extend And Pretend For College Students

Today’s Courier Herald Column:

In retrospect, we should have seen the financial bubble coming.  Virtually anyone that applied got a loan.  There was no consideration given to how the loan would be repaid.  No calculations for repayment ability were required.  Most borrowers overestimated the value of their purchase and underestimated the income that would be available in the future to retire the debt.  The government subsidized an unlimited amount of borrowing, and then the problem was so large that when an alarm was sounded, too many people were invested in the status quo that the system could not be changed until it was too late.

No, the above paragraph isn’t a retrospective of the housing bubble.  Instead, it’s a forecast of the student loan debt bubble which is yet to burst, but is also becoming hard to ignore.

President Obama visited the University of Colorado on Tuesday to campaign for extending current subsidized student loan rates.  Without a change in current law, rates are expected to double from 3.4% to 6.8% this July.  Yet continued subsidies on easy credit only continue to mask the real problem.  If this were the housing problem, it would be called “extend and pretend”.

From a policy standpoint, we have accepted without question that all college degrees have value, and will provide a positive return on investment.  Colleges have expanded their facilities and offerings in a bid to attract students, and passed those costs on to consumers.  The cost of a college education has risen faster than inflation for decades, with the federal government willing to provide the financing for almost anyone who asks.  No one asks if today’s higher expenses are worth the cost to most students.

Those entering college are not required to do any analysis to determine how they will repay the debt.  Many are encouraged to stay in college for a 5th year or longer to enjoy their undergraduate experience.  Many are now finding that their expectations of a certain financial lifestyle were inflated during their college years as they are unable to afford things as employed young adults that they freely spent money on during their college experience.  And that’s for the recent college grads who are actually able to find jobs.

It is relatively easy for current young adults to graduate with over six figures of student debt.  Only then is a student required to figure out how to make student loan payments while also figuring out how to afford housing, transportation, and other basic costs of living.

To make matters worse, graduates who find they borrowed more than they can afford to amortize are unable to declare bankruptcy on student loan debt courtesy of the bankruptcy reform act of 2005.  Thus, lenders who entice students to borrow freely during their college years and the universities that freely accept their checks have no interest in educating their customers about managing their debt or doing a cost/benefit analysis.  It is just assumed to be the student’s problem when they graduate and get smacked in the face with reality.  The lenders and colleges will both get paid eventually.

This is not a small isolated problem.  The amount of total student loans outstanding is estimated between $870 Billion and $1 Trillion according to the Associated Press, an amount that has doubled in the last five years.  To put that in perspective, total credit card debt held by Americans is estimated at $693 Billion and total auto loans outstanding are about $730 Billion according to the Bank of New York.  The amount of student loan debt and its role in our economy is not inconsequential.

Instead of extending and pretending, we must have an honest policy discussion with regards to deflating this bubble.  Why are degrees in philosophy and art history subsidized at the same level as math and science fields?  Why are borrowers allowed to receive loans without demonstrating they have conducted an analysis of how they expect to pay the loan back?  Surely they should be able to complete a simple pro-forma of the average income for a graduate in their field and then deduct the expenses for the cost of living in their chosen city plus the debt payments they will have to make.  Why is this not part of the application process?

And if credit card customers and mortgage holders are able to declare bankruptcy to get out from under crushing debt, why are students told that they must pay back debts they incurred when they were just old enough to sign a legal contract while those lending them money and profiting from their borrowings have a vested interest in them not understanding the consequences of their spending?

College students are adults, and should be treated as such.  To do so, however, requires an adult policy discussion and not a promise to keep the cost of their futures that they are mortgaging cheaper for a little longer.



  1. Chance says:

    This is about where I’m at on this issue. It’s far too easy for college students to borrow up to their eyeballs, only to escape the university with still no concept of how long they’ll be stuck in debt until the first payment comes due. We certainly need to encourage and incentivize education, but the president is dead wrong if he thinks this is a good way to do it.

  2. ryanhawk says:

    “Why are degrees in philosophy and art history subsidized at the same level as math and science fields?”

    That’s a great question. Another good question is why tuition for math, science, and engineering is set at the same level as tuition for other areas of study. Or why tuition at Georgia Tech is roughly equivalent to tuition at a school like Georgia Perimeter College. Surely areas of study like exercise science can be taught more cheaply than electrical engineering, and surely a degree from Tech should cost more than a degree from GPC.

    • Doug Deal says:

      What makes you think technical classes are any more expensive to teach?

      Most of my classes were me, a book and a professor, no specialized equipment neccessary. In chemical engineering, one of our labs was a bucket of water, a tube and a stop watch and 20 hours of analysis and write-up.

      Sure, there are some things that can be expensive, like an NMRI, GCC or IRSpec, but when amortized across the students who use them, over the years they use them, it is not all that much.

      Perhaps professors of engineering get paid more, but why is it then that the most expensive tuition bills are small Northeastern liberal arts colleges?

      • ryanhawk says:

        I think that because I’ve heard it from several different people who would know — i.e. college deans, edu lobbyists etc…. And it’s just common sense that it is going to cost a lot more to hire a professor with in demand technical skills than it is going to cost to hire someone who wants to teach something like Art History or Political Science.

        You make a good point about the price of liberal arts colleges. I’d be more than happy to live in a world where tuition was based on market supply and demand. The only relevance of cost in that case is which areas of study would immediately disappear. I expect many “majors” are heavily subsidized and could not survive if they were competitively priced.

  3. John Konop says:

    This is very important issue! The student loan issue is the same problem we had with housing. Government backed loans on houses, that should of never been approved above rental value. If you pay above that amount you should either have to use 100% private money or come out of pocket for the difference. If the private money did not have the government backed guarantees you would see the price for the risk and or more collateral.

    The student loan issue is the same. The government should only back student loan debt amount, if at all, that are in professions that have an average wage that a person could afford the payment. If a private company wants to take the risk with no government guarantees than let the free market function and you would see much of the problem go away.

    If private lenders had to survive without government backed guarantees and rules, how many loans do you really think we be for 100k to 200k of debt for a communications, teaching….degrees? Students would use public colleges over private, Vo-tech over 4 years arts……………….. I am not saying that it would be a 100% right, but in general it would work out.

    By not using this basic old school approach to lending, verse irrational standards with tax payers on the hook, we will only repeat the last fiasco as I predicted before our last lending crisis.

    Also this is why I have promoted using high school to let kids gain college credits and or Vo-tech skills before leaving high school to reduce cost. As I have advocated numerous times before the high schools, colleges, JC……………..should work in conjunction once a kid enters 9th grade. Not only would this lower the cost of education and make more affordable, it would increase quality.

    Thank you Charlie, this is a much needed wake-up call.

  4. ZazaPachulia says:

    Excellent column, Charlie.

    When the government subsidizes an FHA home loan, the recipient must not only prove that she can repay the debt, but also pay mortgage insurance out of pocket for the bulk of the life of the loan. The subsidy helps first time homebuyers and lenders, who are exposed to increased risk. FHA loans have their own problems, but they’re more sensible than the student loan morass Charlie describes.

    The gracious taxpayers took care of all of my college expenses and then some (in return for some service in the military). I took that route as a working 18 year old in part because the concept of financial independence appealed to me. The service academies and ROTC aren’t for everyone (and they’re not needs-based, so they’re not a great deal for taxpayers, either). But I do like the concept of needs and merit based scholarships/grants that come with guaranteed/required employment–much like the military scholarships we have now.

    In emerging market countries with less educational infrastructure, these types of programs are common in the private sector. We even have something a little bit like it with the Kia and Technical College System of Georgia partnership. There are much better ways to increase the competitiveness of our workforce than throwing more and more money after student loan subsidies that disproportionately benefit colleges and lenders at the expense of private individuals.

  5. ZazaPachulia says:

    Oh, and don’t get me started on post graduate degrees… People get subsidized loans for those, too.

    • CobbGOPer says:

      Well they have to to afford it, as grad school is even more expensive (and for less time, too) than undergrad.

      Besides, we’re all going to have to get a master’s soon anyway; the education subsidies that have allowed so many to go to college have made our measly BA and BS degrees worth only slightly more than a high-school diploma.

      • seenbetrdayz says:

        “Besides, we’re all going to have to get a master’s soon anyway”

        Man don’t remind us. The shift in Nursing right now is that everyone should have a 4 year degree within a few years.

        Now, bachelor’s degrees are nice, but . . .

        There’s no way in hell anyone can convince me that a nurse with an associate degree and 20 years of real-world experience is going to show a significant difference in their skill performance by going back to college to get a bachelor’s.

        But if they don’t do it, they’ll lose their jobs to new grads.

  6. Jimmie says:

    The thing that cracks me up the most is that old kooky, crazy bastard Ron Paul warned well ahead of time about all of these Gov. sponsored Bubbles. Just as he has been warning about the inflated dollar that is going to go bust once China and India start buying oil with gold (those sanctions are a great idea). We’re in pending doom right now, but we’ll just keep on printing money and pretend that everything is A-Ok!

    • Charlie says:

      The problem with Ron Paul’s warnings is that he’s predicted 30 of the last 2 bubble collapses.

      The problem with your comment is that this isn’t going to be another Ron Paul thread. You’ve had a couple of weeks here to get those out of your system. Any additional Ron Paul comments/threadjacks will be deleted.

      Please do not attempt to argue this point, as the ruling of the chair is final.

      • Jimmie says:

        lol. But RP fits in any thread. {Edited: No, he doesn’t. And any continued attempt to argue this point will lead to your ban. Period. End of discussion. – CBH}

          • seenbetrdayz says:

            Well, it is a private blog, and Charlie as manager has the right to determine what content appears. In the Soviet Union, the government would probably tell Charlie what to censor and what not to censor.

            Having said that, it’s gonna be awfully quiet between now and Romney’s loss in November.

            • CobbGOPer says:

              I don’t know, I thought the point of a blog was to drive more people to click and comment. Unless someone is being threatening or hostile, or using extreme profanity, it doesn’t seem like a good idea to me to go around threatening your commenters with bannination if they talk about something you don’t particularly care for.

              Maybe I’ll just start taking my commenting over to GA Pundit. I doubt Todd threatens his posters for having an opinion they’d like to express.

              • Charlie says:

                Wherever you choose to take it, this threadjack ends here.

                Open threads are for the topics of a commenter’s choice. This ain’t one of them.

    • CobbGOPer says:

      Seriously, Jimmie, why are you talking about Ron Paul when we could be talking about Mitt Romney’s plan to fix this problem:

      Yeah I don’t think he has a plan either, unless it involves more federal money for loans.

  7. Jackster says:

    If only we could decouple the notion that a person “fails” in some perspective if they have to extend out their college, or go to a smaller school, etc.

    To me, that’s the societal pressure here – you fail if you don’t complete college, if you don’t go to college, or if you can’t get a job to pay back the loans after college.

    I’m waiting for that item to become center stage, education is the main driver of most peoples’ self worth.

  8. Three Jack says:

    As always the first question should be, ‘why is government in the (fill in the blank – education, business, home) loan business’? Just like every other government program designed to assist us poor, helpless citizens, this one is doomed to fail with potentially catastrophic consequences.

    Unfortunately there isn’t an elected official in DC with the cajones to announce the only real solution to this powder keg…end it as soon as feasibly possible. Let the rate double this year then start the process of gradually eliminating all taxpayer funded higher education subsidies over a period of years giving families time to prepare for funding their kids higher education the old fashioned way, savings.

    • Jimmie says:

      3Jack That’s one of the problems. There are no viable savings vehicles anymore. What’s .4% interest going to get anyone. Wall St and the Investment Banks end up stealing any gains from the riskier investments. Followed by a bailout. Sigh…What are we gonna do, except continue to bend over and take it

      • Three Jack says:

        Jimmie, agreed. But compare .4% interest paid to saver vs. the cost to all taxpayers when we are forced to bailout this bubble in excess of $1T.

    • Jackster says:

      They’re in the student loan business because it is a $6B profit a year (estimated from $60 billion over 10 years stated during the 2010 “reform”).


  9. johnl says:

    I did not have to take out student loans in undergrad, but I did in law school. I was shocked that I could basically take out as much money as I wanted, whether I needed it or not. Not knowing much about it, I thought it would be limited to my tuition and books, but no, I could take as much as I wanted. In fact, the school’s financial aid office urged me to take much, much more than I needed.

    Fortunately, I only borrowed as much as I needed to live very modestly, and I still ended up 30k in debt which still took a while to pay off. Many classmates however, borrowed well into the six figures and lived high on the hog all through school and they’re still paying for it 15 years later.

    Seems like some sort of limits should be set over and above one’s tuition and books instead of nearly limitless borrowing.

  10. Doug Deal says:

    The research that I have read suggests that unless you are getting an engineering/science or other specialized degree, when normalized for equal levels of intelligence, getting a degree results in less lifetime earnings. Mainly because you spend lots of money over 4-5 years instead of earning it and when you factor in time value of money, interest on loans, a 40 year career is not enough time to catch back up.

    • Jimmie says:

      Unless of course you go into politics. Then it’s a windfall. It’s mighty windy here in GA.

    • ryanhawk says:

      The research I’m familiar with suggests a positive ROI at the Bachelors and Masters level, and a negative ROI for a PhD. Here’s one interesting source:

      GT clocks in at #17 (based on 30 year net roi in dollars) for those paying in state tuition, and has the top ranked annual ROI %.

      • Doug Deal says:

        My GT degree has been more than worth it, even though I paid out of state tuition. If it was not in engineering, though, I would have been royally screwed.

        My wife is in an even worse situation. Her degree was in English and her post grad work was a law degree. Combined, her student loans were more than mine, but her income potential has been much less. She would have been better off financially without her law degree as she made nearly nearly as much as a teacher and lost three years of income and incurred 50K in debt.

        If you look at ROI, anything under what you can earn with another normal investment is a loser. I.e., if you spend “invested” 100,000 in your education to get a return equivalent of 3%, you would have been better off investing in mutal funds or even long term cash investments.

        Coincidentally, that is something we learned in Engineering. If an engineering project had a lower ROI than just investing the money in something else, we were taught to recommend against it. Why incur risk and liabilities to end up worse off?

        • Calypso says:

          “If you look at ROI, anything under what you can earn with another normal investment is a loser. I.e., if you spend “invested” 100,000 in your education to get a return equivalent of 3%, you would have been better off investing in mutal funds or even long term cash investments.”

          There is a part missing from your scenario. It is the fact that an 18 y.o. can get that $100,000 loan providing he is going to college, but the problem lies in the fact that the same 18 y.o. can’t go to the bank and borrow that same $100,000 and stick in mutal funds to make your 3%. In other words, he would never have that money to invest, as he could obtain it only due to the fact he is a college student and the money is used (obstensibly) for college expenses.

          • Doug Deal says:

            At 3%, you are pretty much breaking even with inflation. And it would not be an 18 year old, it would be an 18 year old, plus 4-5 years of college, since you do not borrow it at the beginning and you also don’t start paying it back for a couple years beyond that, usually.

            In 4-5 years, living at home, one could very easily sock away $20-30,000 working entry level jobs (one week pay each month for 4 years), and after 4 years you could finish a trade apprenticeship and make more than most entry level college graduates (especially the unemployed ones) and never have a student loan to pay.

            But, this is physical labor, and most people would never want any part in that.

  11. seekingtounderstand says:

    French Revolution/ debt forgiveness because we are $%$# unles we do.

    As a conservative who has witnessed the extreme real estate scams going on by our fellow citizens which then get written off by the banks that where bailed out……………..we need to do it for our future citizens. I truy believe they where not educated enough about finances to make wise choices at our government schools. Our college institution scammed them all.

    • Doug Deal says:

      I agree with the overall conclusion, but most of the “evidence” is anecdotal at best.

      Although my degree is in Engineering, I switch professions and now make my living architecting and developing web applications as a consultant and on my own. A computer science degree is well beyond what most people need to just be a coder. Not everyone needs to design systems and most of what you learn in a computer science program has zero application in the real world. So you understand how an OS works, big freakin’ deal. Microsoft or Linux takes care of that for you, what my industry needs are people who can speak the language (VB, C#, PHP, Java, etc) and who can use logic (if not this than that). Anyone can learn this on the job in a handful of months if they are predisposed to it. Requiring people to spend $100,000 just to come in completely worthless and requiring basically the same ramp up time as someone who is just a computer hobbyist is beyond ridiculous.

  12. saltycracker says:

    Excellent post, C.

    We can wear ourselves out debating how to improve the program but this is an area the federal government has no place in. The states might want to do something to encourage specific trades. It isn’t just the public universities taking advantage.

    Reads like a case is building that we should have known better than loan money they could not repay and the personal guarantees should be invalid. Sounds familiar.

  13. CobbGOPer says:

    One of the problems with this whole thing is the 4-year system. What is the traditional process at university? You pick your major, then you take two years of ‘core’ classes, few or none of which will really impact your major or relate, and most of which are simply slightly more advanced classes we did or should have taken in high school.

    So after two years of taking classes – the majority of which you are simply learning the material for the test and then promptly forgetting it when you’ve passed the class – in these ‘core’ areas, you’re then allowed to start taking your major courses.

    My question is: if the courses I need for my major can be done in two years, why are you making me essentially re-take high-school for the first two years? If I can finish all the classes for a computer science degree in two years, why do I have to take these other classes which will not contribute to my overall understanding of computer science?

    If I want to get a law degree, why can’t I just take two years of poli-sci and then jump straight to law school? Or make it a comprehensive program: you’ll go to school here for 5 years, but once you’re done you’ll have a law degree and be working two years earlier (and cutting out the cost of two extra – and mostly useless – years of school).

    This is where we can do some real good, in reforming the traditional college model. Save some money, and get kids taking coursework that matters to their eventual career choice instead of two years of english, math, and science review that they should have already learned in high school.

  14. Dave Bearse says:

    The kids are only doing what they’ve observed their parents do in many cases without repercussion. Needlessly or recklessly borrowing, and then living large on the proceeds.

    Residents enrolled at public colleges are hardly consumers in the normal market sense of paying for what they use. General taxpayers are footing the bill for 1/2-2/3 of the cost, and lottery ticket purchasers a good bit beyond that.

    There’s simply little need for such consumers to be worred about cost or value when they’re footing but a fraction of the total expense.

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