Student Debt Bubble Diminishes Demand and Ruins Lives, Yet Officials Keep Inflating It

images.duckduckgo.comBy Yves Smith,

The Financial Times has a generally good update on the state of the student debt bubble in the US. The article interesting not just for what it says but also for what goes unsaid. I’ll recap its main points with additional commentary. Note that many of the underlying issues will be familiar to NC readers, but it is nevertheless useful to stay current.

Access to student debt keeps inflating the cost of education. This may seem obvious but it can’t be said often enough. Per the article:

While the headline consumer price index is 2.7 per cent, between 2016 and 2017 published tuition and fee prices rose by 9 per cent at four-year state institutions, and 13 per cent at posher private colleges.

It wasn’t all that long ago that the cost of a year at an Ivy League college was $50,000 per year. Author Rana Foroohar was warned by high school counselors that the price tag for her daughter to attend one of them or a liberal arts college would be around $72,000 a year.

Spending increases are not going into improving education. As we’ve pointed out before, adjuncts are being squeezed into penury while the adminisphere bloat continues, as MBAs have swarmed in like locusts. Another waste of money is over-investment in plant. Again from the story:

A large chunk of the hike was due to schools hiring more administrators (who “brand build” and recruit wealthy donors) and building expensive facilities designed to lure wealthier, full-fee-paying students. This not only leads to excess borrowing on the part of universities — a number of them are caught up in dicey bond deals like the sort that sunk the city of Detroit — but higher tuition for students.

And there is a secondary effect. As education cost rise, students are becoming more mercenary in their choices, and in not a good way. This is another manifestation of what John Kay calls obliquity: in a complex system, trying to map a direct path will fail because it’s impossible to map the terrain well enough to identify one. Thus naive direct paths like “maximize shareholder value” do less well at achieving that objective than richer, more complicated goals.

The higher ed version of this dynamic is “I am going to school to get a well-paid job,” with the following results, per an FT reader:

BazHurl
After a career in equities, having graduated the Dreamy Spires with significant not silly debt, I had the pleasure of interviewing lots of the best and brightest graduates from European and US universities. Finance was attracting far more than its deserved share of the intellectual pie in the 90’s and Noughties in particular; so at times it was distressing to meet outrageously talented young men and women wanting to genuflect at the altar of the $, instead of building the Flux Capacitor. But the greater take-away was how mediocre and homogenous most of the grads were becoming. It seemed the longer they had studied and deferred entry into the Great Unwashed, the more difficult it was to get anything original or genuine from them. Piles and piles of CV’s of the same guys and gals: straight A’s since emerging into the world, polyglots, founders of every financial and charitable university society you could dream up … but could they honestly answer a simple question like “Fidelity or Blackrock – Who has robbed widows and orphans of more?”. Hardly. In short, few of them qualified as the sort of person you would willingly invite to sit next to you for fifteen hours a day, doing battle with pesky clients and triumphing over greedy competitors. All these once-promising 22 to 24 year old’s had somehow been hard-wired by the same robot and worse, all were entitled. Probably fair enough as they had excelled at everything that had been asked of them up until meeting my colleagues and I on the trading floors. Contrast this to the very different experience of meeting visiting sixth formers from a variety of secondary schools that used to tour the bank and with some gentle prodding, light up the Q&A sessions at tour’s end, fizzing with enthusiasm and desire. Now THESE kids I would hire ahead of the blue-chipped grads, most days. They were raw material that could be worked with and shaped into weapons. It was patently clear that University was no longer adding the expected value to these candidates and in fact was becoming quite the reverse.

And for many grads, an investment in higher education now has a negative return on equity. A 2014 Economist article points out that the widely cited studies of whether college is worth the cost or not omit key factors that skew their results in favor of paying for higher education.

Four year college graduation rates are falling, and education cost bloat is part of the problem. If you look at the annual reports of the National Student Clearinghouse Research Center, four year college completion rates as of the six year mark have been in general decline. The Economist article above mentions a 59% completion rate; oddly I can’t find the underlying report on the National Student Clearinghouse website, but Google footprints suggest it was for the 2005 cohort. The six-year graduation rate was 55.9% for the 2007 cohort, 55% for the 2008 cohort, 53% for the 2009 cohort, with a slight rebound to 54.8% completion for the 2010 cohort.

Low graduation rates in and of themselves make college a potentially bad bet. All of the 50,000 foot analyses of “if you go to college, you will make on average X more a year” are based on completing college AND getting a full-time job.

The Financial Times article notes:

But there are even more worrisome links between high student debt loads and health issues like depression, and marital failures. The whole thing is compounded by the fact that a large chunk of those holding massive debt do not end up with degrees, having had to drop out from the stress of trying to study, work, and pay back massive loans at the same time. That means they will never even get the income boost that a college degree still provides — creating a snowball cycle of downward mobility in the country’s most vulnerable populations.

College is also becoming a less effective vehicle of social mobility. The high average educational level of the US by world standards masks a sorry fact: older age groups have very high average educational attainment, while it has fallen sharply among the young. High college costs no doubt play a role, and more specifically, that college is becoming less effective as a vehicle for class mobility. From a speech last week by New York Fed president William Dudley:

Recent work by { Stanford economist Raj ] Chetty and his co-authors has investigated the importance of higher education in achieving upward mobility. They find that many highly qualified lower-income students do not attend selective colleges, while those low- and middle-income students who do—despite facing greater challenges—fare almost as well as affluent students who attend the same colleges. Their research also indicates that some colleges are better engines of upward income mobility than others, and that colleges that offered the largest number of low-income students pathways to upward mobility have become less accessible to them during the 2000s. As a result, higher-education’s contribution to increasing intergenerational mobility has diminished.

The Federal government is continuing to shovel money into student loans despite rising default rates and large scale collateral economic damage. The amount of student debt outstanding, at $1.4 trillion, is bigger than subprime debt on the eve of the crisis, $1.3 trillion.1

90% of student loans are government guaranteed. The Feds apparently prefer to rely on their power to squeeze borrowers relentlessly even when they clearly can’t pay. The article points out that of 44 million with student debt, 8 million have defaulted. But that understates the true default rate, since students defer payments while in school. The New York Fed puts the default rate at year end 2016 at 11.2%, with this very big caveat: “About half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle. This implies that among loans in the repayment cycle delinquency rates are roughly twice as high.”

Ouch. See how high student loan default rates are compared to other types of credit even using the grossly understated “default versus total balances” approach:

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It mystifies me why homebuilders and makers of consumer durables aren’t on the warpath against student debt. It has hit the point when even normally reserved Fed officials are sounding alarms; Dudley talked about the student debt overhang as an “economic headwind”. Anyone who has been paying attention has seen regular mentions in the business press that student debt is leading to lower household formation. Buying houses and having kids are engines of growth.

The Democrats are as much a part of the problem as Republicans. While the article assigns blame to Republicans for cutting support for public schools as a result of their successful campaign against government spending, let us not forget that higher ed cuts have also taken place in Democratic-controlled states like California. Tuition, room and board at UCLA is $34,000, and students can cut the tab to $26,000 if they live at home. While much cheaper than the elite college costs mentioned above, with 70% of US households having less than $1000 in savings, how many parents are set to spend a relative bargain price of $100,000 per child for college?

And the Democrats have been missing in action as far as anything other than tinkering at the margin with this problem. The failure of the former top bankruptcy law professor Elizabeth Warren to call for student debt to be dischargeable in bankruptcy is telling.

University towns are almost without exception deep blue enclaves. Academics skew Democratic in their political loyalties, and professors often operate as as extended think tank network supplementing formal Democratic party operatives. The Democrats are not about to cut the drip feed to what they regard as a key set of not just supporters but allies.

And this also explains another reason what the Democratic party apparatus was so eager to shut down Sanders and mischaracterize his overwhelming support among young people as “Bernie Bros”. The older Clinton cohort and the 10%ers that Thomas Frank calls out in his book Listen Liberal are either direct beneficiaries of a bloated, parasitic higher educational system or are affluent enough to pay for the social class and career advantages it can provide to their children. Universities are on the wrong side of class warfare and are doing what they can to divert attention from that sorry fact.

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1 This data is slightly at odd with the New York Fed’s Consumer Credit report using year-end 2016 data. The Department of Education is not at all transparent and the Data.gov page that professes to have the report I need as of Jan 30 says, “No file downloads have been provided. The publisher may provide downloads in the future or they may be available from their other links.”

originally posted here