Clause 61: The Pushback Blog

Because ideas have consequences

The Higher Education Bubble

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You liked the dot-com bubble? You loved the housing bubble? Get ready for the higher education bubble.

Why Go to College?

Executives and representatives of colleges and universities write articles and give speeches in which they steadfastly maintain that they are not here to provide vocational training. OK, fine — but then, why would anyone with two neurons to rub together take out a loan to attend one?

I have known people who went to college to “broaden their intellectual horizons.” I have no problem with those who can afford the luxury of going to college for that reason taking advantage of the opportunity. But it was out of reach for me. I was there to enhance my ability to make a living, as are many of the other people who attend.

Some people go to get four more years before having to be responsible for themselves. In a 2005 article, the Wall Street Journal put the effective age of middle-class majority at 26 (http://online.wsj.com/article/SB110496649357818050.html). We can’t afford a society in which people are not expected to be grownups until 26. Not only will there be too few productive people carrying too many non-productive people, but a person who defers adult responsibility that long can easily defer it even longer.

Some people go to college to find themselves. There are more cost-effective ways to do this. Get out and work, and find yourself in the black rather than in the red. By now, even taking the grand tour of Europe is a cheaper way to find yourself than college.

Some of us who went to college learned how to learn. If people ever make the jump from being taught to learning how to learn for themselves, they typically do that in undergraduate college. However, this is far too unreliable; too many people who pass through college are still waiting to be taught, rather than taking ownership of their learning. Moreover, we need that transition happening in high school. We need all citizens, whether or not they attend college, being able to own and direct their learning.

Middle-Class Finishing School

In fact, everyone has been talking out of both sides of their mouths on the subject of college for a very long time.

As late as 1980, kids were being told to get a college degree and get a good job with a large company. I worked with people in technology who had degrees in English or sociology who had been hired by Bell Labs and working in technology-intensive roles. The important thing was that you had a degree.

College was, in fact, a middle-class finishing school. To sell for Xerox, you needed a degree. After all, you would be selling to people who mostly had college degrees. The Xerox business card would get you in the door. The important thing was, having got in the door, that you not blow the sale. The most probable way for you to navigate the completion of the sale was to have common shared experiences with your buyers. The people buying from you most likely went to college. Thus, a degree was required.

The large corporation could afford to carry you for the 2-3 years it would take for you to unlearn what you learned in college and become effective in your corporate environment. Thereafter, you would earn your keep.

But corporate downsizing began in earnest around 1985. Suddenly, there were not an abundance of good entry-level jobs with large corporations. By 1990, there were more jobs being created in companies owned by women than in the Fortune 500. This fundamentally changed the game.

Smaller companies can’t carry college graduates for 2-3 years while they figure out which end is up. In knowledge work, if you have to tell me how to do the task you need me to do, it’s easier for you to just do it yourself. I would be a hindrance to you; you could not tolerate me on the payroll.  Meanwhile, colleges still don’t want to provide “vocational training.” The typical undergraduate program prepares a student to be a grad student in that subject, not to go out and deliver value in the workplace.

The people who are mortgaging themselves to the hilt to get their kids into “good schools” are fighting the last war. And losing. Badly.

What College Should Do

The state workers who help the unemployed are now saying that the average person will have 5-7 careers in her/his working life. That’s careers, not jobs. College needs to prepare students for this. Only a minority can possibly have academic careers or become artists, musicians or other creators of culture. The majority will have to make their living working in commercial enterprises.

Most college graduates will have to amortize their college learning and their college costs over 8-10 years, not 30+ years like some older people have been able to do. After 8-10 years, they may have to go back for an advanced degree to prepare for the next turn of the wheel.

Most college programs are centered around:

  • Core courses to feed starving departments, dressed up as “well-roundedness”;
  • Preparation to be a grad student in the major field of study.

Much of the core program is based on survey courses that emphasize spitback: memorization and regurgitation of whatever is of interest to the teacher. The students promptly forget it as soon as the final exam is turned in.

What we really want from college is:

  • Preparation for some useful skills that someone will compensate you for;
  • Understanding of the principles behind the skills (this is what separates an engineer from a technician);
  • Ability to learn, so that the graduate can pick up the next set of skills on her/his own.

We should be able to obtain this in 3 years instead of 4. This would have people standing on their own two feet a year earlier. It’s good for their self-esteem.

Isn’t College Required for a Good Job?

The standard message has been that the earnings of college graduates have left the earnings of non-graduates behind. This has become the evergreen justification for doing whatever it takes to pay for college. But look deeper.

Here is a 2011 article from the Federal Reserve Bank of Cleveland, titled “Are Underemployed Graduates Displacing Nongraduates?”:

http://www.clevelandfed.org/research/trends/2011/0711/01labmar.cfm

We looked at data that could reflect this trend and found that college graduates are in fact becoming more prevalent in occupations that do not require a degree. The trend actually started before the recession, though it has, if anything, increased during the slowdown. Also, a few very-low-skilled occupations have seen a jump in college graduates during and after the recession. While other ongoing structural changes in the economy could be driving all of these trends in the data, they are consistent with the stories of educated people rolling down into mismatched positions.

So, let’s take the obvious and overworked target job: barista at a coffee shop. The average hourly wage, at the time of this writing, is $9. If you are allowed to work full time, you would make $18,000/year (Not all such employers want to allow that, because then they have to offer you the same benefits they offer the people at corporate). Having the college degree might allow you to beat out a competitor who did not attend college for that job.

But that is not the right way to analyze the issue. Let’s say you’ve borrowed $60,000 to attend college. That means you have a debt of $60,000 plus interest to cover with returns of $18,000 a year, out of which you also have to pay for food, clothing, housing, transporation and taxes. Depending on the state you live in, you may only take home $12,600 after taxes. Was college a good investment? I think not. I just checked and found market fixed rates between 6-7%. At 6% compounded monthly, a year’s interest on $60,000 is about $3,700. You’re going to have to be living in your parents’ basement to be able to keep up.

The barista example may seem a little extreme. But as the research report shows, this is not an edge case. There are many jobs that do not require college-level skills where college graduates are displacing non-graduates, but compensation is not moving up to offset the costs of college. The hiring manager would understandably rather hire a college graduate, and college graduates are available to be hired for non-college-graduate wages.

I know, no one goes to college to be a barista in a coffee shop. But that just begs the question: why do they go? We have come full circle.

College Loans

More importantly, after they go, and they have a boatload of debt they can’t repay, what do they do?

Begin with the end in mind.
— Stephen Covey, The Seven Habits of Highly Effective People

The only sensible reason to take out a loan for education is that you think you can pay it off, interest included, in “cheaper” dollars. The dollars are cheaper if they are easier to earn with your education than they were before you had the education.

Here is an example of what not to do: a 26-year-old graduate of NYU with a degree in religious and women’s studies and nearly $100,000 in student debt:

http://www.nytimes.com/2010/05/29/your-money/student-loans/29money.html

There is nothing she can do with that education that helps her get out from under that mountain of debt any faster.

I recently attended a presentation on the current state of consumer credit. Student debt is the only segment of consumer credit experiencing growth since 2008. More importantly, while 30% of the student loans that were originated in 2007 were cosigned, 70% of the loans originated in 2012 were. You can look forward to a massive transfer of wealth from families to colleges and banks in the future, as parents are tapped for loans that their kids are unable to repay.

Here is the inside-the-engine-room perspective:

http://www.insidearm.com/opinion/a-love-letter-from-your-student-loan-bill-collector/

Last summer [2010], it was announced that student debt achieved the distinction of being greater than that of credit card holders and even the victims of subprime mortgages.

As the author notes:

As many employers now pull credit reports on job applicants, our defaulting student loan applicant is almost automatically assured a “No, thank you” no matter how otherwise qualified they might be.

Lenders make loans with the expectation that they will be repaid. Lenders are not investors, gamblers or speculators. Lenders provide temporary use of funds for profit (interest) with the expectation that the debt will ultimately be repaid, with low risk of non-payment. Somebody is going to be on the hook for that money. It doesn’t matter if the student is dead:

http://abcnews.go.com/blogs/business/2012/11/mother-inherits-dead-sons-student-loans-petitions-to-have-them-forgiven/

http://consumerist.com/2012/06/14/father-stuck-paying-dead-sons-student-loans-but-no-one-will-tell-him-how-much-he-owes/

From the first article:

Edwards had three student loans when he died, two federal and one private. The two federal government loans were forgiven within a month of his death. However, the private loan company is refusing to forgive the loan.

The two federal government loans were forgiven with taxpayer money. You and I paid his loans. Ain’t we nice? The private lender did not have access to taxpayer money.

“He was paying the loan bills when he died, but the balance is still over $10,000, and if I’m ever a couple days late on a payment, the calls keep coming until I pay,” Edwards told ABC News.

You cosigned the loan! What did you think that meant?

So What Do We Do?

Understand the new realities. College is not going to be the automatic entry point to a middle-class income and standard of living. Your child may graduate college, even with an engineering or technology-related degree, and be looking for work. Other degrees, such as English, psychology or art history, offer even less optimistic prospects of employment opportunities.

If your family is sufficiently well off that you can pay for the educational experience for it’s own sake, great! By all means, if it is what you want to do and you have the support of the people writing the checks, take advantage of the opportunity. For the rest of us, however, college is an investment and has to be evaluated as such.

Insist on your child getting a degree that offers a meaningful opportunity to enhance her earning power after graduation. No prospect of payback, no funding, period.

Children should not graduate high school without knowing what it takes to maintain their standard of living. They should know what they would have to earn to be able to buy the home they currently live in. They should have to research whether the careers that interest them would allow them to afford that home.

Avoid private loans. They are more difficult than any other debt to get rid of in bankruptcy. You are better of paying for college on a Visa card.

If you cosign a loan with your child, it’s like going into a business partnership with him. Is that something you are willing to do? You will need to be able to exercise controls over his spending and repayment, or you will be stuck with the debt. If you can’t see your way clear on that, don’t cosign the loan.

Am I calling for the youth of America to be turned into mercenaries, caring first and foremost about their ability to make money? Damn straight!

If you do go to college, you will be exposed to Maslow’s Hierarchy of Needs repeatedly. As the theory teaches, if you can’t meet basic needs like food, clothing and shelter, you won’t care about self-actualization.

Written by srojak

May 2, 2013 at 6:14 am

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