Who Will Pay for The College Bubble

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You are not against college education if you don’t want to subsidize unsustainable college loans and grants. It is frustrating to see taxpayers on the hook for other peoples’ college loans that result from the high cost of college due in large part to wasteful spending and the government easy money program which encourages the spending.

Enrollment growth accounts for some of the increased spending but  government loans account for most of it.

Colleges rely on loan programs to finance their ever-increasing costs and the government is only too ready to make them available.

Students and parents are being robbed as colleges continue on with their reckless spending, often for things that have nothing to do with education and more to do with building appeal. Rising tuitions surpass inflation rates.

Student loan debt now surpasses $1 trillion. Student loan delinquency exceeds mortgage delinquency and the total debt balance for college loans exceeds credit card and mortgage loan balances as of 2011 according to the Federal Reserve’s report.

Do you doubt that there is another bubble coming?

President Obama has encouraged student defaults by recently setting up a program that requires taxpayers to pay off all remaining student loans for those students who do not have them paid within 20 years. It is an invitation to deadbeats.

With 1 in 2 graduates not getting jobs or jobs appropriate to their level of education on top of an already high default rate on student loans, the eventual result will be a college bubble with record numbers of defaults and many colleges will be unable to sustain themselves.

Taxpayers will be on the hook for all of it under this administration. Will we take over colleges as we did the auto industry and AIG?

When is someone going to hold the appropriate people accountable? The high cost of college is largely due to mindless mismanagement by college officials. They are the GSA of education. The government should be putting a stop to it but instead they are promoting it with their easy loan incentive programs.

President Obama wants the Congress to keep the student loan interest rates at 3.4%. If they don’t, the rates will go to 6.8%. I think they should remain low, and there is no issue about this, no one is saying to do otherwise.

Obama is making this non-issue an issue for political reasons and he has presented no real solution to the real problem. To show you how sincere he is, in 2007, then Senator Obama decided to campaign when the exact bill came up for a vote and he missed the vote. He is still campaigning as 1 in 2 college seniors cannot find jobs.

This week, Obama visited colleges to talk about the non-issue. He visited the University of North Carolina at Chapel Hill and the University of Colorado in Boulder where students take on less debt than the average student and, on Wednesday, he went to the University of Iowa, where the average senior in 2010 had loans totalling $27,391, higher than the national average of $25,250. It is all show.

The problem with student debt lies primarily with the colleges and it is the same problem that the government has. They can’t stop spending, they won’t cut, and they rely on students taking on more and more debt to pay for their exorbitant tuitions. Their standards for student acceptance have been lowered in many colleges who now accept students who are in need of remedial education not college and often cannot finish a four-year program but are left with school loan debt.

Not everyone went to college in the past, it is a modern day phenomenon. Today, it is expected that, regardless of aptitude, everyone must go to college, often a boarding college, and the amenities are expected to equal the curricula.

Examine the evidence –

Everyone can go to college as long as they are willing to borrow the money the government has made so readily available, but the price is becoming too high. The American Council on Education says that 80% of all students are enrolled in public colleges. What is wrong with Vocational education?

The U.S. Public Interest Research Group reports that student debt more than doubled from 1993-2004 alone. Four-year public state colleges have increased by 7.9% from 2010-2011 and public four-year out-of-state by 6.%. Increases for two-year colleges have followed a similar path. [Chronicle]

College tuition is rapidly becoming what will be a lifelong burden for middle class college students who are not eligible for grants unless they default after 20 years.

According to the National Center for Education Statistics, the difference between tuition and the net cost less financial aid at public two-year colleges is not significant at a few thousand dollars, but the difference at private nonprofit four-year schools is about $20,000. The average annual tuition with expenses, less board, at a private nonprofit four-year college is about $35,000.

The government easy money program has enabled colleges to simply raise tuition as costs increase instead of making the necessry cuts.

The U.S. Department of Education funded 88% of federal education loans in 2008-09 and 85% in 2009-10, 87% overall. The total federal education loan volume, not including consolidation loans, currently exceeds $1 trillion.

Total federal funding for college loans is $173 billion. This does not include all the spending bills or innumerable other grants.

Add to this the states’ grants which are heavily tied to race and ethnicity and are quite costly. Orthodox Jews were recently added to the list of racially-eligible students.

Easy money grants, with their high default rates, are government loans, hence taxpayers will shoulder the losses, allowing colleges tocontinue their unabated spending. This year alone, college costs have risen by 8.3% while the inflations rate is 3.77%.

The default rate on college loans is 20% and growing. Some for-profits have default rates at 40%. With fewer students able to pay back their college loans, the college-bundled derivatives are the new bubble, and the costs will be placed squarely on the shoulders of the taxpayer.

The federal government spent $41.3-billion on grant aid for undergraduate and graduate students in 2009-10, the most recent year for which data are available, according to one of two reports released Thursday by the College Board. That’s up from $25.2-billion the year before, an increase of about 72 percent, or $16.1-billion in constant dollars.

Pell grants, the grandest of the grants, are an unsustainable tax burden. Some try to say that enrollment explains the increases, but enrollment only accounts for 40% of the rise in costs.

Sixty percent of the increases are because of the government loan program.

The Higher Education Opportunity Act of 2008 allows students to receive two Pell Grants in one academic year (to include summer school) and this change alone adds about $4 billion annually in program costs.

The maximum Pell grant, as part of the Stimulus, boosted the grant from $5,350 to $5,550. In 2009, the income threshold went from $20,000 to $30,000 and income exclusions were increased to include Earned Income Tax Credit, refundable child tax credit, welfare and social security. This was added to other exclusions from 2008.

This totals up to 60% of the growth in the cost of Pell Grant program and it has nothing to do with enrollment growth. The majority of increasing costs are directly attributable to legislative changes in the program.

Total spending on the Pell Grant rose 58%, from $17.9-billion to $28.2-billion between 2008-9 and 2009-10. That jump was driven by a 16%increase in the maximum Pell Grant, the largest one-year increase in its history.

When the maximum grant amount is increased, more students become eligible for the grant: 7.7 million students received Pell Grants in 2009-10, up from 6.2 million the previous year.

The new American Opportunity Credit is a college tax break included in the federal stimulus bill. Over all, undergraduates received an average of $11,461 in aid per full-time-equivalent student in 2009-10, including $6,041 in grants from all sources and $4,883 in federal loans.

Net fees and tuitions for college have been going up faster than inflation.

College tuition will increase at triple the rate of inflation next year. College officials know that students can borrow more money for college so they’ve come to rely on raising tuition to deal with their problems as opposed to looking for waste, fraud, or contractual changes for staff.

Lending for college has become profitable and risk-free. Increasing college costs mean students must take out more loans, more loans mean more securities lenders can package and sell, more selling means lenders (soon-to-be only the government) can offer more loans to package and sell, more selling means lenders can offer more loans with the capital they’ve accrued, which means colleges can continue to raise costs. (CrooksandLiars)

The result is over $800 billion in outstanding student debt, over 30% of it securitized, and the federal government (the taxpayer) directly or indirectly on the hook for almost all of it. (CrooksandLiars)

College costs are rising partly because of high salaries for reduced work loads. NPR cites time off for professors as a problem.

Faculty members are paid for their output in three areas: teaching, research and service (e.g. committee work and student advising). For many years, at schools where serious research was frequent and prolific, faculty members were granted reduced teaching loads in order to free up additional time for writing, lab work or creative endeavors. Over time, what was once a normative classroom load of 3 classes each semester (3 & 3) was reduced for scholars to 3 & 2, then 2 & 2, then 2 & 1 – to the ultimate extreme. Soon this reduction became normative, regardless of the amount of research produced. “Good schools” had lower teaching loads than others.

Colleges award lifetime contracts to Professors on the basis of their publications, and sometimes the published works are insignificant. Professors tend to stay too long with the benefits and short work days. Craig Carnaroli of the University of Pennsylvania said that “Over 50% of our budget goes to the people that we employ.” College professors now make an average of over $100,000 a year.  Penn’s president makes over $1 million.

USA Today reported that 23 Private College Presidents Made More Than $1 Million in 2008, while 110 made more than $500,000.  In case you were wondering, as recently as 2002, there were no million-dollar presidents, says NakedLaw. All this is possible because of easy loan money.

The number of salaries at colleges has multiplied as well. According to The Atlantic –  staff salaries have increased because of the array of enrichment components that include head-counselors, cruise directors, personal physicians, trainers, tutors, student-life workers, alumni affairs, and so on.

New York Times article reported that over the past 20 years,  colleges have doubled their non-teaching staff, while enrollment has only increased by 40%.  Jobs include monitoring environmental sustainability and a major part of their focus is on student “lifestyle.”  Economist Daniel Bennett, who conducted this study, says “Universities and colleges are catering more to students, trying to make college a lifestyle, not just people getting an education.”

There are more social programs, more athletics, more trainers, more sustainable environmental programs.”  The student loan program made this possible.

Sports cost and not all big time sports are lucrative. Football, for instance, often brings in sufficient funds to cover the expenses, but 29% suffer a loss. Another problem is that many athletes cannot make the grade academically, but the NCAA now requires Division I universities to go through a selection process every ten years which makes universities more accountable for their players’ academic performance.

The President of the NCAA, Mark Emmert, wants to give stipends to student athletes so they don’t need to work a part time job. If they get these stipends in lieu of a part time job, does that mean they will spend more time on academics? If you believe that, I have a bridge to sell you. Why should taxpayers end up paying for it? Excuse me, are these institutions of learning or are they training camps?

Spending on luxury dorms, gyms, swimming pools and other amenities has become a necessity to lure students. Freakonomics author Stephen Dubner said that the chancellor of his alma mater told him that  “[the gym] was a top priority because parents and prospective students increasingly think of themselves as customers, shopping for the most amenities for the best price, and the colleges that didn’t come to grips with this would soon see their customers going elsewhere.”

But gyms are nothing. At High Point University in North Carolina, students are treated to valet parking, live music in the cafeteria and Starbucks gift cards on their birthdays, according to NakedLaw.

Colleges generally operate on two 14-week semesters and summer school, which amounts to a 50% utilization rate. Classrooms, libraries, labs sit idle for the other 50%. There’s room for improvement here.

The colleges spend billions to advertise, lobby and make campaign contributions. For example, the University of Phoenix, a for-profit college, has an exclusive partnership with GOOD magazine, sponsoring an education editor, and they have spent $9 million on lobbying and campaign contributions in 2010 alone. The for-profits are becoming the fastest growing sector in our college level programs.

For-profit colleges are encouraging homeless people to attend because student loans are so easy to acquire. They pay a $2000 stipend to the homeless and the college gets $20,000 a year, with their loans making up the difference. Often the students never graduate but they keep the debt.

CrooksandLiars.com reports that 96% of for-profit students take on debt and within fifteen years 40% are in default. A Government Accountability Office sting operation in which agents posed as applicants found all fifteen approached institutions engaged in deceptive practices and four in straight-up fraud. For-profits were found to have paid their admissions officers on commission, falsely claimed accreditation, underrepresented costs, and encouraged applicants to lie on federal financial aid forms.

Bloomberg states that publicly traded higher education companies rely on three-fourths of their revenue from federal funds, an increase of about 48% in 2001 and currently approaching the 90% limit set by federal law. In other words, colleges rely on borrowed money to finance their schools up to the legal limit.

The non-profits suffer from the same problem. For-profits account for less than half of student loan defaults. Nor is the issue one of “good colleges” vs. “bad colleges.” As this New York Times article illustrates, even students at prestigious non-profit schools like NYU can find themselves in financially ruinous circumstances because of their student loans.

Obama’s solution is to shift the entire unsustainable burden of college loans, socialist style, to the taxpayer with his Income Based Repayment, which ties the size of student loan payments to the borrower’s income. IBR allows borrowers to pay out no more than 15% of their discretionary income, per month, to the loan. The U.S. also forgives whatever hasn’t been paid off in 25 years (changed to 20 years by Obama).

It was passed in 2010, and it was to go into effect in 2014, but Obama has moved part of the timetable up to 2012. The IBR cap will drop to 10% of discretionary income, and the government will forgive whatever hasn’t been repaid in 20 years.

Also, holders of federally-backed private loans will be given the opportunity to consolidate them with their federal loans and only send out one check a month.

So, the taxpayer not only gets to pay for their own loans and their childrens’ loans, they get to pay for everyone’s loans.

The government has fixed it so we will all pay. The President sees the problem, and I give him credit for that, but his answer is, as always, to put it on the taxpayer and there is no accountability for the colleges in his plan. The losses will be placed on the backs of taxpayers and colleges will continue their spending spree.

Government driving up the cost of education

Rethink our status driven approach to a career

 

SOURCES –

New York Federal Reserve

Free money

Higher Ed Watch

CBS

CLHE

NPR

The Atlantic

Naked Law

Money US News

Crooks and Liars

 

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