Tuesday, April 11, 2017

Student Debt Bubble Ruins Lives While Sucking Life Out of the Economy

nakedcapitalism |  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:
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.