College Algebra Should Be Illegal

Apparently it is in this year to promise a free college education. That way, college-age people will like you, back you and strive mightily to get you elected. Their parents, who in many cases cosign their college loans, will like you, too.

To be fair, we have all been beaten about the head with statistics showing the supposed advantage in earning power college graduates have over non-graduates since I can remember. While the economist in me wants to dig a little deeper and look at component factors (such as major, program rigor and course content), I can see why people react the way they do to that data. Meanwhile, college costs have increased at 2.5 times the rate of inflation since the 1980s. So, yeah, I understand the pain.

In 2014, 69% of graduates of public and private non-profit colleges graduated with debt, and the average debt load of those graduates was almost $29,000. This is a substantial portion of anticipated first-year earnings that alters the economics of getting a college degree. In 2013, Senators Dick Durbin, Jack Reed and Elizabeth Warren called for a basket of student loan reforms, including penalizing colleges who had high graduate loan default rates.

“They will have to have skin in the game,” [Senator Reed] said. “They will have to make financial judgments based on how well-informed and how reliable their graduates are in terms of paying back their student loans.”

I would like to take a different approach to this issue. In this essay, I will survey what content can be moved into public secondary education so that more of what we now consider to be a college education is available at no cost to the student.

Preparation for What?

I am not saying that the education professionals are scheming to slow children’s learning down in order to exploit them by selling them more courses. Many of the people who have shaped our public education system are earnest, sincere and want to do what is best for the kids. That is what makes the problem so intractable.

Some people believe that all children should be prepared for college; others believe that would be a disservice to many students who would be better served preparing for a trade. We have differing concepts of the purpose of childhood: is it to be engaged as an end in itself, or is it a time of preparation for adult life? We have different levels of funding across school districts: how much does that influence outcomes?

All these questions are worthy of discussion — but we don’t really discuss them. The proponents of different viewpoints gather together, share evidence supporting their pre-existing beliefs, and holler abuse at those who disagree.

Creating the Client

The same schools that are not teaching your grade-school child to read are teaching remedial reading when the kids should be learning effective composition and algebra. Then, when the kids go to college, they can be put through more remedial courses in composition and algebra to correct prior omissions in their education.

Indeed, U.S. schools do teach arithmetic well … But they teach it over and over again, instead of assuming students have learned, say, fractions after a couple of years. In his study of textbooks, Mr. Schmidt found that U.S. books covered up to 35 different math topics a year — that means teachers fly through them at a speed of one a week — and didn’t drop any of them until seventh grade.

If some topics are taught over and over, algebra usually isn’t taught at all until ninth grade because . . . well, because ninth-grade algebra has always been an American tradition. But isolating algebra that way means that about 90% of a ninth-grade math book is new material — a huge blast of abstract thinking after years of easy-going arithmetic.
— “Low X-pectations: Students Fear Algebra, And Then Comes the Ninth-Grade Crunch“, Wall Street Journal,  16 Jun 1998.

For many students, Algebra 1 is their first formal encounter with abstract thinking.

.. Algebra is what teachers call a gatekeeper course; you have to go through it to reach the possibilities beyond. Algebra is the language of math and science, “the language of problem solving,” says University of Chicago math professor Zalman Usiskin. It deals in abstractions — using letters to generalize math operations — that expand thinking skills. In a technology-fueled society, says Mr. Usiskin, not knowing algebra “limits what you can do.”
— Ibid.

Abstract thinking is essential not only to make a living as a knowledge worker, but to solve problems as a citizen. Without the ability to think abstractly, you can’t find patterns. Every problem is brand new, having nothing in common with any that you have ever seen before. Abstract thinking is a necessary skill, and those who are on the sensory side of Myers-Briggs and don’t come out of the chute thinking abstractly are especially dependent on the education system to teach it to them.

Youngsters who take algebra tend to go to college, research shows, and low-income youngsters who take it are almost as likely to go to college as middle- and upper-income kids. The gap in test scores between students in private school and those in public school largely disappears if they take upper-level math courses, beginning with algebra.
— Ibid.

Thus it is premature to say to a ninth-grader, “you don’t need to take algebra because you’re not going down an academic track.” He sure won’t if he can’t learn math and can’t think abstractly.

Three Years of College

Many high schools offer advanced placement classes. Some even offer college-level courses in conjunction with local community colleges. Can we formalize those and push down the content of what is now a year of college so that everyone can get access to it in their public high schools?

The current estimate for a year of room and board at a college starts at around $10,000. Tuition, fees and incidentals pile on top of that. Even in-state tuition at public colleges averages about $9,500 a year. Getting students one year of what is now college somewhere cheaper would significantly reduce their costs.

Do Something Different

It is clear that an adult starting out in life with no work experience and $30,000 in debt is not loaded for success. We wish there were some grown-ups in the room who would tell them not to do that, but evidently that is not going to happen.

Nevertheless, you should understand the risks you are taking on. Look for alternatives to get the same content at lower cost. Above all, wring all possible value out of the free public education options you have available to you.

Is Texas Housing Overpriced?

Last week, Fitch Ratings pronounced that Texas has the most overpriced housing in the country, warning of  a possible correction. In its report, Fitch wrote:

Fundamentals do not appear supportive of current prices and the economy is vulnerable to the energy sector. Overall, Fitch views Texas prices as approximately 11 percent overvalued, with prices in Houston, Austin, and Dallas each growing by over 20 percent since 2011.
— quoted in the Austin American-Statesman, http://www.statesman.com/news/business/are-texas-home-prices-overvalued-as-report-claims/njZms/

The report went on to state that Texas had “vaulted past California and now has the housing markets deemed most overvalued.”

Texas is a big state, and conditions in Houston, Midland-Odessa and Wichita Falls can all move independently of one another. Nevertheless, the report makes blanket overall statements about Texas, so one has to interpret and consider it in these terms.

Compared to What?

Making a statement that real estate is overpriced begs the question: in comparison to what measure? There are two primary objective measures of value:

• Market value: the amount of money someone will actually pay for the asset;
• Net present value (NPV): the value of present and future cash flows that will be generated or required by the asset, discounted by the time value of money.

Net present value requires managing some uncertainty, because it involves forecasting future events:

• Future cash flows in and out of the asset;
• The appropriate discount rate.

Nevertheless, NPV is appropriate for an investor in rental real estate to use. You have an initial outlay and future outlays to maintain the property. You have future inflows from rents, modified by the risks of having the property unoccupied at any time.

For owner-occupied properties, NPV is not usually a consideration. It would require using imputed rent, and it would ignore non-financial advantages of home ownership.

Appraisal

During the process of purchasing a home to be financed through a mortgage, the lender will almost always require an appraisal. The appraisal is an attempt to estimate the market value of a home. An appraisal is an opinion, not a fact. Organizations such as the Appraisal Institute (http://www.appraisalinstitute.org/) endeavor to ensure the reliability and rigor of real estate appraisals. Nevertheless, they always introduce levels of subjectivity that are not present with the hard evidence of a market transaction:

• What existing homes that have sold are comparable to the home under discussion?
• How far in the past can you go to obtain a valid comparable sale?
• How far away from the home under discussion can you go to obtain a valid comparable sale?
• What are the components of value you can count or measure, such as bedrooms or finished square feet?
• What are the components of value you cannot count or measure, and how do they influence value?

There is an interesting definition of appraisal in Investopedia:

An appraisal is an opinion or estimate regarding the value of a particular property as of a specific date. Appraisal reports are used by businesses, government agencies, individuals, investors and mortgage lenders when making important decisions regarding real estate transactions. The goal of an appraisal is to determine a property’s market value: the most probable price that the property will bring in a competitive and open market. Market price, the price at which a property actually sells, may not always represent the market value. For example, if a seller is under duress because of the threat of foreclosure, or if the property was sold in a private sale without being exposed to the open market, the property may sell below its market value.

The distinction between market price and market value is worth noting. However, where the appraisal differs from the market price, how do we know which is closer to market value?

The reason lenders want the property appraised is to provide a control, managing their risk. In the past, when the lender who originated the mortgage expected to service the mortgage, the lender wanted to know that the homeowner actually had at least the equity position in the property that the lender believed. If the loan is underwritten in the belief that the mortgagee will have a 10% equity position in the property, but in reality the mortgagee will only have a 5% equity position, the mortgagee has less skin in the game and the risks of having the mortgagee walk away from the property under adverse circumstances are greater than the lender knows.

The appraisal business was strained in the years leading up to 2007, as mortgages were increasingly originated by organizations who had no intention of servicing the loans. These originators had every incentive to do the deal and little skin in the game themselves once they had sold the mortgage. The real estate industry, mortgage industry and regulators are struggling to cope with these changes and find the right balance of getting business done and protecting the interests of the various parties.

In Search of Market Value

There can be circumstances in which a buyer either overpays for a house or gets a bargain. In these situations, market price will not reliably reflect market value. But how do we know, and how do we identify market value?

Consider a purchase situation where comparable homes are selling for $150/square foot. A cash buyer purchases a home with 3,000 finished square feet of living space for $600,000, or $200/square foot. Assume there are no specific compelling features that push up the value of this house in the overall market. The buyer just wants this house. We say things like:

• “He paid too much for that house.”
• “He better be ready to stay there a long time or he will never get his money back.”

Thus, rather like obscenity, overpaying is something we know when we see it. Finding objective support for the claim, however, can be problematic. Take the hypothetical purchase price down to $465,000, or $155/square foot. Did the buyer really overpay? Or was the house finished better? In better condition? Did it have some feature that was more compelling than comparable houses sold in the recent past? Would any of these characteristics be similarly appealing to other buyers?

Establishing a measure of market value other than market price is more art than science. We have to try, because mortgage financing would be unacceptably risky without some attempt to validate the transaction price. Nevertheless, any attempt to establish a valuation basis other than what someone will actually pay for the asset introduces a lot of subjectivity.

Asset Bubbles

The events of 2007-2008 have heightened our awareness of asset bubbles in real estate. Bubbles can have negative consequences when they burst, as the prices people are willing to pay for comparable assets drops precipitously in a very short time.

Seiji Steimetz describes bubbles from an economic point of view:

.. the definition of a bubble involves some characterization of the extent to which an asset is overvalued. Let us define the “fundamental value” of an asset as the present value of the stream of cash flows that its holder expects to receive. These cash flows include the series of dividends that the asset is expected to generate and the expected price of the asset when sold. In an efficient market, the price of an asset is equal to its fundamental value. For instance, if a stock is trading at a price below its fundamental value, savvy investors in the market will pounce on the profit opportunity by purchasing more shares of the stock. This will bid up the stock’s price until no further profits can be achieved—that is, until its price equals its fundamental value; the same mechanism works to correct stocks that are trading above their fundamental values. So, if an asset is persistently trading at a price higher than its fundamental value, we would say that its price exhibits a bubble and that the asset is overvalued by an amount equal to the bubble—the difference between the asset’s trading price and its fundamental value. This definition implies that if such bubbles persist, investors are irrational in their failure to profit from the “overpriced” asset.
— “Bubbles”, Library of Economics and Liberty, http://www.econlib.org/library/Enc/Bubbles.html

Right away, the first thing we notice is that Steimetz equates “fundamental value” with NPV. This is the orthodox economic position, but as noted previously, it profoundly limits the applicability to the owner-occupied home. Most people who purchase their residences do not attempt to calculate their imputed rent and determine the NPV of the home purchase. If they even notionally consider it, it is most often a justification for a buy/rent decision they have already made.

Steimetz concludes:

The jury is still out on whether or not bubbles can persist in modern asset markets. Debates continue among economists even on the existence of irrational or rational bubbles. And there is often confusion in trying to distinguish irrational bubbles from rational bubbles that might be generated by investors’ rational but flawed perceptions of market fundamentals. Most modern efforts focus on developing sophisticated statistical methods to detect bubbles, but none has enjoyed a consensus of support among economists.

Whether or not bubbles can persist, we have seen that they can occur. Perhaps the best identifier of a bubble is behavioral: are purchasers making decisions on the inherent properties of the asset, or are the prices being driven by prior increases in price, with the expectation of a “greater fool” to come along in the future and pay even more for the asset? The latter is properly identified as speculation, not investment.

The more speculation going on, particularly in the same direction, the higher the likelihood of a bubble. Thus, in the years 2002-2007, residential real estate was seen as a stairway to the stars, with no possibility of downside. Originators began to give more consideration to the expected price performance of the asset than the credit risk of the borrower. As we experienced, it all came crashing down.

Is There a Bubble in Texas?

With this framework, we can evaluate the claims made by Fitch as to the conditions in Texas using the facts on the ground.

Is Texas Dependent on Energy?

The Texas A&M Real Estate Center provides a monthly review of the Texas economy. In their review for November 2014, the mining and logging industry, which includes oil and gas extraction, still accounts for less than 3% of total Texas jobs. The report states:

Of the 11,768,300 nonagricultural jobs in October 2014, the highest percentage of employment by industry was in the government sector followed by the trade industry, education and health services, professional and business services, and leisure and hospitality. Since October 2013 the state’s professional and business services, financial activities, construction industry, transportation, warehousing and utilities industry, and mining and logging industry have expanded their shares of Texas employment at the expense of the government sector, trade, education and health services, leisure and hospitality, manufacturing, other services and information industries.
— Ali Anari and Mark G. Dotzour, “Monthly Review of the Texas Economy: November 2014”, http://recenter.tamu.edu/pdf/1862.pdf

Thus the claim that the Texas economy is vulnerable to the energy sector is not supported by available data.

What about Price Growth?

The Fitch report also cites the fact that prices in Austin, Houston and Dallas have gone up over 20% since 2011. This is a significant increase, but how to interpret it?

The TAMU Real Estate Center also maintains an affordability index for various Texas markets. The index is the ratio of the median family income divided into the income required to qualify for an 80 percent, fixed-rate mortgage to purchase the median-priced home. Here are recent historical trends in these markets:

MLS Area	2013	2012	2011	2010	2009	2008
Arlington	2.51	2.95	3.32	3.13	2.4	2.11
Austin	1.8	2.09	2.38	2.31	1.88	1.56
Bay Area	2.17	2.38	2.61	2.49	1.99	1.67
Beaumont	2.18	2.51	2.71	2.35	1.96	1.68
Collin County	2.26	2.64	3.04	2.92	2.41	2.08
Dallas	1.94	2.31	2.65	2.58	2.09	1.77
Denton	2.62	2.99	3.25	3.07	2.25	1.98
Fort Worth	2.71	3.27	3.75	3.53	2.74	2.35
Galveston	2.16	2.57	2.44	2.27	2.09	1.33
Garland	3.18	4	4.58	4.58	3.14	2.71
Houston	2.02	2.3	2.63	2.53	2	1.72
Irving	1.96	2.61	3.13	3.2	2.39	1.88
Northeast Tarrant County	2.41	2.79	3.24	3.14	1.98	1.69

Source: http://recenter.tamu.edu/data/hs/afford.asp

Thus, for example, a median income home buyer in Dallas in 2013 would need a mortgage 1.94 times her income to purchase the median priced home in Dallas. Higher numbers indicate lower affordability.

To get a sense of comparison, let’s look at California. The California Association of Realtors doesn’t do their affordability statistics the same way. Instead, they report on the percentage of households that can afford to purchase the median home. For 3Q14, their numbers are:

Single-family homes statewide	30%
Los Angeles metro	32%
San Francisco Bay area	21%

Source: http://www.car.org/marketdata/data/haitraditional/

While the different methodologies frustrate direct comparison, it is clear that the median income household in California cannot afford the median priced home.

Moreover, look at the Texas figures across the rows. The figures are not trending uniformly upward from right to left. While prices are rising, so are median incomes in the region. Yes, prices are going up, but affordability is not falling out of bed.

Consider the earlier discussion on speculation and asset bubbles. If prices had gone up 20% in 3 years and affordability indices had marched from 2.5 to 4+, that would at least support the idea of an asset bubble developing. But the data do not show this. Instead, we observe that incomes support the rising prices. The area is generating wealth and jobs, and people are bidding up home prices.

Conclusion

The Fitch report makes serious and startling claims about the Texas real estate market. I am unable to find data to support these claims. The data I can find support my observations on the ground that the Texas economy is diverse across industries and, while real estate prices are rising, they are not rising out of proportion to wealth production.

Articles

The actual Fitch report costs money to obtain. These publicly available sources have quotes and summaries:

• http://www.statesman.com/news/business/are-texas-home-prices-overvalued-as-report-claims/njZms/
• http://www.dallasnews.com/business/residential-real-estate/20141222-new-report-texas-home-prices-overvalued-may-be-unsustainable1.ece
• http://www.businesswire.com/news/home/20141219005525/en#.VJRMzV4CqY
• http://www.housingwire.com/articles/32406-fitch-ratings-texas-and-california-are-officially-overvalued

 

Mark Cuban on Higher Education

Mark Cuban, owner of Landmark Theaters, Magnolia Pictures and the NBA Dallas Mavericks, has written several articles on what he believes is a bubble in higher education:

http://blogmaverick.com/2012/05/13/the-coming-meltdown-in-college-education-why-the-economy-wont-get-better-any-time-soon/

http://www.huffingtonpost.com/mark-cuban/will-your-college-go-out-_b_2558689.html

Cuban calls for a business focus on attending college:

The class of 2014 and beyond now has to prepare a college value plan. What classes are you going to take online that enables you to get the most credits for the least cost? What classes are you going to take at a local, low cost school so you can get additional credits at the lowest cost?

Then, with your freshman and sophmore classes out of the way, you can start to figure out which school you would like to transfer to, or two years from now, which online classes you can take that challenge you and prepare you for the areas you want to focus on. If you have the personal discipline you may be able to avoid ever having to step on a campus and graduating with a good degree and miracle of miracles, no debt.

That is a great idea, but I don’t know how many graduating seniors could actually execute it. There are some major risks that they would have to manage:

• Many students gear their performance up or down in response to their perception of the performance of students in their classes. Often there are people in local schools who are not really serious about their education. The student who wants to implement Cuban’s plan cannot be lulled to sleep in the low-cost school, or transfer to a more competitive four-year school will carry a nasty shock.
• This assumes that the student knows what course of study s/he intends to pursue at the outset and stays on that course. Many college freshmen do not know what they want to major in, or even what one does with the major once one graduates.
• The student must ensure that the credits taken before transferring will be honored by the school to which s/he intends to transfer.

The key caveat is provided by Cuban: “If you have the personal discipline, …” It can be done, but it requires a much greater degree of focus and self-motivation than many college-age students currently possess.

The one place where I really differ with Cuban is where he says:

College is where you find out about yourself. It’s where you learn how to learn.

There are more cost-effective ways to find out about yourself than attending college. And can we really afford to have 21- and 22-year olds who are still finding out about themselves? All your life you will be finding out about yourself; when is it time to join the grownup world and start producing?

As to learning how to learn, he is right that undergraduate college has been the place that people typically made the jump from being taught to learning how to learn, if they ever did. But it is an inefficient delivery system; look at how many people who attended college and 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 take ownership of their learning.

The Higher Education Bubble

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.