This week we may be staying a bit closer to our economic roots with a discussion of the whole “Boomerang Kids” situation (impoverished loan-burdened kids having to move back in with mom and pop because the “drank the Kool-Aid on “get a lot of education and there’s sure to be a job.” Thousands are finding that’s either not true, or if there is a job, it involves standing by a grill flipping burgers.
My consigliore, a normally meek and mild-mannered tax attorney, has been eyeing this space for a good while and offers a few thoughts…
“Student Loans = the real estate “No Job, No Income” loans
What happened with Student Loans is that they took it out of the Free Market economic model, just like they did with Real Estate Loans.
In order for the Free Market to work in the credit markets the lender needs to actually be risking their money … if they are NOT then they don’t give a rat’s ass about the Credit Quality of the Loans they are giving out (and perversely may actually be making LOTS of money on loans that with even a casual glance they know will NEVER be paid back!! econ 101 … reward $$$ for doing something, you get more of it – so the incentive is for the loan issuer to make BAD LOANS!!).
What happened with Student Loans is actually very simple, the “lender” had all of it’s risk removed from the game.
With real estate, as everyone understands now, it was the divorcing of the upfront payments to the lender making the loan from the business risk associated with the loan (since the loans after issuance and the originator collecting their upfront fees were immediately packaged up and sold to clueless third parties). With Student Loans something similar happened.
With Student Loans the way the risk to the lender was removed from the game, so that they could make loans without regards to loan credit quality (ala a clone of the real estate loan origination game), was done by two simple mechanisms:
1) The Bankruptcy Code was changed so that one could virtually NEVER DISCHARGE a loan if it was made for an “educational” purpose!! i.e.: you OWED FOR LIFE (think slavery here ….). In almost all other aspects of American life CREDIT RISK exists for the lenders … so the lenders at least try to PAY ATTENTION to their prospects for eventual repayment (a company or person could go bankrupt and the lender would never get their money back) . NO NEED TO DO THIS FOR “STUDENT LOANS” since BY LAW the borrower can NEVER GO BROKE wrt their student loan (they could still be collecting on it from a person’s estate when the person dies at the ripe old age of 80!! after making payments all their lives!!)
2) The government in it’s infinite wisdom decided that for many, actually most, loans to “GUARANTEE THE LENDER” that they would get paid for their Interest and Principal no matter what the student did … OR for what purpose the “Educational Loan” was made (8 year degree in clay pottery making? Same guarantee as a loan for a person in Medical School or one getting an advanced degree in Microbiology or Chemical Engineering).
With those types of Government Imposed Distortions to the Free Market, both of which distorted the market such that neither the Lender NOR the supposed “Educational Establishment” had to care about either credit worthiness of the borrower OR the issue as to whether the “Education” being received would actually assist the borrower in making enough money to pay back the loan, everybody decided just to make money NOW and forget about the long term benefit to the student.
These two dynamics of course has led to lenders lending freely (no risk to them … like with the real estate loans they make money regardless as to whether the loan makes economic business sense in a free market system) AND to the “Educational” institutions not needing to care about whether the education they were giving out provided “value” to those receiving it (and as a corollary they also no longer needed to care about the “cost” of their product … since if they raised the price they would just force their consumers – students – to borrow more money to cover that higher cost).
The entire system of post secondary education in the US has become totally divorced from the Free Market place.
The “Student Loan” issue is a HUGE one, and one that isn’t going away easily.
*Higher Education LOVES the current system since they make LOTS of money off of it (because it makes their customers “price insensitive” and thus inclined to “overbuy”).
*The Banks /Loan Originators etc. LOVE the current system since they make LOTS of money off of it (because they do NOT have to factor “credit quality” into ANY loan decision – they are guaranteed payment no matter what).
The “simple” solution would be to make student loans non guaranteed and bankruptable again … which would make lenders look closely as to the value provided by the loan for any one individual student and their field of study/grades etc.. Will that happen? Of course not! Too many ox’s would get gored … starting with virtually all private colleges and all for profit schools (both of which would have to cost cut and downsize dramatically) and also including a huge chunk of the financial services industry.
It is going to be interesting to see how this plays out over the years … but personally I believe the changing of the Bankruptcy Code back to it’s original structure would be the most efficient way to handle the problem.
~ Older and Wiser
(ps: wanted to add. this was all perfectly foreseeable. when they changed the bankruptcy code we kicked this issue around the office at the time and ALL of us came to the conclusion – way back then -that students /borrowers were being screwed while banks and the higher educational establishment were being given a government license to steal. that the stealing would start out slowly at first … but eventually would become an all consuming monster. it was all perfectly foreseeable … and was brought about via extensive lobbying and the purchasing of “legislation” by the vested interests who stood to make many many billions of dollars off of the scheme. the only disagreement we had in the office was how long it would take until the students would realize just how screwed they were. at the short end one person said 5 years, I on the other hand said 15 to as long as 20 before it would come to a head. looks like my timing is just about dead on)”
For those who have forgotten, Ures truly was a college president-level fellow who left the “school industry” a number of years ago, because I saw what was happening. In short it was this: Kids were coming in for a good education, signing up and going (at the time) $18,000 in debt for a 1.5-2 year program.
However, when I saw that expected jobs (and rising employment) were not there, I left the industry within a couple of years. Now, talking to people in the industry, there’s much discussion of how schools have plans to “go to private funding within 2-years” as one put it.
That sure sounds nice, but here’s the reality which you can write down and take to the bank: Most schools have not designed their programs around best “bang for the buck.” Most – many in the private/for profit sector – have “sold” education which is priced at the level of available funding.
They’ll deny it every breathing second, but most all are maxing out student loan and grant programs for everyone who comes in the door.
When school owners start talking about plans to revert to “selling education for cash” I get a little disgusted. I have been in that position and even with perfect sales skills, you can’t get blood out of a turnip. The people who are coming into most schools don’t have two dimes to rub together. Therefore, absent an economic miracle, I’m lumping private/for-profit schools with “plans” to sell education for cash, or a set of loans, in the same category I’d put a crack-head promising to quit. It’s a bad gamble.
The root cause of (what ails us in student loans) is the whole mythos which the higher education lobby has promoted – namely that an education is no good unless it’s from an “accredited” school.
Well, here’s the ugly truth: Education is education regardless of where you get it: Non-accredited school, the University of Hard Knocks, or from the holier-than thou, wrapped in robes people who “admit you” to student loan debt for life, rather than “sell” you an education which may – or may not – be paid off – EVER, including by bankruptcy except for exceptional cases which seem to mysteriously appear whenever the complicit media are looking. Might look to our nation’s capital and ask “Gee, which large powerful newspaper has an interest in a chain of schools which are for profit?
The government has not yet come to the obvious answer, and it is simple as the nose on your face, but no one wants to talk about it because it would remove cancerous student loan debt and put learning back in its proper place: In the hands of students. But first a bit of history.
When I decided to go back to school at mid-life, I shopped schools until I found one which would give me credit for life experience. Go ahead – look it up – the College Level Examination Program.
Basically, this lets a bright (self-learner, like Ures truly) to bone up on things like the difference between Egyptian pottery versus pottery Crete, and go challenge a bunch of time-wasting electives. I also blew off 2-years of math and a couple of years of English and such, though they obviously didn’t test out on use of spellcheckers or grammar checkers.
When I CLEP’ed my way through school, since I was really engaged in the core learning that I was after in Business Administration, I naturally got a spectacular GPA because why? I didn’t have to load up on bull-shit filler courses.
While I appreciate that there are lots of people in higher ed who have a wonderful time on things like history of the Middle Ages, that ain’t terribly relevant in most workplace settings.
Side Note: My older sister has an MLS and seems I recall her as being really expert in that kind of history as a minor from the UW in Seattle. But she did very well because she was interested. But this gets me to the point that when you’re sizing things us, achievement follows interest. Plain as that.
You want to know why the drop-out rates are high? Mandatory stuff that doesn’t track well to interest in a subject. How did I get a first class commercial radio ticket at age 16? Burning interest in electronics, of course! D’oh, why the academicians can’t get this is obvious.
Programs which document personal competencies are dissed and sneered from the hallowed halls of higher ed.
In fairness, is there some value to being well-rounded instead of a monomaniacal gearhead, for example? Of course! And is there some value from rubbing shoulders with the rich kids from the other side of the track at the Ivy League schools? No Bonesman (go look it up) in his right mind would argue the point.
But what’s the real answer? Stop using higher ed as a major tool of employment and start teaching people what they don’t know and give it up on the “wrapped in academic robes” crap. We can no longer afford government underwriting of the higher ed crowd and until they stop bullshitting the public about things like “accreditation” their funding needs to be cut. And a class-action lawsuit against the government for getting the jobs forecasts terribly wrong ought to be considered, since under pressure from the school industry, kids are still enrolling in programs which have lowering probabilities of employment.
Yes, college-educated people make more money than high school dropouts, but we’re confusing a whole bunch of variables here. The higher ed crowd would have you believe that this is from attending those filler classes that keep butts in chairs and federal money coming in.
Nothing could be further from the truth. The FACT is that some people have hustle and some people don’t. And if we want to have that argument I can point to some highly successful college dropouts (Apple? Microsoft?) as a prime examples of how “You can’t keep someone with smarts and hustle down.” My first example might be Bill Gates.
Is my eldest daughter facing BK because of student loans? Yep. Is the other daughter still buried in student loan debt? Yep. Does my son who avoided the trap and peer pressure have money in the bank and is living debt-free at age 31? Yep.
So sorry, higher ed funding is a joke, a swindle, and a lie, depending on whether you want to tell it like it is…or repeat the same band mantras that have led us down the garden path on this stuff. Sure, it’s an employment/job creation scam, but it’s one we can ill-afford now.
Strip a man of his “papers” and those with gumption, hustle and determination will still make it to the top.
The Big Lie is college makes the man. No, good parenting along with good values and principles (regardless of source) makes the man, especially coupled with a willingness to see opportunity and apply hard work. Go back to my example dude. The rest is pretty much frosting and it’s dishonest of school owners to claim credit while forcing most (including 2 of my 3 kids) to eat their cake.
You seeing how this Law of Financial Motion stuff works?
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Part 2: The End of ALL Jobs
In Wednesday’s report, we made an astounding forecast, which unless I live to be well into triple digits, I would be around to see, but my son – and if he ever gets hitched up and has kids – following generations of the Ure clan will. But that’s where we run into issues: Big Ones: Because once an economy runs out of jobs, the “economy” as we know it implodes. With no jobs, no one has income, so unless machines are going to provide us with Nanny State comforts (in which case what’s the point of “living”?) we’ll crash and burn in a major way long before our forecast date. So this morning, besides laying out our retirement saving plan in the ChartPack, we pick up the scent and see what are some of the “best case” ways for the End of All Jobs to arrive. After we march through some of the morning headlines…
Safer Computing: Swearing Off Cookies
It has been a while since I roared the praises of the Maxa Cookie Manager which you can download and install for a free test drive by clicking here.
To upgrade from the demo to full working is still less than $30 (During their Spring Sale) and one heck of a bargain at that, if I do say so.
A new version of Maxa is due shortly (V. 6.0) and we’ll advise in due court when it is due for release, upgrade paths, and all that-there kinda like stuff.
“Live on $10,000″ A Year
Having a hard time making ends meet? (Like who isn’t, right?) A good starting point to better match up income with outgo is our $10 e-book “How to Live on $10,000 a Year…or less!”
It’s an automatic download. . Click here for the index and details.
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