Higher Education another bubble waiting to pop
Next time you throw a BBQ and Mrs. Smith is boring you with another tedious conversation on her son’s college prospects, throw this grenade: “I believe too many people go to college.” Watch the jaws drop as you blast this tired piece of conventional wisdom. People unthinkingly accept the current system, where even low skill jobs often require a college degree, and never question why. Has everyone blocked out all the lazy stoners and drunks who coasted to degrees alongside us, and refused to contemplate whether over $100K to “get a piece of paper” made any sense for these slackers? Employers know college is the new high school and use that piece of paper as a minimum bar certifying someone’s ability to write in complete sentences. We now accept a premise that disqualifies 70% of the workforce from decent paying jobs.
A sister conversation to that, one new parents are familiar with, starts with a question: “Have you already started saving up for college? Hope so, because by the time he’s 18 it’s gonna cost…” The questioner waits for your eyeballs to glaze over and your shoulders to slump, to which they will sagely nod. A simple response will turn this back on them: “No, I’m not worried about it. College education costs are a bubble that is bound to pop well before then.” Your reward will be a look of confusion, followed by a slowly dawning realization, “Shoot, why hadn’t I thought of that before?” It’s as if the housing bubble, where the same “costs will only go up” argument was prevalent, taught us nothing. Sadly, our elected central planners clearly haven’t learned from it, as Yahoo’s The Ticket reports:
Senate Republicans blocked a vote Tuesday on a bill that would have extended the current low 3.4 percent interest rate on Stafford student loans, taking issue with how the Democratic bill would fund the extension. If Congress fails to pass such an extension by July, the rates will double.
Unfortunately the gridlock is over whether to even pay for this extension, and not whether it’s a good idea in the first place. But it should be:
Some experts worry there is a student loan bubble that will collapse when many of those who borrowed money for education cannot find work, causing default rates to skyrocket.
Occupy Wall Street’s incoherence is legendary, but one message that should have been received loud and clear is that the heavily subsidized college industry is churning out a product that isn’t worth the cost. Another example of Thomas Sowell’s point on good things versus Good Things. Greater access to college education is a good thing, but put in the hands of politicians, it turns into a Good Thing, and it becomes politically incorrect to question its costs or whether we’ve reached the point of diminishing returns. Federal distortion of the student loan market skews the risk equation, making a bubble inevitable. When that bubble pops, like with the housing market, taxpayers will foot the bill.
Today, the government is heavily involved in student lending, much of which goes through its Stafford loan program that makes fixed-rate loans to undergraduate and graduate students attending college at least half-time. But even before the federal government entered the market, people took other steps to help close that gap. First, they shopped for the best value in education. Of course, they did not have perfect information about their choices. But they had trips to campuses and access to third party sources to reduce their uncertainty. In financing their education, they relied less on their own credit and more on their parents who (at least when labor and stock markets were strong) helped finance that education by a combination of gifts and loan guarantees.
Many people and private institutions of means were alert to the financing gap, which they helped close with scholarships and other forms of financial aid. All these measures are still available. Their key advantage is that everyone involved in the process has a strong incentive to make those investments work. Monitoring student performance and student loans is not easy, but it is surely done best by those who have direct and close ties to the student.