FT Piece on student loan bubble

[matjone]

https://www.ft.com/content/a272ee4c-1b83-11e7-bcac-6d03d067f81f?segmentid=acee4131-99c2-09d3-a635-873e61754ec6

 

Thoughts on this?  The solution I usually see proposed is to let the government pay for it.  But shouldn't something be done about the cost?  I would have thought the internet would have lowered the cost of an education, but it appears to be going in the opposite direction.

[DTEJD1997]

https://www.ft.com/content/a272ee4c-1b83-11e7-bcac-6d03d067f81f?segmentid=acee4131-99c2-09d3-a635-873e61754ec6

 

Thoughts on this?  The solution I usually see proposed is to let the government pay for it.  But shouldn't something be done about the cost?  I would have thought the internet would have lowered the cost of an education, but it appears to be going in the opposite direction.

 

The government is already paying for it...Just how much of the current batch of student loans is going to be paid back?

 

How about this?  How about the students pay for it?

 

No more student loans! 

 

How about the educators are held accountable for their actions?  Why are there so many lawsuits against "for profit" skools?  Why are there so many lawsuits against law skools?  Why are there so many "scam blogs"?

 

How about the skools have to tell the TRUTH about the product that they sell?

 

Those that are good, do well.  Those educators that are simply trying to rip off the system or collect a paycheck can hit the bricks?

 

I read an article about a financial planner that is telling parents that they need to put away $500 to $1,000 a month, every month, for their children's college education.  That in 20 years, a college education could easily cost $400k.

 

I would posit that if a college education costs $400k, it will not have an economic return for the VAST majority of students.  Take that $400k and buy property or a business, or investments.  Who is going to have $400k for an education?

 

If you don't have $400k, and borrow it, how are you going to repay it?  What happens if interest rates go up?  If you are paying 7% on a $400k loan, you are going to be paying close to $30k a year in INTEREST alone.

 

I work with some young attorneys.  Their situation and job/life prospects are truly pitiable.  They will NEVER be able to enter the middle class.  A good chunk of them have $250K+ in student loan debt.  They work "contract" jobs for $22/hour.  Work comes & goes...so it is hard to get in a full 2,000 hours a year.  If you work 1,700 hours a year, how are you going to pay for your expenses AND pay back your loans?

 

I am absolutely passionate about how education has been corrupted.  It has ruined, many, many peoples lives. 

 

 

[Cigarbutt]

I find this is a significant issue too.

In Canada, the problem shows regional variation and is less severe but adequate access to affordable education is getting more difficult.

 

For the US situation, some may be interested to look into what Daniel Pianko has to say about the student loan issue. Late payments and defaults is a developing concern now. One has to wonder about the underwriting principles of those loans and the unintended consequences that are being played out due to government (over)intervention. Like in health care, these kinds of issues will be resolved in time. It's just that we seem to be going in the wrong direction.

 

Access to affordable and relevant education is key to social mobility which, itself, has been decreasing for some time.

 

For the new generation:

-Are they acquiring the right skills?

-Are they getting their bang for the buck?

-Does the higher education system maximize potential abilities for all?

 

Should the government get out of the student loan business or redefine its role?

 

My perspective is that a lot of people are going through higher education because of lack of better options, don't acquire relevant skills, incur significant debt along the way and end up in positions that don't require specialized skill and knowledge. This is not a recipe for success.

[DTEJD1997]

Hey all:

 

Here is another small piece of evidence that "education" has become corrupted and it's all about how much $$$ the educators can get their hands on through student loans....

 

In Michigan, there are some law schools where 1/2, OR LESS of their students pass the bar exam.  Of course, if you do not pass the bar exam, you don't get to practice law.  If you don't get to practice law, how do you get employment as an attorney?  These same schools publish figures showing that something like 90% of their graduates get jobs...I don't get the math...

 

Additionally, the catastrophic failure rates are NOT a 1 time fluke event.  This has been going on for a few years now.

 

One of the "schools" is admitting a good percentage of people who scored SO LOW on their LSAT, that they simply would have been better off randomly selecting answers (A,B,C,D).  The LSAT is 200 questions, so if you simply guess "C" to every question, you should get about 50 correct answers...This school has a good chunk of people who can't get 50/200 correct on the LSAT.

 

So what has happened, is that some lower ranked schools are simply taking anybody who wants to come and can get student loans.  It does not matter if they are likely to pass the bar.  The important thing is that the school gets the money.  This is also an indictment of the quality of their education.  If you are good enough to pass your classes, you should be good enough to pass the bar exam.  OR could it be that the schools are simply passing people along from class to class, year to year, to simply get more money?

 

This problem is not limited to Michigan.  There is an even WORSE problem with this in California.  It is starting to creep into other states too.

 

Many law school deans are on record saying they face the dilemma of laying people off/shutting down OR lowering admission standards to stay open. 

 

Then you've got the problems with the ABA.  The ABA accredits law schools.  Where are they?  What are they doing?  How can schools where 1/2 or less of their graduates keep their accreditation?  How are they not even put on probation?

 

So the Department of Education is finally stepping in and has pulled the Charlotte School of Law ability to get student loan funding. 

 

https://www.nytimes.com/2017/02/07/business/dealbook/for-profit-charlotte-school-of-law-loans.html?_r=0

 

The law school problem is only the tip of the iceberg....

[matjone]

How good of an education can you get with an internet connection and maybe a few thousand dollars for books and other expenses here and there?  My guess is that a lot of people who are reasonably intelligent and motivated could cut out a lot of unnecessary expense with this method.  Personally I would have been better off  watching MIT lectures on youtube than going in person to listen to lower quality professors at the school I went to.

 

I also think that it should be easier to have these debts eliminated in a bankruptcy.

[SharperDingaan]

A student loan is simply a tool, that helps millions of people get an education.

There are many who think that's a bad thing. That we would be collectively better off if student loans didn't exist; & there were fewer but higher quality doctors, lawyers, accountants - earning more. Others argue you can never have enough of those doctors, engineers, nurses, etc. Hence it would appear that for some professions, making student loans available is a good idea; but for others - not so much.

 

Some people see student loans as just another form of predatory lending, no different to the teaser rate mortgage lending of the financial crises. It may well be; but the solution is bankruptcy - the same as it was for those mortgagees of the financial crises. Students are not special.

 

Others suggest that education should be free, & in many places - it is. But to make something free is to devalue it, because  now everyone has it. If I live in a forest of old growth trees I don't appreciate it - because every tree I look at is an old growth; even if that forest is the only remaining old growth forest of its type in the world.

 

Institutions are simply responding to opportunity; their product is a student more educated than they were when they started. Education does not guarantee a job, it just makes it easier to get one - as every immigrant taxi driver learns very quickly.

 

In our marketplace, 'worth' is demonstrated by what someone else is willing to pay for it. Arguably a employer hiring a new graduate, paying $X of student loan off upon hire - conditional upon the student staying with the employer for Y years. If the market will not pay, the education has zero value. We already have this, but prefer not to use it - as its a modern day form of slavery.

 

We have what we deserve. We wouldn't make the choices required of us, and are now reaping the consequences.   

Doesn't mean that we have to continue to do so.

 

SD

   

 

 

 

   

[LC]

If the market will not pay, the education has zero value.

 

Others suggest that education should be free, & in many places - it is. But to make something free is to devalue it, because  now everyone has it.

 

Not sure I agree with either of these statements. An unemployed surgeon is more valuable than an unemployed ditch digger. Price does not equal value.

 

Free education does not devalue the education. The price is just a transaction price. Look at the Chinese cities built upon free IP, they are in fact more valuable because they have removed the transaction cost.

 

Most education and information is already out there to learn freely. Heck, I can download a med school's worth of textbooks and watch all the lectures online. That is not the reason we don't have a civilization filled with doctors, engineers, etc.

[Gamecock-YT]

 

So the Department of Education is finally stepping in and has pulled the Charlotte School of Law ability to get student loan funding. 

 

https://www.nytimes.com/2017/02/07/business/dealbook/for-profit-charlotte-school-of-law-loans.html?_r=0

 

 

I ride the train everyday with these students....talk about a delusional bunch. Think their shit doesn't stink. Know a few grads as well, they all say they wish they hadn't done it.

 

I've seen the latest thing the feds are wanting to do is give the schools some skin in the game. 5% of their funding being tied to students graduating and/or getting jobs after graduating. Sounds like the makings of a horribly perverse system of incentives.

[SharperDingaan]

If the market will not pay, the education has zero value.

 

Others suggest that education should be free, & in many places - it is. But to make something free is to devalue it, because  now everyone has it.

 

Not sure I agree with either of these statements. An unemployed surgeon is more valuable than an unemployed ditch digger. Price does not equal value.

 

Free education does not devalue the education. The price is just a transaction price. Look at the Chinese cities built upon free IP, they are in fact more valuable because they have removed the transaction cost.

 

Most education and information is already out there to learn freely. Heck, I can download a med school's worth of textbooks and watch all the lectures online. That is not the reason we don't have a civilization filled with doctors, engineers, etc.

 

Consequence matters

Two students from similar backgrounds using student loans to pay for school (equal opportunity); one studies engineering, the other studies literature. On graduation both work as a barista, whilst looking for a job. But the engineer gets a conditional sweetener from an o/g company to work in a crap location (ie: Libya, Alaska, etc.) for 2 years, with a 10K sign-up loan repayment; the literature graduate remains a barista. The job offer, & sweetener, were made because the engineer had in-demand skills; which the literature graduate did not have - the literature skills had no commercial value.           

 

Think of the humble MBA.

If the only place you can get one is an Ivy School, there would be very few MBA's, they would all come from the same families, and they would all get paid extremely well - including the idiots. Add a few loans, scholarships, & competitive entry; the supply rises, the pay remains good, but you can now at choose between candidates. Now make it free & remove the competitive entry (we're all 'equal'); everybody gets an MBA, & the pay plummets on the excess supply. We have just made an MBA - the new BComm, and the old BComm - essentially a college diploma. Credential devaluation.   

 

Theoretically a room full of PhD's is more valuable than a room full of ditch diggers; but if the PhD output is just research papers that go nowhere, the ditch diggers are actually more useful ('pushback' that academic 'experts' are now discovering). The PhD's don't actually become useful until they are married up with VC in an incubator - & collectively start producing new product or services.

 

Obviously, not popular views.

Let the markets signals do their thing, & the chips fall where they may

 

SD

 

   

[DTEJD1997]

If the market will not pay, the education has zero value.

 

Others suggest that education should be free, & in many places - it is. But to make something free is to devalue it, because  now everyone has it.

 

Not sure I agree with either of these statements. An unemployed surgeon is more valuable than an unemployed ditch digger. Price does not equal value.

 

Free education does not devalue the education. The price is just a transaction price. Look at the Chinese cities built upon free IP, they are in fact more valuable because they have removed the transaction cost.

 

Most education and information is already out there to learn freely. Heck, I can download a med school's worth of textbooks and watch all the lectures online. That is not the reason we don't have a civilization filled with doctors, engineers, etc.

 

Consequence matters

Two students from similar backgrounds using student loans to pay for school (equal opportunity); one studies engineering, the other studies literature. On graduation both work as a barista, whilst looking for a job. But the engineer gets a conditional sweetener from an o/g company to work in a crap location (ie: Libya, Alaska, etc.) for 2 years, with a 10K sign-up loan repayment; the literature graduate remains a barista. The job offer, & sweetener, were made because the engineer had in-demand skills; which the literature graduate did not have - the literature skills had no commercial value.           

 

Think of the humble MBA.

If the only place you can get one is an Ivy School, there would be very few MBA's, they would all come from the same families, and they would all get paid extremely well - including the idiots. Add a few loans, scholarships, & competitive entry; the supply rises, the pay remains good, but you can now at choose between candidates. Now make it free & remove the competitive entry (we're all 'equal'); everybody gets an MBA, & the pay plummets on the excess supply. We have just made an MBA - the new BComm, and the old BComm - essentially a college diploma. Credential devaluation.   

 

Theoretically a room full of PhD's is more valuable than a room full of ditch diggers; but if the PhD output is just research papers that go nowhere, the ditch diggers are actually more useful ('pushback' that academic 'experts' are now discovering). The PhD's don't actually become useful until they are married up with VC in an incubator - & collectively start producing new product or services.

 

Obviously, not popular views.

Let the markets signals do their thing, & the chips fall where they may

 

SD

 

 

SD:

 

I am not sure where you are based...but I am going to guess it is not in the USA.

 

One of the big problems, and there are MANY, is that there are "false" signals being sent out about education.

 

Many "schools" are lying about the outcomes of their students, the wages that they earn, and the value of the degree they confer.

 

To compound the problem, they are legally allowed to do this.  One example of this was one of the lawsuits against Cooley Law Skool.  The judge found the skool not guilty because prospective students are "sophisticated consumers" and they should have known that Cooley's representations were false.

 

From one of the lawsuits against Cooley Law School:

 

Judge Quist points out that for the class of 2010 Cooley was previously able to report on employment reports that are “inconsistent, confusing, and inherently untrustworthy” (decision, page 16) and “so vague and incomplete as to be meaningless” (decision, page 22)

 

http://abovethelaw.com/2012/07/class-action-lawsuit-against-thomas-m-cooley-law-school-dismissed/2/

 

So you can see that schools are allowed to publish "inherently untrustworthy" statistics & figures.

There is no problem with that in the court's opinion.

 

The ABA won't revoke skools accreditation either.

 

So what recourse does a student have when they find out they have a worthless/defective education?

 

In the USA, you can't bankrupt out of your student loans. 

 

A very bad situation to be sure!

 

 

[CorpRaider]

I think Canadian real estate is a bubble.  What should I do?

[JayGatsby]

Good article, but I disagree with the author's conclusions. There's been increasing discussion that access to capital is what's driven up the price. You see it in the stats she quotes on the number of administrators and amount of construction; the colleges aren't primarily competing on price. If the government wasn't guaranteeing the loans lenders would be more focused on the amount of the loan and earnings multiple as that's the amount they can lose. Potentially the lending would be through the school similar to car loans. Gary Johnson talked about this during the presidential election, he just wasn't very articulate: http://www.ibtimes.com/why-college-so-expensive-libertarian-gary-johnson-wants-eliminate-education-2383517

[SharperDingaan]

Students can whine all they want, but no one forced them to take the loan.

No one forced them to go to school X, or go with an in-class delivery - versus entirely on-line.

 

Yes the student made a bad decision, welcome to the first of many; but there is no bail out for stupid.

Millions of people make  stupid decisions every day. Students are not special.

 

Sure, schools are lying (often by omission)- so is almost every business in NA. We call it marketing licence.

Cooley is just an extreme example, so is United Airlines.

 

If the consumer will not do their DD, & its a buyer beware market (US) - what do we really expect?

It's 'too hard', or it's unreasonable to expect this of a 'teenager/young adult', doesn't cut it.

 

We just don't want to hear it.

 

SD

[LC]

Theoretically a room full of PhD's is more valuable than a room full of ditch diggers; but if the PhD output is just research papers that go nowhere, the ditch diggers are actually more useful ('pushback' that academic 'experts' are now discovering). The PhD's don't actually become useful until they are married up with VC in an incubator - & collectively start producing new product or services.

 

The difference is that the PhDs/Engineers have an automatic call option because they can perform 2 useful skills for society. They can dig ditches and perform surgery.

 

The literature majors/ditch diggers can only perform 1 useful skill towards society.

 

So yes: society needs to allocate the resources efficiently (marry the PhD with the VC) to utilize that call option. If you live in an inefficient society, maybe you want to be a ditch digger and forgo the education expense.

 

I live in the US.I graduated with a Bcomm from a Canadian Uni in finance in 2008. Not exactly a great time to be entering that workforce. I dug my ditches for years. But eventually the call option paid off.

 

On a side note: everything I learned in Uni (aside from the social skills) could have been learned for free online. Of course, employers don't think that way. But that is another of society's inefficiencies.

 

Imagine 2 students, both with the same knowledge. One came from a big uni and has ($150K) debt. The other debt free and learned everything online. As an owner, I can pay the debt-free student less money, and get the same output. The indebted student requires more salary because he has an additional expense.

[RichardGibbons]

Yes the student made a bad decision, welcome to the first of many; but there is no bail out for stupid.

 

Yes, there is.  It's called bankruptcy.

 

Millions of people make  stupid decisions every day. Students are not special.

 

Yes they are--their student loans aren't dischargeable in bankruptcy.

 

IMO, they should allow student loans to be dischargeable.  The result would be fewer student loans since lenders would have to care a bit more about creditworthiness. But I think it's probably a good thing if people are unable to borrow hundreds of thousands of dollars to get degrees in 16th Century Austrian literature.

[JayGatsby]

Yes they are--their student loans aren't dischargeable in bankruptcy.

 

IMO, they should allow student loans to be dischargeable.  The result would be fewer student loans since lenders would have to care a bit more about creditworthiness. But I think it's probably a good thing if people are unable to borrow hundreds of thousands of dollars to get degrees in 16th Century Austrian literature.

I was talking to a student in the UK recently and they have an interesting system. Here's a decent summary of it: http://thecollegeinvestor.com/13871/student-loans-different-uk-vs-us/

 

Basically tuition is capped (all school's are public and there's no states, so it's a bit different), the loan amount is capped , the repayment is based on your earnings, interest is low, and after 30 years it's officially discharged if you've never been able to repay.

[ScottHall]

I like how literature is just a worthless degree to many of you, but engineering is not. The lack of intellectual humility in this topic is staggering, even for a group of value investors.

 

You guys place way too much emphasis on ranking the various types of toilet paper.

[LC]

For every Chinese city which has grown exponentially out of poverty based on manufacturing and engineering, there are 30 cities which have done the same based on critical reviews of Shakespeare and the next great American novel.

 

Nobody is saying these degrees are worthless, but hard sciences have higher average salaries with less variance. Who would you lend 150K to?

[Jurgis]

I like how literature is just a worthless degree to many of you, but engineering is not. The lack of intellectual humility in this topic is staggering, even for a group of value investors.

 

Yeah, (value) investing is the last liberal art and literature grads can make $$$$$$ in it.

 

Right, Scott?  8)

[RichardGibbons]

I like how literature is just a worthless degree to many of you, but engineering is not. The lack of intellectual humility in this topic is staggering, even for a group of value investors.

 

You guys place way too much emphasis on ranking the various types of toilet paper.

 

It's because with an engineering degree, you can build cool stuff like robots.  QED.

 

You place way too much emphasis on disparaging the conventional as if unreasoned unorthodoxy is something to be proud of.

[Jurgis]

I mean to lie about my returns only when I'm mean. I don't do it on average!  8)

[RichardGibbons]

I think the problem is that people rate the degree and not the people enough. It's all social signalling nonsense, but it doesn't surprise me at all to see value investors adhering to society's institutions. They adhere to Ben Graham like he's Jesus Christ instead of following in his footsteps intellectually of being a revolutionary thinker of his day.

 

I agree that the degree is far less important than the person, though I think it's more than simply social signalling.  My interview questions focus on some stuff people have learnt in school not because I care if they went to school, but rather because I know that if they don't understand how to apply concepts like computational complexity, the odds of them being awesome at a programming job is low.

 

I think the Ben Graham stuff is part of evolution.  It's easier to be revolutionary if you have a strong grasp of the ideas of others.  Or at least that's my experience. 

 

Now it's all cottage cheese headed nonsense by people who I think lie compulsively about their returns, on average, and quite frankly, are probably in the poor house. I hate to say it, but I feel like by creating this forum Parsad has lead a bunch of lemmings off a cliff to bad returns.

 

I'd be surprised if a huge portion of the people here lie about their returns because it seems pointless and rather stupid.  Instead, I think it's selection bias--there are a bunch of people on the forum, and the vast majority of the ones who want to talk about their returns are the ones who have outperformed. Jurgis has been quite open about when he's had subpar results, but I think he's exceptional in his intellectual honesty.

 

I'm not sure about the extent the lemming thing may be true or not, or whether this forum would be better or worse than anything else.  I feel like the length of the threads on things like SHLD and VRX are more representative of the controversy of those companies than the board's interest.  Since this is a value board, and value's been underperforming for a while, I'd expect that, in the last few years, bad returns are more likely on this board than a growth board, but I don't think that's necessarily representative of long term performance.  It is certainly an interesting question.

[SharperDingaan]

Most everywhere, making student loans available is seen as a good thing. There is just variance on the how/if the money gets paid back; we (society) create rules we think best suit our circumstance, & then live within them.

 

As soon as there are rules, there is gaming of those rules.

But just about everywhere, if you screw up you get your head handed to you; irrespective of whether you are a saint or sinner.

Welcome to life, there is no 'undo'.

 

Like it or not, in the first few years following graduation the degree substitutes for experience (it's why it's called a sheepskin); & it underpins the 'name value' of the school you went to. But after 3-5 years, you're hired on what you've done SINCE getting your degree. A literature graduate who founded a start-up is as 'useful' as an MBA, engineer, doctor, or nurse. What YOU did matters - not the school you went to.

 

Sadly we don't value making babies the same way we value these other things we may have done. Mom (a literature graduate) who makes & raises 2 babies over 10 years (ie: makes life itself), gets punished for her entire life. Hence, hardly surprising that in western countries, birth rates have been in decline for decades.

 

I paid a lot of $ to go to Harvard or MIT; I don't want to hear that most of its value has depreciated within 5 years. I suffered material 'opportunity loss' going to Harvard or MIT; I don't want to hear that it was entirely avoidable, had I done it on-line instead, & that millions of people do exactly that. Nobody likes being made an idiot.

 

We reap what we sow .... but it doesn't mean that we cannot get on a plane & get our education elsewhere;

it's why many parents try to ensure that their kids are dual-national.

 

SD

 

 

 

 

 

[Gregmal]

I think a trend we are already  starting to see, but one that will become more prevalent is focusing on higher education in earlier years rather than blowing a load on colleges and universities. My parents always stressed the importance of a good education and my siblings and I all had the opportunity to go to private schools. The logic was that the mind and the individual develops far more during the early-mid teenage years and thus those years and the education received is more crucial towards development as a person than going to a "brand" school for $50,000 a year. So for $10,000-$20,000 a year for 4 high school years, you supposedly get much more than you would for 4 years at $40,000-$50,000/year.

 

Maybe I'm an outlier, but the first two years of college are gen-ed which is the same everywhere, and personally I found being adventurous far more enlightening than mundane tasks that largely revolved around things like being able to do what you are told and memorization(tasks I knew I could do if I wanted and thus felt no need to do if the content did not compel me). Additionally, having gotten a real education in high school, I was already at a huge advantage having taken calc+stats classes and advanced sciences and then showing up to college and seeing people spend 2+ years and tens of thousands of dollars learning Earth Sciences and Algebra. This was over a decade ago.

 

My youngest brother went the same high school route however went into college knowing he wanted to be a biomedical engineer. I had a vague idea that either law or finance interested me, but otherwise not a clue. My brother seems to be in the same boat as a lot of kids these days, whereas I was in the same boat as many in my day. So I think there is becoming a naturally tendency for kids to develop their interests earlier, and then pursue them more efficiently. I think universities will soon be forced to evolve and as a result of both the lack of demand and well as the insane costs, I think we are not too far off from seeing the typical 4 year degree cut down to 2-3.

[scorpioncapital]

Most countries have 100% free college. The US is a bit of an aberration with the $50,000 or $100,000 student loans. I suspect the nation is rich enough to figure it out.