Driving Up the Cost of Higher Ed:  Bette and the New Educational Baseline

Before he departed for his freshman year in college, Middle and I were talking about student debt and the high cost of a college degree.  He looked at me and asked “How in the hell did this happen?”  This article is the third in a series that tries to make sense of what in the hell did happen to so disproportionately ratchet up the costs of higher education.

The cost of a degree didn’t just skyrocket willy-nilly over the course of decades, much as the shuttle Challenger didn’t just explode and the Titanic didn’t just sink.  In each instance, there were a variety of reasons that came together to set the stage for the events in question by guaranteeing that higher education now had a far more massive demand for its services than ever existed previously in American history.  In terms of the demand for higher education, the first factor was globalization and the knowledge-based economy.  The theory was that the lower-end and unpleasant manufacturing would be farmed out overseas and the Americans would, in their wisdom and foresight (and for those with Asperger’s, this is sarcasm), keep the higher-end technical manufacturing, administrative and service functions here.  The second factor – and the one that we’ll explore here – is also business-related:  starting in the 1970s and afterwards, the business community shifted the educational baseline for employment from the high school diploma to the college degree.

A reasonable part of the shift during the last quarter of the twentieth century was objective.  The baseline for academic performance – rightly or wrongly – is the SAT and since the the Golden Era of the 1960s, the average SAT scores on both the verbal and math components had dropped consistently.  There was also continuing criticism of the public school system and its apparent inability to prepare young people to compete in the workplace.  No, folks, what we discuss today has been around in one form or another for decades.  American business through the 1970s and 1980s was in the process of having its lunch eaten by the Japanese and Germans and entire industries were simply being destroyed.  Remember the textile industry?  Foreign competition was hungrier and the sense was that the former Axis powers had lost the Second World War but were well into the process of winning the peace.  Given these factors, the push was on in the business world to recruit more and more college graduates to work instead of those with potentially suspect high school diplomas.  Hey, our high schoolers might be idiots but the good ones go through the still-respected college system and are ready to roll in the workforce was the attitude.  If you are old enough to recall the stories about Ford Pintos catching fire and Chrysler employees sending cars out the factory doors with empty bottles rattling around inside the car doors, it actually made sense.  This gave the kids another four years to mature and gain a better education in preparation for the world.

But increasing global competitiveness wasn’t the only reason that businesses shifted their baselines upwards.  The other reason was simply a question of cosmetics and I was privileged to be intimately acquainted with two separate instances of cosmetic baseline changes.  The first instance was cosmetic in terms of appearance to other businesses.  My first real job was when an employer hired me as part of its first group of college-educated “professional” hires for a particular operational area.  It was the job that actually paid me enough money to allow myself to move out of the family household, where I’d lived for a year after my own college graduation and it pertained to ceded reinsurance.  You can certainly refer back to the link, but the best real-world example is that of a bookie laying off bets with other bookies so that he isn’t wiped out should that million-to-one shot actually pay off.  Many insurance policies were written with reinsurance provisions that allowed a company with a large loss to be reimbursed by other companies and it was my job, along with the others, to review all of these losses and first ascertain if a reinsurance provision existed, then determine the amount to be billed and finally to get the money back from them.  It is an arcane, technical arena of insurance and the hubs for such work are all in major cities such as New York, Los Angeles, Munich, Atlanta and London.  My hire came about because the operations director for my new employer had looked around and noticed that everyone with whom his department interacted to retrieve the monies had, at the minimum, a bachelor’s degree and in his mind, they’d be more willing to pay if they had faith in the competence of the people doing the billing.  It made sense cosmetically.  But the reality was that with adequate training, the job didn’t actually require a college degree as much as the capacity to focus and a simple willingness to learn and this was something that the majority of the existing non-college staff had in abundance.  We new hires did have to undergo two full weeks of classroom training before the director even allowed us onto the floor to shadow our non-degreed trainers and to say that it was uncomfortable was an understatement.  The demand for a degree was further fueled when these same staffers were told that if they wanted to go anywhere else within the company at or above their pay-grade, they would now require a college degree.

The second instance of a cosmetic baseline change was to demonstrate perceived competence to prospective customers, even if the job again didn’t require a college degree.  Hey, we’re better!  Our people have college degrees!  I left the reinsurance position to move to a smaller city where my better half was in school.  There was no hope of another reinsurance job but I managed to swing another hire as a commercial claims adjuster for a regional insurance carrier.  It is a mystery greater than the disappearance of Amelia Earhart that the claims manager and supervisor actually hired me since I had no actual experience doing this and simply had to learn on the spot, absorbing information and settling claims across a spectrum of insurance lines – workers’ compensation, commercial and auto liability.  But it was also another uncomfortable situation since that company had instituted a college-degree requirement for all claims adjusters.  That meant that any future hires into adjusting positions had to be college graduates and that any future promotion for an adjuster was predicated upon the completion of a degree; another increase in the aggregate demand for a degree.  Because I didn’t receive the home office training received by new hires with a degree, I was literally dependent upon the goodwill of those around me, most especially those non-degreed adjusters now locked into a position.  When one of these adjusters – Bette – asked me to help clarify her purported confusion about a liability case, I agreed to do so and then smuggled the file out of the office to study it that evening to find the appropriate response.  When I gave her my response the following morning, I passed her test.

Bette was the perfect microcosm for the debate on whether a degree was truly necessary.  A claims adjuster is the person who proverbially walks behind cleaning up after the elephant parade; the adjuster is dealing with those who have had a loss and it’s not uncommon to take undeserved heat arising from misplaced anger.  The questions that arise also beg answers that don’t come from calculators:  How do you compensate someone for damage to an arm or leg?  Does a person who is considered ugly deserve less for a scar than someone who isn’t considered ugly?  How much does someone deserve for pain and suffering?  It was Bette’s handling of a particular case that taught me a life lesson in assessing value, detail and negotiation.  Our insured store’s security had publicly and wrongly detained an African-American educator in a neighborhood store for alleged shoplifting, immediately afterwards releasing him when the manager realized his innocence.  A claim was filed for wrongful detention and the insured wanted to see it negotiated promptly so as to avoid a publicly humiliating trial.  The case was assigned to Bette and she visited the educator and his wife, departing their home with the skeleton of what became a mutually satisfactory settlement after only the first visit.  What she noticed on the visit was a variety of travel magazines on the coffee and end tables and she used that as a departure point for cordial conversation.  After they began to discuss their claim, it became the segue to a settlement when she tied a potential amount to the cost of a vacation in their dream locale.  The upshot was that the couple happily had a two week vacation for considerably less than a possible jury verdict.  This case demonstrated more than anything that the college degree was utterly irrelevant to performance of the job at hand.  There was nothing about 120 credits of academia that could have successfully concluded this case, or almost any other for that matter.  What was required for a successful career was simply native intelligence, good people skills and an acute ability to observe.

There is a time and a place for higher education.  I want my bridge-builder and aircraft designer to have a good basis in engineering, which can only come from concentrated study.  I want my Family Practitioner and medical researcher to likewise have skills that only arise from concentrated study.  But the simple reality is that we’ve allowed ourselves to be told that the only route to financial success is via a college degree and business hiring has now cast that into cement and again, the only winner is the institution of higher education.

Driving Up the Cost of Higher Ed:  Globalization and the Knowledge-Based Economy

A short while back, my middle child and eldest son – aka “Middle” – asked me how college costs managed to rise so disproportionately over the past several decades.  The resulting article was a response to his question and looked at five different factors, each of which contributed to the present mess in the cost of a college degree.  The first of these factors was Globalization and this article is the first of a series examining the factors in greater detail.

Globalization wouldn’t be the first thing that springs to mind when you think about why the cost of higher education has risen so dramatically in the past three decades.  It frankly wouldn’t be the second or third thing either, since the effect upon the cost of a college degree isn’t primary.  The impact is derivative instead, yet it’s still important because it helped to pave the road for the persistent annual tuition increases as the institutions of higher education realized that there was now a massive and sustained rise in demand for their product:  a college degree.

Globalization is the economic principle that economic progress and advancement is improved for everyone when there is a free-flow of capital, technology, resources and labor across the globe and unhampered by national borders.  It is supposed to be a sort of rising tide lifts all boats effect as the aforementioned inputs flow to that global region best able to utilize them to produce in the most efficient and effective manner.  It is the linchpin concept behind the fiercely debated North American Free Trade Agreement of 1994 and the World Trade Organization, which was instituted by treaty in 1995.  It’s actually a reasonable concept and one that I didn’t oppose when the debates occurred two decades ago.  But where the issue had an impact on higher education was a subsidiary concept:  the Knowledge-Based Economy.

The Knowledge-Based Economy is of more amorphous origin, but the principle is predicated upon the notion that global resources are allocated where they can be most efficiently used until they can be brought to market as a final good or product.  Since one of the basic variable costs in production is labor, it makes intellectual sense to shift lower-end manufacturing – requiring little education and training – to third world locations where a peasant can be paid a small fraction of what’s earned by an American laborer.  This would continue and the First World nations would be left to utilize their own resources in the conceptual, design and engineering aspects of the production.  Higher-end and technical manufacturing would stay in the First World, at least until such time as the tides had lifted the other nations enough that they also had the intellectual and technical capabilities to support the design and engineering components.  Corollary to the Knowledge-Based Economy was the Service Economy, where American workers would be spending their time providing higher end services to run and support the now-displaced production aspects elsewhere across the globe.  I expect that some corporate visionaries envisioned a society in which the great mass of Americans became mandarin-like technocrats in a great machine that churned out profits enriching the lives of all privileged enough to participate.  But I also now expect that there was another group of corporate visionaries who saw this as the opportunity to offshore all manner of labor costs so that unions could be undercut and profits grown.  Understand one small yet highly significant fact from the early and mid-1980s:  there was a shift in how corporate senior executives were paid and stock packages and options now became even more potentially lucrative than salaries authorized by a Board of Directors.

So now start to think of higher education in terms of supply and demand and this is probably where these principles began to have an impact upon the cost of a college degree.  Preceding generations of young Americans had other alternatives to higher education so that there was less demand for it.  Young males could be drawn off into the military via the demands of the draft and the Cold War.  They also had options in sustainable, living-wage manufacturing and trades that did not require a degree.  Fewer women pursued a college degree since there were fewer, then-socially acceptable career paths available to them.  All of these factors meant that there was lesser demand for college, even though the GI Bill of 1944 had opened the spigot to higher education.  But then changes began.  The draft ended and the military shifted to an all-volunteer basis, followed two decades later by the end of the Cold War.  Women began to achieve greater opportunities for careers and there was a decided societal push for women to obtain an education and then a career.  And through the last three or more decades, the trickling shift of American jobs began and then became a torrent.

It was now here, at the end of the 20th century, that Globalization and the Knowledge-Based Economy became fully enunciated as guiding principles and the offshoring of American manufacturing began wholesale.  The resultant demand for a college degree turned the college marketing and admission process into a literal cattle chute and the colleges and universities realized that they had become – for many Americans hopeful for a future – the only game in town.  Even before this point, parents and guidance counselors pushed their kids to go to college so that they could have a better, more fulfilling future.  Mike Rowe, of Dirty Jobs fame, wrote about this in Popular Mechanics in August, 2013.  He described a conversation with his high school guidance counselor in which the counselor touted the value of a college degree, even to a kid who wasn’t certain of what he wanted except for the understanding that his own skill set might be more technical and practical than intellectual.  I can attest to this type of conversation as well in my own experience.  So there was already a presumptuous mindset about the value of college:   but the increased demand that came from social change and the simple removal of other viable options simply drove everybody to the chutes.

But here’s the thing about cattle chutes.  Some of them lead to slaughter pens.

The Cost of Higher Ed:  “How in the Hell Did This Happen?”

PracticalDad note:  The pace of writing over the past number of months slowed significantly, even to a crawl, but the conversations with the kids have continued regardless.  Late this past summer, prior to his own departure to freshman year of college, I was talking with Middle about college costs and he looked at me and asked “how in the hell did this happen?”  It’s a great question deserving of an answer, but like so many others, not one that has an easy answer.  What follows is a series of articles looking at the interconnected factors that have contributed to the disproportionately high cost of college.

Higher Education is a hot, steaming mess.  If you look at the number of colleges and programs offered, you might not think so, but in terms of actually obtaining that college degree, it really is a hot, steaming mess.  When you actually review the data, you find that the cost of tuition has risen more than 1100% since 1978 and what’s even more food for thought is that the linked article was published four years ago, in 2012.  Comparatively, the median American family income has risen only 269% in nominal dollars – a not-quite three fold increase over that same 1978 – 2012 timespan.  Factor in the disproportionate rise in the cost of healthcare by 601% over the same period and acknowledge the fact that more of the burden of these same costs are now borne by the American family than in 1978 and you begin to understand why it’s become such a hot-button issue.

But costs don’t rise in such a fashion because they just levitate like so many feathers carried in the wind.  There are reasons for this and the reasons are multi-fold and interconnected, one playing out upon another over the course of decades, unnoticed by the mass of people because they’re engrossed in the very short-term necessities of either raising a family and living a life, or just binging on Netflix.  From this perspective, there are five factors that have contributed to our present situation:

First, the effects of globalization and the shift to a “knowledge-based” economy.  It used to be that entry into the fabled American middle class was predicated upon a sustainable, living wage job that could be had with just a high-school degree.  That it was in a factory was acceptable since the employee could raise a family in a standard that was undreamed of during the Great Depression years, and it didn’t require additional education unless the employee wanted it.  But starting in the 1980s, companies and Wall Street began touting globalization, a principle whereby American corporations maximized their their profit for shareholders by shifting the lower-rung manufacturing overseas and retaining the higher-end positions here.  In this model, Americans would design and engineer the goods that the world needed while the little brown and yellow people elsewhere would have to contend with the workplace drudgery and pollution that came with manufacturing.  That you didn’t need to provide a sustainable living wage and could get a ‘tween-ager to manufacture a high-end pair of sneakers for pennies?  For the win, baby!

Second, there was a purposeful effort by companies in the late 20th century to alter their job requirements so that the baseline for hiring in a wide variety of positions was now a college degree instead of a high school diploma.  That these same positions were now already successfully filled by capable high school graduates was irrelevant, a degree replaced the diploma as the baseline.  There’s certainly an argument for some of that being the result of a desire to move beyond what was perceived to be a failing public education system incapable of turning out satisfactory candidates.  But I can speak from experience that there were other factors as well.  The predominant reason was that as businesses made this move to a degree the hiring baseline, it created a ripple effect as their competitors felt compelled to do so in order to maintain the semblance of competitiveness, particularly in the eyes of their customers.

Third, the effects of shifts in the funding paradigm for higher education.  Where a significant support previously was provided by the government, the burden of educating young people has shifted first to the family and within the last decade, to the student.  I don’t believe that people truly understand the impact of the state and federal governments in the middle of the Twentieth Century upon higher education.  On the one side of the house, the Servicemen’s Readjustment Act of 1944 – aka The GI Bill – made significant educational funding available to millions of servicemen who returned home from the Second World War and literally provided higher education for an entire generation of young adults.  On the other side of the house, state governments boosted spending for their state institutions through the next several decades until the amount spent per student climaxed and then began to decline in the 1980s.  The ebbing has occurred in that while there are still educational benefits for veterans, we now have a volunteer military and the numbers of available recipients is far less than in the decade immediately following the end of World War Two.  Likewise, purposeful budgetary funding per student by most, if not all, state legislatures has declined in the three decades since the Reagan Administration.

Fourth, the shift to self funding by first the family and then the student was greased by years of low interest rates and the easy availability of credit.  What’s occurred with the funding of higher education is a microcosm of what’s occurred within public society as well.  As the Congress and Executive began two decades of vicious sniping and attack, it has devolved into a farcical situation in which there is no longer an agreed upon budget but instead a lengthy trail of continuing spending authorizations and debt limit increases.  Because decisions can’t be made and the debt continues to rise, the Federal Reserve has – and I hate to say it, but it’s true – stepped into the breach to delay a day of reckoning by maintaining artificially low interest rates.  So the financial role of government in higher education has shifted from fiscal policy laid out in conscious budgetary decisions to monetary policy as demonstrated by the low cost of borrowing money.  Here’s the difference between fiscal and monetary policy:  fiscal policy is made by consensus, which is often messy and combative as issues are threshed through.  Monetary policy however, simply acts to delay any decisions because there is no perceived cost to borrowing and hence, no need to actually make a decision; can’t make a decision because it’s too unpleasant to hash through?  Don’t worry, we can hold off because it won’t cost much.  On the micro-level of the student and family, the story line for years was that borrowing to finance your education was wise because it was investing in yourself and would pay off in the long-run.

Fifth, all of the preceding factors braided together neatly to create an entitlement sense amongst higher education that it simply now had a captive market.  And based upon the ways in which some of the institutions have spent their money, their perception has seemed to be that the market was in the French Quarter as college presidents and administrators strolled down the Rue amidst a shower of cash screaming out laissez les bon temps rouler!  There was no perceived need to keep the spending down – apart from paying for pesky things like permanent faculty – since the money flowed and the steady flow of students continued.  Money was spent on increasing administration, extraneous and honestly unnecessary programs of study and physical plant and student options that are high-end accessories as many of the institutions competed with one another.  And yes, when your brochures are showing photos of climbing walls and Mongolian Grills as student dining options, then that would arguably qualify as high-end.

So that’s the short version.  Like much else in America, we’ve gotten use to having plenty of options and choices without remembering that these options come with a price tag.  As my father used to comment from time to time:  champagne taste, beer budget.  Over the next several weeks, I’ll expand upon these factors individually because honestly, there’s some fascinating stuff out there.

College Education and “Skin in the Game”

I think that the kids need to have some skin in the game…

       Tech Guy and Father to the PracticalDad

This comment was made to me several days ago, just a day after both Middle and another posted a video about Bernie Sanders proposing free college tuition for all Americans.  Taped in a conference room at his Burlington, Vermont campaign headquarters, candidate Sanders restates the issue – higher education is unaffordable to hundreds of thousands of young Americans – and follows with both a plan and a plea.  Since I’m unable to find this video outside of Facebook, I’m providing a link to a CNN interview with Wolf Blitzer in which the same proposal is discussed.  Please understand that you have to get through a short segment on Hillary Clinton as a setup for the interview.

As full disclosure, I like Bernie Sanders even though I’m nowhere near a socialist in my leanings.  When he gave a filibuster in late 2010, I made it a point to have the kids watch – even if only for a few minutes – so that they could see a filibuster in action and his name has come up in later discussions with the kids.  The problem is painfully and correctly obvious.  We’ve allowed a system to be created that predicates supposed achievement and financial security upon the acquisition of a degree that can cripple a young adult’s prospects for more than a few years and the cumulative level of student debt now surpasses the national level of credit card debt.  The mantra in the PracticalDad household for the past eight years has been we need to get you through college with as little debt as humanly possible and Eldest is almost at that point now.  So how do we make this happen for the millions of other young Americans?

What Sanders proposes is a popular two-fer, free tuition for all young Americans to be funded by a transaction tax upon each stock trade made on all equity markets across the country.  Get the youngsters excited while simultaneously sticking it to Wall Street.  The transaction tax specifically is a $.50 fee made upon each market transaction by all entities that trade in the exchanges and is what is referred to generically as a Tobin Tax, in honor of the man who first proposed the concept several years ago.  It is partially based upon the number of shares in any particular transaction, so a hedge fund moving 100,000 shares of a company would pay the tax while Joe Six-pack moving 100 shares of the same company in his own transaction would not.  The fees would be aggregated and then used to fund the tuition for any college student in the country, at any public school.

But here’s where the Tobin Tax concept becomes interesting.  The equity markets have reached the point at which more than 2/3 of all transactions are now done via HFT – High Frequency Trading – aka what is now nicknamed Skynet.  In other words, high speed algorhythmic programs running out of the TBTF banks and hedge funds across what is considered Wall Street.  The key idea behind the original concept was to somehow curb the amount of HFT trading so that that small group of investors would no longer have an outsized advantage on the rest of the public; by the time that Joe Six-pack can place a single sell order, an algorhythmic HFT program can execute dozens for a distinct advantage.  HFT wouldn’t be outlawed but it would be curbed.  The potential tax revenue on this would, by estimate of 2008 transactional data for all forms of financial instrument trades – stocks, bonds, swaps, etc – amount to greater than $300 Billion and even if the result of the transaction tax is a 50% reduction in the number of trades, the proceeds would approximate $175 Billion.  And that’s with a five year old report based upon trade data from 2008.  As angry as Main Street has become with Wall Street’s predation and apparent control of the levers of political power via campaign contributions, Sanders’ proposal has the potential for some serious popular legs.

But after thinking about the proposal, I have two issues with it and neither pertains to the Tobin Tax, but instead the notion of free tuition itself.  The first concern is more pragmatic – what’s the point of paying for every young American’s tuition if there’s no real, sustainable-living wage job available for him or her upon completion?  It’s a lovely notion that Junior can achieve a more affordable education but at the end of the day, the point of higher education is ultimately to prepare people to take their places as productive members of society.  It’s hard to be productive if there isn’t enough economic activity to support said jobs and the end result is that the youngsters continually return to gather even more credits because there’s nothing else to do.  Taken to it’s logical conclusion, the program eventually costs even more because the kids just go to school instead of being gainfully employed.  Without sustainable, living-wage jobs for them, this is akin to nothing more than refueling airplanes so that they can maintain holding patterns instead of being able to land and letting the passengers get on with their lives.  Sanders is correct in that he makes this a concrete proposal as part of a larger package of actions that have to occur.

The other issue is more philosophic.  Should we put together and sponsor a package in which something such as the tuition for higher education is free or should we, as a society, make the statement that it has sufficient value that the student and/or family should still put something towards it?  In other words, assure that the student has some skin in the game, as the other father stated to me later.  I believe that it’s human nature that we have more appreciation for that in which we’ve had a personal stake.  How many of us parents have seen kids take greater care of those items where there’s a personal investment?  If you want to make it a sliding scale tuition based upon income, then so be it; but society can still absorb sufficient of the cost that the amount owed isn’t punitive or exhausting to the payer.  Part and parcel of the philosophy piece – dark as it is – is the notion that there is no such thing as a free lunch (TINSTAAFL).  Even if there’s no ticketed monetary cost to be paid, there exists the prospect that the price will be paid in other forms and in this case, the prospect of some form of compulsory national service via a re-institution of the military draft and/or form of civilian service.  It’s an old idea that has been kicked around first by one side and then another but as funds go to one particular group and others believe their ox to be gored, the resultant clamor could result in such a deal being reached.  Hey, the kids are getting free tuition and money’s tight elsewhere…why not let them pay it back another way?  Some can disagree that it might ever happen and some can disagree that it’s a bad thing, but the prospect exists and it needs to be out there before any final decision is reached.

The issue might seem insurmountable given the barrage of commentary from one side and another amidst a 24/7 newscycle.  But it’s good to remember that our country has made such statements about the value of public higher education before and each in times more troubled than these.  The great land-grant universities – Berkeley, Purdue, Penn State and the like – arose out of legislation passed during the Civil War and the GI Bill arose out of the ashes of the Second World War.  And these were far greater fights than what would be faced with the Wall Street crowd.

A WTF Proposal on Reducing 529 Tax Benefits

It was an audible what the f*#% that escaped my lips as I read a NY Times article that explained how President Obama was now proposing to eliminate tax-free withdrawals from 529 college savings plans.  Under the proposed changes, the money earned from any new contributions to 529 accounts would lose the capital gains tax protections that have made 529 plans a decent tool in the belt for paying for higher education.  In addition to the loss of the capital gains tax forgiveness – if the money is used for qualified educational expenses – the money earned via the accounts investments would actually be taxed at the much higher ordinary income rate.  Incredibly enough, the proposal is part of a much broader package that a White House official described as designed to consolidate a variety of educational tax breaks and also funnel more money to middle-class families.

Let’s take a few minutes to actually parse through the proposed changes since this strikes me as a measure with multiple intents.  First, I have no doubt that this is tied to the floated proposal to fund free community college for eligible students..  While the tuition proposal is the carrot however, this measure would be the stick to help herd even more young people into the community college track.  We already know that the disparity between the stagnant income and the wildly inflative tuition rates has led to a shifting of family income levels downwards through the college system.  What I mean by this is that as tuition rates have risen far faster than family incomes, what a family could afford for their children has shifted downwards from private non-profit institutions (Yale or Pacific Lutheran for example) to state supported institutions (any of the SUNY institutions or your local state college).  So while a solidly middle class family could get the kids through a Pacific Lutheran in 1980, the same family would be hard-pressed to do so in 2015 and would be more likely to have the kid attending the local state college or university instead.  Even if the states are, as a group, funding less on a per student basis than in the past decades, state schools are still more affordable and the 529 plans are a legitimate tool in saving for that alternative.  Remove the 529 plans as an effective savings instrument and even the public institutions become more unaffordable; the result is that if the youngsters are going to be educated, then one of the few alternatives is to utilize the community college for an associate degree or if a bachelor’s degree is sought, the first two years of general education requirements.

Second, make no mistake that there’s an almost punitive intent in this proposal.  It would be one thing to make the 529 less attractive by simply removing the preferred tax status of capital gains forgiveness and there are more than a few people who would probably look at the 529 and say meh, moving on to other alternatives.  But this proposal moves far beyond that: this actually turns standard taxation and accounting measures on their heads by taking what monies have been made from a capital gain status – which is precisely what they are – and wholesale shifting them to an income status with a concomitant increase in taxes.  The authors of this proposal are doing the old west equivalent of dumping dead animals in the water hole to poison it for anyone else.

Third, there is signifcant debate over what income level is, in the eyes of the authors, the middle class.  The class card is played by the notion that the 529 plans “primarily provide a subsidy to people who would save in other forms anyway”, according to Sandy Baum of the Urban Institute.  Yes, it does provide extra bang for the proverbial buck over other investment vehicles.  But that tax provision was an intentional public policy message that higher education did matter and this program was an effort to help offset what even then was recognized as an oncoming problem.  The notion that the 529 is simply another investment vehicle, akin to the standard mutual fund or whatever, is also not true since anybody who’s investing in the 529 plan understands that use of the funds for any other purposes means that there’s going to be a tax penalty for withdrawal.  If this is just another savings vehicle, then just take the money and dump into a consistent money-losing fund that costs you 10% annually.  The class argument is also offset by the fact that the average 529 account only has about $19770 and the average regular monthly contribution is $175.  This isn’t the kind of investor that’s looking to get subsidized; this is the kind of investor that’s hoping to squirrel away enough money to get the kids through a state institution.  The GAO notes that while only a small percentage of families utilize 529 accounts, the median income of those families with 529 accounts is three times that of those without 529 accounts.  I believe that would actually be true, apart from the fact that it’s coming from the GAO.  The simple fact however, is that it’s common knowledge that higher incomes simply remove the possibility of any grant or need-based scholarship for the student, leaving the costs to be either borne by the family and/or student with savings and debt.

The Obama Administration notes that it has other incentives to more than adequately offset the 529 change.  These include making the American Opportunity Tax Credit permanent, with a maximum credit of $2500 annually, subject to income requirements.  The other notable action put forward by the administration is that the tax bill on any student forgiven (yes, they’ll forgive the debt but you have to pay taxes as though it was an income) would be eliminated.  The reality there is that unless you are engaged in a program that eliminates student debt in return for service of some kind, it’s damned hard to get the student debt forgiven.  The onus is upon the borrower and the person has to demonstrably show that it is indeed a hardship for self and family; that is a steep hill to climb and few are able to do so.

The families utilizing the 529 plans are the ones who are looking ahead to the future and making an effort to save for it.  Eliminating the benefits of the 529 is as much a penalty for savers as are the other policies of the government, most especially the ridiculous rates on various savings accounts.  The message from the power structure is that we aren’t to worry, that there will be other options and if nothing else, we can always just borrow more when the time comes…precisely the last thing that savers and responsible parents want to hear.

There is also another aspect to this entire matter that bothers me, but it’s something that I frankly have to work through before I put it out there.  Suffice it to say, there will something more on this when I’m comfortable that I’ve thought it through.

Some Thoughts on Free Community College

I was sitting with my Better Half when there was an online article about President Obama’s recently announced plan for free community college tuition.  As we read the article and then followed up with other sites, the commentary flowed.  On the one hand, it can be trolled as yet another spending program with dubious results but there are some other aspects to consider.

Our conversation was framed by a discussion earlier at dinner with one of Middle’s friends, who is presently a college junior at a state university.  As he explained his course load, he commented that the very first Gen Ed class that he took on Day One was a math course, which started with the concept of counting.  Both of us looked at him and my wife stopped and asked for clarification and he confirmed that it started with simple counting before moving on to more complex topics such as addition.  This was on top of stories from others of his contemporaries, which led us to the conclusion that much of the early college course load is simply remedial and if this is indeed the case, then there is actually some value in the President’s proposal.

But before that, what is the core of the proposal? When you read the brief articles – and yes, the devil is in the details – there are requirements of all parties involved for this to work.  First, the students – those who are eligible and I smell income requirements in the air – are required to maintain a GPA of 2.5 and must be in school for at least half-time.  They must also show continuing progress towards their program goal, whatever that may be.  For their own part, the community colleges will have to offer programs that are either fully transferrable to a local four-year public university or occupational training programs for which there is high demand (and oh yeah, actual job opportunities).  The government part of the deal is that the Federal Government will put up three-quarters of the money and the states will put up the other quarter of the funding; in the ideal theoretical world, the student would be able to save $3800 in tuition each year.

Now let’s pick this apart as we did on the sofa.  The reality facing America is that our students, as a whole, are performing poorly versus their peers across the globe.  Our students are behind in science and math, critical in today’s technological society.  But look at the cost differential of the same type of course taught at both the community college and local state university.  A basic three credit Math 100 course at my local community college (and I’ve verified the numbers via the respective tuition website pages) would cost a student $458 while a basic three credit Math 100 course at the local state university would cost $792, a differential of $334.  Since these basic courses would be generally identical in scope, it makes no sense on a societal level to duplicate the courses with some students paying the higher amount and effectively wasting the resources.  This is clearly an effort to bring about some relief to the issue of student debt, which now is in excess of $1.2 Trillion, more than the amount of outstanding credit card debt.  It is also a concrete effort to combat the several decade mantra that the college route is the route to take after high school; it’s a mantra that has now sucked in enough people to swell the rolls of student debt holders to more than 40 million young adults.  The inclusion of the word local is also meaningful to students.  Part of the message sold over the past several decades is loosely reminiscent of Bluto Blutarsky’s infamous line from the movie Animal House: …the best seven years of my life.  The community college proposal is squarely saying that a quality higher education doesn’t have to include the now-expected time away from home.  I understand that there are plenty of young people who crave that – God knows that I did – but that was a different time with a different set of circumstances.  With the job market being what it is in terms of wages, would you rather live away from home now and take on debt or clear your decks now and then proceed with your life?

There are other points to make here.  It’s a message to community colleges that they need to take greater care in offering programs that are indeed timely and of value.  As costs drive more away from any higher education, the message is that the money will be there for students if there are programs that make sense; so cull away the nonsense and put together curricula that meets society’s demands.  It also sends a message that there has to be a greater effort by both the community colleges and four year institutions to mesh what’s offered so that money isn’t wasted on credits that won’t transfer to the four year university.  There have been several instances in which I’ve been told by someone that their kid or neighbor’s kid won’t have credits transferred, meaning that the resources are wasted.  Multiply this across – at least – several hundred thousand students and that’s considerable money simply down the tubes.  There’s likewise a message to the four year institutions that perhaps there are other options to the public and that in a period of declining resources, they’re best served putting the money into that which truly does train, educate and enlighten.

Since I began this article two days ago, other information about the proposed cost has been issued by the administration, assuming that you actually believe them.  According to the Press Secretary, the President’s program would cost about $60 Billion over the course of a decade…so call it roughly $6 Billion annually.  The knives will come out and it’s going to be decried as budget-busting, although the concept that an outlay of $6 Billion – nah, since we’re all of going on $20 Trillion in debt, let’s use the lower case and call it billions – is actually laughable in the greater scheme of things.  There’s actually the argument that this type of spending would actually be an investment.  According to the Federal Education Budget Project, produced by the New America Foundation, the collective student default rate for federal student loans as of 2011 was approximately 18%.  Yes, this is 2011 data but let’s apply this default rate to the 2014 student loans issued in the amount of almost $100 billion; this is a default of approximately $18 billion.  The same article from FEBP shows that the net recovery of defaulted money is approximately 80% for a net loss of $3.6 billion.  The net differential on the $6 billion average annual outlay is a loss of $2.4 billion.  The important thing is that as the system begins to change over time, the defaults should lessen and the money begin to flow to where it’s most effective.  This doesn’t even address the psychic and emotional toll on young adults who are stuck with a debt albatross around their neck as they start out in their adult life, nor does it address the delayed creation of households, which is actually important for the national economic health.

There’s one other point from both our conversation and a review of the information.  There’s a collective failure when the colleges – community and four-year – are forced to offer such utterly ridiculous course offerings as taken by Middle’s friend.  This information is certainly offered by at the secondary – hell, even the primary – level and it’s a complete failure that the information isn’t being collectively learned.  And that’s on us.

Honesty at the College Visit

This weekend saw yet another college visit for Middle, who is now in his senior year of high school.  It occurred at a major urban east coast university and naturally, the place was festooned for the thousands of visiting prospects and parents, who were respectively excited and terrified.  Before the breakout sessions for the Admissions/Aid and then the various individual academic schools within the university structure, there was the obligatory reach-‘n-grab for all manner of flyers, pens and cheap lanyards as the herd milled past the tables set up in the arena concourse.  For all of the obligatory rah-rah however, there was a session of clarity and honesty in the early afternoon and it was eye-opening for the handful who were in attendance.

Middle is an arts kid – creative and talented, someone who appreciates the poetry of E.E. Cummings more than the need to subtract – and in his element, he’s a wonder to behold.  All of the paternal gush now aside, we joined dozens of students and parents for the Theatre Department’s information session.  It was hosted by the Theatre Department’s Assistant Chair as well as the graduate theatre program director, each with years of experience running this nationally recognized program and it occurred in the front rows before a stage undergoing transformation to the mythical Scottish village of Brigadoon.  The department chair spoke about the program and it’s structure, as well as the various concentrations and where the graduates were getting work.  He then however, commented that if the students were hoping to come here and then simply make it into the big-time, they were suffering from a notion that was preposterous; they would work diligently and hard to learn a craft that might earn them a weekly wage of $150 to start.  As he discussed the capabilities of the various adjunct faculty, he told of a graduate who had been on Broadway but was now back and teaching as her mother was helping care for the graduate’s child since the typical Broadway salary didn’t allow for the burden of childcare expenses.  I glanced at Middle, who was silently digesting all of the information that was more telling of reality than he’d get from the glossy brochures that inundate the mailbox.  The two of them also acknowledged that they were glad that it was far more affordable for the in-state kids and they didn’t blink when a mother later asked about the state residency requirements; this woman was a heavily-accented immigrant who would be willing to move to make this work for her child, even if it meant that her child would have to wait a year for the opportunity.

When it was over, we joined a group who were waiting to make personal comments or ask questions.  I thanked the gentleman for his candor and he remarked that he very much understood the issue of tuition.  When he himself was in high school, he had the opportunity to attend a college for free and his own father decreed you will go here.  He then touched his index finger to his thumb to make a small circle that he placed before his eye, and commented that it made a huge difference for him, allowing him to take advantage of opportunities that paid nothing yet provided real dividends for his career.  Middle stood nearby listening, taking all of this in and it was invaluable since it wasn’t coming from the ‘rents.

The old reality of college – the best seven years of my life, as Bluto Blutarsky once commented – is dead.  I don’t know where Middle will ultimately wind up or what he’ll do and I know that the decision will be hashed out in the coming months.  But there were three lessons that I believe he took with him from the sessions.  The first is that beneath the glossy exteriors and play to the emotions, this is a difficult first lesson in finding the balance between the dreams and the adult realities of the present-day world.  The second lesson is probably more important, and that is that this is a decision that will be made with the parents; indeed, the folks might just be more far-sighted than he realizes as he comes to terms with the reality that you can’t have it all, despite what it proclaimed in advertising.  The third lesson is that it’s not just his own Mom and Dad who are asking hard questions, ones that he simply doesn’t yet grasp as a teenager.

This coming weekend will see yet another college visit and this time, we’ll go as a family and bring Youngest along. He’ll be bored at moments and that’s fine, he’s old and disciplined enough to suffer well for the short duration.  But my hope is that even years away from this decision, he’ll take enough in to see the process so that he’s not so swayed by the marketing that’s printed to sway the kids.  Because last week, he – now in seventh grade – looked at a brochure sitting on the kitchen island and stated man, I wanna go here ’cause everyone looks so friendly.  Yes, the boy’s coming along.

A Prophet In His Own Land

There are times when it’s better for the kids to hear it from another adult since repeated commentary in the household smacks of the prophet in his own land deal, just more nonsense spewing out of the old man’s mouth.  Today was one of those rare occasions when one of the kids got to hear it full bore from another parent, even if that kid was Eldest, the college student who actually gets it.

She’s home on summer break and joined me at the grocery store.  Our cashier at the checkout line was a mother of two that had, at one time, gone to our church.  Her kids are of similar ages to Eldest and Middle and as we transacted business, I inquired as to their whereabouts.  The discussion was fascinating because it encapsulated both what I’ve been saying to my kids for years as well as providing a snapshot of larger economic issues.  Neither of her kids are now in school, although her eldest had spent a year in college before transferring elsewhere and ultimately dropping out.  There was significant discord in her household as she and her husband refused to take out a PLUS loan or co-sign for any loans that he might take on himself, leading him to withdraw for now.  It wasn’t that they didn’t want to; but both Mom and Dad recognized that the old college model – the best seven years of my life – are gone.  The boy wasn’t deadly serious about it and uncertain as to what he wanted; topping it off was that Dad had lost his own job and their own finances were shaky although they at least owned their home free and clear.  The unhappy conclusion for their Eldest was that he would find a job and pay off his existing student debt while he figured out his next step.  The cashier’s daughter is graduating in a week but has decided, despite straight A’s and a stellar athletic stint, that she’d rather work for now while she figured out her next steps.

What came through in the conversation, as Eldest listened, were several points.  First, that there really is a shortage of livable wage jobs out there for young adults as this woman’s kids are struggling to find adequate employment.  Second, that the student loans really are a deadweight on household formation, a cornerstone of viable economic growth; she commented that her kids, and others that she knew, were having difficulty pulling together the down payment for a used car, let alone for a house.  This is borne out by the recent Zerohedge/Pew Research article showing that the average net worth of a college graduate with student debt is a full 20% less than an unindebted high school graduate of the same age.  As she pointed out to Eldest, her wish – and mine as well – was that the adult kids would come for Sunday dinner and visits, not every breakfast without fail.  My contribution to the conversation was the third point, one that Eldest has heard me make before:  if an average young person’s lifespan is expected to surpass 80 years, does it make sense to take on the debt now instead of growing a bit and letting the post-high school smoke clear?  Make sure that there’s a plan for college, otherwise take some time to get your life in order before incurring the cost.

Eldest clearly wants to be out in the great wide world on her own.  She’s smart and in the past several weeks that she’s been home, I’ve noted thought processes that were dormant in earlier years and some of these go to standing on her own two feet.  She didn’t say much in the conversation with the cashier acquaintance but I could tell that the persistent home meme about student debt had paid off, leaving her with the prospect of doing what she wants when college is through.  Setting up her own place and moving out into the great wide world.

Now I have to keep talking to her younger siblings. 


The College Food Bank

It’s been awhile since I’ve written on the college debt issue although the topic has certainly had play within the household as Eldest continues her way through college and Middle starts to examine options.  But while inured to the issue, I was appalled to find that the local state university’s Student Christian organization now runs a food bank for students so that they have something to eat.  Why?  Because in an effort to get through with as little debt as possible, students are cutting out the student meal plan and getting by on what they can cadge.

This particular food bank is not officially sanctioned by the university as any approved student organization but is indeed one of the multiple services offered by the campus student christian organization.  It has a paid chaplain whose salary is covered by the local ministerium of churches but no other staff and it’s office is located in a university provided building.  The need was noticed a very few years ago by the chaplain when he found that some students were simply going without and then hitting events in order to feed themselves.  Now the notion of college students living on ramen isn’t new and even I had friends and acquaintances eating cheap hot dogs, spaghetti and ramen in college; but what’s different is now that these students can’t even afford the cheapest food and are simply doing without in entirety.  When I spoke with my own pastor, who sits on that group’s board and informed me of the bank’s existence, she stated that what they were handing out were single serving items such as instant soup or single serving mac/cheese which were easy to fix when there are minimal kitchen facilities.  The kids aren’t cutting out the niceties to go to the basics, they’re being forced to cut out the basics in the entirety.

There’s now a fundamental disconnect in our society.  We sell the importance of a college education and many kids take it to heart, yet we saddle them with crippling debt and a barista job at Starbucks.  Now that they’re getting the disconnect, they’re doing everything that they can – unhealthy as it is – to still get the degree.  It’s time to rethink higher education and put our money where our mouth is…because God knows that more than a few kids aren’t putting anything in their mouths.



Student Debt:  Written Off Debt Doesn’t Mean It’s Gone…

Reuters recently reported that banks wrote off $3 Billion in student loans for the first two months of 2013, an increase of fully 36% higher than the same period last year.  While some will salivate, thinking that the bank is giving up on the loan and there’s an opportunity to escape the stifling debtload, it’s important to recognize one salient fact:  Debt that’s been written off doesn’t mean that it’s gone or dead…it’s just being reassigned. 

Many have now learned that student debt is different from other debt in that it cannot be discharged in bankruptcy; there is no clearing of the slate with the requisite hit to your credit history.  That’s the crucial difference when you hear that a bank is writing off a student’s debt versus any other person’s debt.  The ultimate effect of a written off loan is that it’s treated by the bank as an expense; it’s considered as a cost of doing business and the net loss – face value of the loan less any recoverable amount – is deducted from revenue to determine the profit for the year.  So the banks are saying that they’ve had enough on some loans and will write them off.  But the non-dischargeable nature of the loan doesn’t change and whoever buys that loan – a so-called vulture – will accept the risk of non-payment for the possibly greater return on the debt.  And the fact that this can haunt someone forever means that the vulture has considerable upside to the transaction since there’s no alternative for bankruptcy.  So for the bank, it’s an accounting transaction only and no relief for the student who’s in arrears or default.

One of the lessons that I try to teach the kids is that things don’t just happen, but there’s frequently a reason for why, when and how they happen.  In this case, Bloomberg reported last week that Obama was cutting the collection agency commissions for student loans in default from 16% to 11%.  Prior to this announcement, a debt collector could receive up to 16% of the debt as commission if payments of a sufficient size were realized and it’s this largesse that led to some of the well-documented abuses noted over the past year.  With the President’s action, the commission will decrease to 11% regardless of what’s received, so the effect is to diminish the pressure tactics and abuses.  The second part of the why-when-how aspect is that some of the largest student collection agencies – such as NCO and Pioneer Credit Recovery – are subsidiaries of JPM Chase and Sallie Mae (SLM) respectively.  While I’m not conversant with the arcane details of corporate accounting, I suspect that the write-off involves a shifting of the debt to the subsidiary where it can be recovered at the still pertinent rate of 16% instead of the 11%.  The net effect is that the student debt write-off has been simply front-loaded and shifted as the parent corporations still profit and the students are still pursued.

So what’s the takeaway from this?

  • These bank write-offs are irrelevant for the debtor as they’re still responsible for the debt;
  • This is just another piece of anecdotal evidence that the financial industry has an advanced view of what’s going on within the present administration;
  • While the news of larger write-offs adds to pressure for further action to effectively address the entire issue of student debt, it’s still incumbent upon the parents to help the kids figure out how to obtain the best education possible with the minimum amount of debt, if there has to be debt at all.