Easy Street Investing

The student loan bubble: Your thoughts

My article about New York’s new “free” college system — as well as the growing student debt bubble — generated A TON of great feedback from readers and today I want to share some of the comments and ideas that came in.

But first, since today is “Tax Day,” let’s remember that the very reason these conversations are important is because they are really about OUR money and how it is being used by our elected officials.

Here’s a wonderful summary of the situation from a reader named Tony …

“I once entered into a discussion with a teenage student. He believed that many of the things that people pay for should be ‘free.’ I asked him what he meant by ‘free.’ He replied, ‘Nobody should have to pay for it — like medical care.’

I then asked what he meant by ‘pay for it?’ He said, ‘Nobody should have to spend money on it.’

I asked if the people that worked in the doctors’ offices, the hospitals, and all the other places would be working for free. If so, how would they live? He thought a moment and said, ‘The government would pay them.’

I then asked where the government would get the money. He thought, then said, ‘From taxes.’

I then asked, ‘Who pays the taxes?’ He had a hard time with that question.

I then pointed out that there are some free things, but really not that many. The wind is free, as is sunshine. A view of the mountains or stars is free — or the moon. The view of a landscaped house is NOT free — someone spent a good deal of time and money creating that view.

A swim in the ocean is free. A swim in a lake may or may not be ‘free.’ If it is a natural lake, it is free. If it is a manmade lake, someone paid quite a bit in time and money to construct that lake. It IS, however, free to most people.

In general, when people want something ‘free,’ they mean ‘free to ME; let someone ELSE pay for it.’ It is ‘free’ to THEM in the sense that a parasite lives free on a host or a bicycle is ‘free’ to a thief. In most cases, the costs are simply TRANSFERRED to someone else.”

This was absolutely my point, Tony.

And quite frankly, while I don’t think any qualified American should be denied a college education because of affordability issues, that ISN’T what New York’s program is about.

Now, I said it was quite possible that some families in the state would simply view this new law as a windfall.

A reader Dave echoed that idea with the following story:

“I am a retired high school guidance counselor who has witnessed all of these scenarios and many more. I remember a wealthy family with a yacht that did not think it was their responsibility to pay for the education of their talented son. I witnessed lower middle class families who lived beyond their means receive generous financial aid while similar families that had the discipline to save did not.”

Meanwhile, it is quite possible that New York’s colleges will simply expand to accommodate all the new students and all the accompanying tax dollars.

And that raises questions of its own. Like this one from a reader named Michael …

“It’s hard enough for us profs to educate and motivate students who go into debt to get a degree, but what are we going to get now that it’s free?

Excellent point, Michael. It’s interesting to get a perspective from someone working in a higher-learning classroom.

As you note, if college really is just the new high school, one wonders whether it will really be of much value to some of the students who attend simply because it’s available and “free.”

Moreover, what does it mean to college professors … their classroom dynamics … and the outcomes for the students who were already highly motivated to attend?

It isn’t like options weren’t already available to get qualified students into universities — whether you’re talking about loans, need-based aid, or merit-based scholarships.

On top of that, there are still plenty of ways to earn a good living WITHOUT a college education, too.

A reader named Peggy summarized all of these ideas, writing in the following …

“My son had academic scholarships for tuition throughout his undergraduate program. As parents, we paid room and board. He worked a year beyond graduation, then decided to go to U of Oregon for graduate school. That left him with over $35,000 in loans. In the long run, the graduate degree may help his career, but that hasn’t been evident as yet.

Why is this country giving scant lip service to vocational colleges? There is a scarcity of trained people in many fields. We don’t even offer job fairs in most schools that inform students of opportunities in technical professions. Not everyone is going to be successful in an average college or university.”

I don’t know why, Peggy. But you’re absolutely right that many people may not end up getting good returns on their college “investments.”

And thus, if more of the funding is coming from taxpayers, it means WE are not getting good returns on OUR investments.

Plus, there’s still this idea of a self-reinforcing cycle of increased funding leading to increased costs.

Many readers wrote in to comment on skyrocketing tuition and fees.

To John, it’s pretty simple …

“The real costs of all services — education and medicine coming first to mind, which are exempted from market forces and command their revenues by the force of the tax collectors’ bayonet — will always spiral upwards exponentially.

Such continues until the market economy eventually reacts, and destroys the previous subsidized and by then hideously inefficient model. Higher education is about to come face to face with the electronic and internet capabilities of the real world and economies of scale. Hold on to your hat!

Post high school education was traditionally and will be returned to its proper place, as an investment in self. It must survive rational cost/benefit, risk/reward, investment/return, and delayed gratification analyses. Its courses and costs must be practical and provide skills which are in demand by employers. It must be affordable without subsidy to the investor student.”

I agree wholeheartedly.

It’s also insightful to hear from readers who graduated many decades ago, like Edwin who said …

“My first year at the University of Michigan in 1954 in-state tuition was $90/semester. Adjusted for inflation that would be a little over $800 today. So why is that same tuition $13,000+ today??!!”

Beyond the availability of easy money itself, it’s also how that easy money is being spent.

For example, a reader named Bill says  …

“At the main campus of the UW in Madison square footage has quintupled (5X) since the early 70’s while campus enrollment is down 15,000. But every square foot has to be heated and cooled and maintained as well.”

It’s true. And do college students really need luxurious dorm rooms or sushi stations in their cafeterias?

The answer is obvious. However, we are also seeing an “arms race” as thousands of colleges and universities try to attract students — and all that money! — to their campuses.

Jim says …

“One way to provide ‘free’ college education is to waive tuition, but require the graduate to pay a percentage of lifetime earnings (say 10%) above what an average high school graduate would earn. This way, the present generation will support the next.”

It’s an interesting concept, though it could still leave plenty of taxpayers holding the bag.

Perhaps there is no easy solution to what one reader attributed to our “accepted culture.”

At the same time, I encourage all of us to think long and hard about these issues … to voice our opinions, not just in private exchanges but in public forums … and to remember that other than sunsets and ocean swims, very few things in our lives are truly free.

Best wishes,

Nilus

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