Sunday, December 2, 2012

Cost-Benefit Analysis of Education

The financial costs of education are increasing faster than ever. Over the past several years, the costs of schooling have jumped exponentially. This is not just in colleges but also in elementary, middle, junior high, and high schools.

A huge portion of the increase is the involvement of the federal government. The scary part about this is that the federal government really has no business in education. While many of our founding fathers and the framers of the US Constitution were in favor of a public education system, they were opposed to federal involvement in that system. The fact that Article 1 Section 8 of the US Constitution doesn't explicitly grant congress the power to run schools is the most obvious evidence of that fact.

The current public school system was, in reality, the brain-child of industrialists and career politicians. It was not designed to do anything more than make sure that kids were educated well enough to work in factories. They had to be able to read safety manuals, maintenance manuals, and the like. They had to do basic math in order to figure out how to measure raw materials in order to process them. That's one reason why shop classes were part of the basic curriculum for so long. "College Prep" was a curriculum designed for the top percentage, sort of what you'd call an honors or "AP" program these days.

Today, the schools attempt to maintain that same mission while trying to claim that all students are being prepared for college. It means that the system is fighting itself. Caught in the middle are the students who believe that a C+ average means they are entitled to at least an associate's degree.

So, upon high school graduation, we now have a record number of kids headed off to college.

A better educated society is a good thing. To a great degree, personal accomplishment hinges upon it. If the person doesn't get a formal education and a degree, they need to read, research, and study on their own. Education is the foundation to success, be it formal or non-traditional.

However, who should pay for it?

It is an individual responsibility to educate one's self once you graduate from high school, and reach adulthood. It is your life. You are free to decide what you wish to do with it. However, you are responsible for doing it yourself. That includes paying for it.

College is expensive. It gets more expensive semester by semester, it seems. Unless your parents started saving 5 years before you were born and you worked 20 hours a week from the time you were 14 (saving every penny for college), the chances are that you cannot afford to pay for it. That leaves very few options.

Option one -- join the military and earn the GI Bill. That will help. It does not cover all the costs. You'll still end upworking a part time job or taking out a loan or two.

Option two -- scholarships. However, unless you are in that tenth of a percent that is athletically gifted, the chances are that the scholarship(s) won't cover all the tuition and fees. You will have to work and/or get a loan or two (or four). Some scholastic scholarships out there, though rare, go far enough to cover all of your costs, etc. However, they usually include some form of internship during your summers at the company who is paying for it. Like joining the Army, you will also have some form of time commitment to the company once you graduate.

Option three -- borrow, borrow, and borrow more. This is the option that has helped create the mess we currently have.

Option four -- get a skilled-labor license or certificate. They are cheaper than a degree. Then get a job in that field. We need welders, plumbers, electricians, and mechanics. Work your butt off. Continue to save up. In five to ten years, go back and parley that into an engineering degree. (Just one example). Just don't waste your money on cars that are beyond your means, renting a huge house (or buying one that you cannot afford), impressing girls, clubbing, drugs, the newest gadgets, movies, eating out, data plans on smart phones, etc. Meet your basic needs and save the rest. Eventually, you will have enough, hopefully.

Many student loans used to be "guaranteed" by the government, be it state or federal. That meant that you would apply for a loan at your local bank. Among the paperwork would be a request for the government to co-sign the loan. This was good for the bank. If the student defaulted on the loan, the government would pay off the majority of the loan (not all of it, and not the interest, just the principle). Then the student would be taken to court and the government would sue to be reimbursed. The government would get its money, too. It would garnish wages and withhold tax returns. However, if the student were actively seeking a degree and making a C+ average, all payments would be deferred until a certain time after graduation. That time was designed to give the graduate time to gain employment.

In 2009, the socialists held the majority in both houses of congress as well as the executive branch. So, they decided to try to "save" some money under the alleged intent of also alleviating the burden to former students who would have to pay back those loans. So, they passed a law that was highly lauded by first Senator then President Obama. The idea was to allow students to borrow directly from the US Government instead of private lending institutions.

At first glance, the idea looks good on paper. The Congressional Budget Office estimated that direct loans would "save" the federal government $87 Billion over the course of 10 years (an average of $5.8 Billion a year FY10-FY19). This savings would, on paper, come from not having to pay off the defaulted loans as well as reduced court costs in attempting to recoup the principle. Also, the government would then reap the benefits of the interest, directly, instead of getting just its share from taxing the lending institutions.

Second and third order effects were ignored in the initial analysis. First, with the government backing the loans and making them more available, schools were now swamped with more students. So the schools increased their cadre, increased their number of administrators, and raised their tuition rates to cover all of these new expenses (and to make profit, since that is what businesses operate to accomplish). Many of the schools also saw the opportunity to increase revenues by lowering admissions standards.

Adding to the cost burdens upon all schools, elementary through graduate programs, is labor costs. Not only do the colleges now require more professors and a ridiculous increased percentage of administrators, but the teachers and administrators are demanding higher pay and benefits to go along with the jobs. Most college professor jobs were not created as full-time positions. However, many of them are working full-time hours. They want just compensation for their work. Those that are considered full-time positions also demand higher pay and better benefits. This leads to ever-increasing overhead and labor costs for the schools.

The analysis did a poor job of calculating drop-out rates. With more students now attending, you had a higher percentage of those who couldn't make the grades or those who decided the academic life wasn't for them. Now you have students who did not complete their degrees and do not qualify for those big-paying jobs they planned on getting. So, they have jobs that require lower skills than a BS in engineering, that pay less, and they owe for their attempt.

While the bill allowed for direct loans, it also couldn't violate the US Constitution and make secured student loans illegal, or outlaw unsecured loans. So, there were still borrowers that sought out the loans from private institutions. When borrowers failed to pay, the banks took legal actions.

You also had students who honestly believed in Pegasus and unicorns. They sought degrees in things that interested them, but had no market value. A degree in "gender studies" is not conducive to a mid-level position at a marketing firm. You are lucky if it can garner you a position as an assistant department manager at Sears. The bottom line is that no degree guarantees a job. Some degrees are more marketable than others. A degree that is less marketable most likely means that there will be no job paying that $35k a year starting that these entry-level basket-weavers honestly believed were waiting for them. So, they are working for $11 an hour, paying off student loans, paying for gasoline, and trying to eat. the loans aren't being paid back.

Go back to that ever-increasing average tuition rate. That means the principles on the loans are much higher today than they were just five years ago. Together, the math adds up to much more money the government doled out that is not being replaced. Increasing or decreasing the interest rates won't affect the fact that the principle is still too much. The interest rate could be 0%, and these graduates and drop-outs still couldn't afford the payments.

In 2013, we will have the first batch of four-year graduates that went to college entirely on the direct loan program. the burden on taxpayers will skyrocket by January 2014 when many of them, more than ever before, reach the six month mark and cannot make their first repayments. In fact, the CBO has already indicated that its initial projections of "savings" were about $33 Billion too high, and the "savings" may be closer to $47 Billion. If you are checking my math, that $7 Billion remaining difference is the estimated cost, to the federal government, of administrating the program, which the initial analysis overlooked.

When the analysis is calculated for FY14, it should not surprise anybody to suddenly find that $47 Billion to be adjusted down, again, quite possibly into a negative savings (otherwise known as an increased cost to tax-payers). Reducing the interest rates or forgiving interest on many of these loans, as Obama has proposed many times during his most recent campaign, will further decrease that "savings".

This is why the  loan programs should have stayed in the private sector. In the private sector, the lending institutions still can say "no" to a high-risk loan. The lending institutions have more flexibility to negotiate repayment programs and interest forgiveness (in order to recoup just the principle and not lose money). For the federal government to do so literally takes an act of congress.

So, just like with the housing market and the flexible-rate mortgages that congress, under the great leadership of Barney Frank, mandated with Fannie Mae, etc., you know have Sallie Mae and direct Federal Student Loans. As with the housing market, there will be a crash. Colleges will face bankruptcy. So will the graduates who cannot afford to pay back even 70% of their loans (which has already been proposed as a solution to the "education bubble"). This will just make our already lethargic and bleeding economy even worse.