Extra credit could bankrupt students

johnnymk · 09-04-2009, 05:34 PM

http://blogs.reuters.com/rolfe-winkl...rupt-students/

The market for college education looks a lot like the market for houses circa 2006 – very bubbly. And the reason is similar: There is too much credit.

Colleges can keep raising prices, despite the recession, because the government keeps lending students more money to pay them.

According to a report cited by Anne Marie Chaker in the Wall Street Journal on Thursday, the government will lend students $75.1 billion to pay for college this year, up a spectacular 25 percent compared with last year.

But the extra credit isn’t benefiting students. It’s just inflating the price of their education, burying them under a bigger pile of debt despite stagnant wage growth and poorer employment prospects.

This is eerily reminiscent of the housing bubble, when too easy credit inflated the price of houses well beyond their fundamental value.

What is the fundamental value of a house? Roughly speaking, it is what a buyer can pay for it, some portion of his income plus what he can borrow.

Historically, the increase in house prices has tracked income growth. But excessively easy credit disrupted this relationship over the past several years.

A similar dynamic is playing out in the market for college education.

A college degree can be valued by the incremental earning power that it can provide over a working lifetime.

In other words, how much more will you make if you go to college than if you don’t? Are those extra earnings enough to pay back your loans with interest, along with the opportunity cost of forgoing full-time wages while you’re a student?

A common misconception is that a college degree is worth a million dollars over the average working lifetime. But a paper published late last year by the National Association of State Universities and Land Grant Colleges pegs the value at close to a tenth of that, $121,539.

This is a very rough figure. There are big differences depending on the type of school, the time it takes a student to finish their degree and other factors. In any case, the present value of going to college is positive, but not nearly as high as most think.

And surely, during a recession, colleges wouldn’t be able to keep raising prices. Not only are job and wage prospects down, more parents are struggling to make ends meet, and lower house prices mean that the home equity ATM has stopped spitting out cash. But this year, the price of tuition is expected to rise 12 percent.

Indeed, since 1979, according to the Bureau of Labor Statistics, tuition has outpaced inflation every single year, and by greater than two times most years.

Where is the money coming from to increase prices? The government. According to Dr. Richard Vedder, Director of the Center for College Affordability and Productivity, federal loan programs are responsible for the dramatic rise in tuition costs. First made widely available with the Higher Education Act of 1965, federal loans went from near zero to $75 billion this year.

This leaves students saddled with debt when they graduate. In a CCAP paper published in April 2008, Andrew Gillen says that in 2006, the average student graduated with debt equal to 50 percent of his median income, up from less than 35 percent in 1999.

A big reason colleges will be able to raise tuition prices this year is because dependent undergrads can now borrow $31,000 from the federal Stafford loan program, up from $23,000 just last year.
The government, we’re led to believe, is acting heroically to “save” the economy by providing credit where the private market won’t.

In reality, it’s sustaining an asset bubble, and not just in college educations. Those who are asset rich — homeowners, banks, stock and bond investors — are benefiting at the expense of everyone else as the government props up the value of their holdings.

In the long run this will be very destructive for the economy. Those who need to buy assets are being forced to pay prices that are artificially inflated because the government is providing too much credit to finance the purchase. The price isn’t being allowed to fall, so buyers who don’t have oodles of cash lying around are forced to pile on the debt.

The government should get out of the way and let the price of college fall. If it doesn’t, many who would otherwise want to buy a college education will refuse as the costs race ahead of the benefits.

zippyjuan · 09-06-2009, 05:20 PM

There is no industry, and education and healthcare are currently the bigggest examples, that cannot find a use for however much money you want to throw at it. Schools keep spending more and more money but are the students learning more from it? Sure maintaining facilities and trying to keep current on things is good. But you hit points of diminishing returns. Students borrow the money because college costs so much but it also costs so much because the students can borrow the money.

Another thing which is changing is where the schools get their money. At my school, the University of Colorado, the share of monies coming in the form of state funds has been shrinking for a long time. They instead look to private funds and higher tuition to pay for things.

I was lucky enough to go to school back when it was extremely affordable for me. My in-state tuition (subisidised by taxpayer and out of state students) was under $300 a semester not including books. My parents owned a house less than two miles from campus so housing was taken care of. It has increased at a rate higher than the overall inflation about every year since then.

Jeffbx · 09-08-2009, 05:18 AM

When I got my undergrad degree back in the '90s, I paid cash every semester & had zero debt upon graduation. I'm in a graduate program now, and it's over $50k for a 20 month program.

The cost of education has gone up WAY higher than the cost of inflation every single year, and I agree that something's going to give sooner or later.

johnnymk · 09-08-2009, 05:41 AM

Another example of government subsidies responsible for higher costs.

attgig · 09-08-2009, 10:52 AM

i think if you're in any sort of research university, they'll always be cash hungry.

clutchy · 09-08-2009, 05:57 PM

it's absolutely the availability of cheap debt that is driving up costs. Maybe schools reflect actual inflation in this country... scary

my first run through college cost me $100k, my 2nd one cost me about $7500... guess which one i'm now making money with...

students need to go to school when they're ready and pick something that's useful and not just go b/c that's what you do.

09-04-2009, 05:34 PM	#1
johnnymk Chief of Naval Operations Join Date: May 2000 Location: LEVITTOWN< PA> USA Posts: 13,621	Extra credit could bankrupt students http://blogs.reuters.com/rolfe-winkl...rupt-students/ The market for college education looks a lot like the market for houses circa 2006 – very bubbly. And the reason is similar: There is too much credit. Colleges can keep raising prices, despite the recession, because the government keeps lending students more money to pay them. According to a report cited by Anne Marie Chaker in the Wall Street Journal on Thursday, the government will lend students $75.1 billion to pay for college this year, up a spectacular 25 percent compared with last year. But the extra credit isn’t benefiting students. It’s just inflating the price of their education, burying them under a bigger pile of debt despite stagnant wage growth and poorer employment prospects. This is eerily reminiscent of the housing bubble, when too easy credit inflated the price of houses well beyond their fundamental value. What is the fundamental value of a house? Roughly speaking, it is what a buyer can pay for it, some portion of his income plus what he can borrow. Historically, the increase in house prices has tracked income growth. But excessively easy credit disrupted this relationship over the past several years. A similar dynamic is playing out in the market for college education. A college degree can be valued by the incremental earning power that it can provide over a working lifetime. In other words, how much more will you make if you go to college than if you don’t? Are those extra earnings enough to pay back your loans with interest, along with the opportunity cost of forgoing full-time wages while you’re a student? A common misconception is that a college degree is worth a million dollars over the average working lifetime. But a paper published late last year by the National Association of State Universities and Land Grant Colleges pegs the value at close to a tenth of that, $121,539. This is a very rough figure. There are big differences depending on the type of school, the time it takes a student to finish their degree and other factors. In any case, the present value of going to college is positive, but not nearly as high as most think. And surely, during a recession, colleges wouldn’t be able to keep raising prices. Not only are job and wage prospects down, more parents are struggling to make ends meet, and lower house prices mean that the home equity ATM has stopped spitting out cash. But this year, the price of tuition is expected to rise 12 percent. Indeed, since 1979, according to the Bureau of Labor Statistics, tuition has outpaced inflation every single year, and by greater than two times most years. Where is the money coming from to increase prices? The government. According to Dr. Richard Vedder, Director of the Center for College Affordability and Productivity, federal loan programs are responsible for the dramatic rise in tuition costs. First made widely available with the Higher Education Act of 1965, federal loans went from near zero to $75 billion this year. This leaves students saddled with debt when they graduate. In a CCAP paper published in April 2008, Andrew Gillen says that in 2006, the average student graduated with debt equal to 50 percent of his median income, up from less than 35 percent in 1999. A big reason colleges will be able to raise tuition prices this year is because dependent undergrads can now borrow $31,000 from the federal Stafford loan program, up from $23,000 just last year. The government, we’re led to believe, is acting heroically to “save” the economy by providing credit where the private market won’t. In reality, it’s sustaining an asset bubble, and not just in college educations. Those who are asset rich — homeowners, banks, stock and bond investors — are benefiting at the expense of everyone else as the government props up the value of their holdings. In the long run this will be very destructive for the economy. Those who need to buy assets are being forced to pay prices that are artificially inflated because the government is providing too much credit to finance the purchase. The price isn’t being allowed to fall, so buyers who don’t have oodles of cash lying around are forced to pile on the debt. The government should get out of the way and let the price of college fall. If it doesn’t, many who would otherwise want to buy a college education will refuse as the costs race ahead of the benefits.

09-06-2009, 05:20 PM	#2
zippyjuan Picture of the Day Guru Join Date: Oct 2002 Location: Sunny San Diego Posts: 8,756	There is no industry, and education and healthcare are currently the bigggest examples, that cannot find a use for however much money you want to throw at it. Schools keep spending more and more money but are the students learning more from it? Sure maintaining facilities and trying to keep current on things is good. But you hit points of diminishing returns. Students borrow the money because college costs so much but it also costs so much because the students can borrow the money. Another thing which is changing is where the schools get their money. At my school, the University of Colorado, the share of monies coming in the form of state funds has been shrinking for a long time. They instead look to private funds and higher tuition to pay for things. I was lucky enough to go to school back when it was extremely affordable for me. My in-state tuition (subisidised by taxpayer and out of state students) was under $300 a semester not including books. My parents owned a house less than two miles from campus so housing was taken care of. It has increased at a rate higher than the overall inflation about every year since then. __________________ I add new pictures to my photo gallery pretty regularly. You can see them here if you are interested: http://www.pbase.com/jeffryz

09-08-2009, 10:52 AM	#5
attgig Chief of Naval Operations Join Date: Jun 2000 Location: the burbs of baltimore Posts: 11,924	i think if you're in any sort of research university, they'll always be cash hungry. __________________

09-08-2009, 05:57 PM	#6
clutchy Rear Admiral Lower Half Join Date: Dec 2000 Location: Yucaipa, CA Posts: 2,863	it's absolutely the availability of cheap debt that is driving up costs. Maybe schools reflect actual inflation in this country... scary my first run through college cost me $100k, my 2nd one cost me about $7500... guess which one i'm now making money with... students need to go to school when they're ready and pick something that's useful and not just go b/c that's what you do. __________________ LK was treated unfairly thanks X

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09-08-2009, 05:18 AM	#3
Jeffbx Fleet Admiral Join Date: Mar 2000 Location: Michigan Posts: 9,390	When I got my undergrad degree back in the '90s, I paid cash every semester & had zero debt upon graduation. I'm in a graduate program now, and it's over $50k for a 20 month program. The cost of education has gone up WAY higher than the cost of inflation every single year, and I agree that something's going to give sooner or later.

09-08-2009, 05:41 AM	#4
johnnymk Chief of Naval Operations Join Date: May 2000 Location: LEVITTOWN< PA> USA Posts: 13,621	Another example of government subsidies responsible for higher costs.

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