Friday, February 22, 2008

Student Loan Meltdown Next?

this diary at Daily Kos and the discussion thread are thought-provoking. there's very little denial any longer that the banking industry is in serious trouble due to lax lending standards in the mortgage market over the last seven years. could the student loan market face a similar fate? student lending has already been the subject of scandal. now that we're facing a possible recession and the soft job market that this entails, how high will the default rate go?

putting all of this aside, the real issue is the cost of higher education. i've encountered several interesting theories regarding the iron clad law that the cost of higher education shall rise much faster than the rate of inflation. one theory is that education is labor intensive and because there are few ways in which the process of providing an education can be automated, the cost of doing so rises faster relative to the cost of doing other jobs. if there were a way for one educator to effectively teach ten times as many students, it would be possible to charge less per student.

a theory proposed in the diary i linked is that colleges and universities raise tuition and fees simply because they can. this theory posits that providing ready and easy access to educational loans has made it easier for colleges and universities to raise prices. perhaps legislation should be passed allowing educational loans to be discharged in bankruptcy. or are low wages for jobs not requiring a degree the real problem? if high school graduates could skip college and go directly into the job market and enjoy a satisfactory standard of living would colleges and universities face lower enrollments and be forced to compete for students, resulting in lower educational costs?

so, what can be done? should it be harder to borrow money for school? should we collectively pay for the cost of higher education so that students don't have to pay for their educations out of pocket? one objection to this that i find compelling is that using taxes to pay for everyone's education forces those who don't go to college or graduate school to pay for the people who do go. since college and graduate degrees translate into higher earnings this means that a relatively privileged minority will be subsidized by the less privileged majority.


Unknown said...

The theory that universities raise tuition and fees simply because they can is an erroneous one, at least in my experience. State schools are generally barred from doing that unilaterally--the state legislature or a board of governors generally has to approve of any such hikes, and in some cases, there's opposition to those hikes because the state is on the hook for scholarships.

That's the problem in Florida right now. Most of our students are on at laast a partial state scholarship called Bright Futures. If the state allows tuition to go up, the state's expenditures go up as well, which means they're on the hook for an even larger amount of money. As a result, Florida schools have low tuition compared to the rest of the nation, but we're also at the point where nearly every school is cutting back admissions, because tuition only covers about 20% of the actual cost of a student attending school.

I have a problem with the last example as well, simply because I think it's a limited way of looking at public subsidies of education. We benefit from subsidizing higher ed, even if we don't partake in it individually, because it has a stabilizing influence on society. It's much like people paying taxes that are used on roads they never drive on, or for public transportation they never ride on. No one ever gets use out of every penny they pay in taxes--but we generally get more than our money's worth from something, so it all evens out in the end.

emily1 said...

thanks for weighing in. i didn't know that state universities had to to get approval to raise fees and tuition. i guess that's why i shouldn't post off the cuff without doing my research. your comment spurred me to actually do some and i found a link discussing the reasons why education is so expensive. one of them confirms one of the theories i listed in my post:

"Colleges are labor-intensive.

On average, 75 percent of the costs to run a college are related to personnel expenses, including benefits.

Faculty salaries are especially expensive, particularly in high-demand subject-matter areas, like business and engineering."

there's also some information in this link that points out that state universities don't have a lot of control over labor costs:

"Colleges do not always have control over their personnel expenses. Some states require that public institutional employees be covered by the state's civil service system and its wage rates, administrative regulations and dismissal policies."

this article also makes another important point:

"Many universities are like small-to-medium cities in size and scope. They may be involved with delivering health care, food service, child care, housing, police and fire protection, and other services that are subject to local regulations and licensure requirements."

i agree with you that a more educated society is better than a less educated one. countries that invest in education eventually see a rise in their standard of living, and this is a good argument for public subsidies for education.

Unknown said...

And yet, in most states, higher ed is one of the first things on the chopping block when times get tough financially for the state, which is exactly the opposite of what is needed, because in tough financial times, more people want to go back to school. It's an effed up situation no matter how you look at it.

FM said...

all of this will probably just encourage young people to enter the skilled trades, which is not a bad thing.

the world will always need mechanics, electricians, and plumbers. (and an added bonus -- these jobs cannot be outsourced!)

the world does not need any more lawyers.

i predict that entering the skilled trades will become increasingly competitive as college tuitions rise.

emily1 said...


a person who has been laid off almost has to go back to school because employers treat you like a loser if you have a gap in your resume when the economy picks up and they start hiring again. it's like a person constantly have to pay a high fee for their continued membership in the middle class.


i agree. i can't help but think that one thing that needs to happen is higher wages for jobs not requiring a college education. one reason people mortgage their futures for college is that jobs outside of the skilled trades(which are challenging to break into) and professional job market for college graduates, pay so little.

Unknown said...

As a victim of the predatory student loan farming of the 1980's, who thought his student loans were discharged in bankruptcy in 94, and what now appears to be that they are simply not discharged but in default for over 20 years, I can only hope that the default rate soars to near 50 percent. Then maybe congress will pull its head outta its tail and help the students.

I notice they are quick to help the loan (fianance) industry, but even with over 15 years of documented notifications of the problems with the student loan industry, congress has failed to address the reforms that need to be done the most: the predatory loan industries practices.

Screw them. They have ruined too many american lives.

Like my congressman Pete Hoekstra says, its time the govenrment got out of the student loan industry because it cannot manage it properly and now its costing taxpayers (let alone the victimized students) too much money.