We watched as Harvard projected up to a 30% decline in its endowment fund by year’s end, Yale 25%, and the list goes on and on. Expansion projects have all but stopped, faculty searches stayed, and financial aid spiraling down. Syracuse even sent an anxious letter to alumni asking for $2 million to prevent hundreds of scholarship students from leaving for lack of funds. State schools have been slammed even harder as 36 states face genuine budget deficits, none even close to California’s massive debt (see my blog on this state), which threatens to raise tuition by a whopping 10% in these deflationary times.
As noted in earlier blogs, supporting education isn’t just a noble cause; it’s the key to our survival as a world power with economic growth. It is a productivity-enhancing hedge against the massive borrowings saddled onto the backs of future generations – the only way we have a shot of stemming the post-recovery, inevitable inflation that results from a huge national debt and limited productivity growth. It is the primary path to the research that will create those new technologies where jobs and prosperity are born. It is the training and skill-building that makes your labor force create value for the country.
As also indicated in an earlier blog, the shortfalls in the pool of technically, mathematically and scientifically trained workers requires us to open the immigration doors wider than is politically popular. I’ve illustrated in past blogs how these immigrants have created and sustained a disproportion number of American jobs. But wouldn’t it be even better if we made getting educated easier for our own citizens?
With families no longer able to rely on “cashing out” or borrowing against their home equity for college costs – the myth of the home as America’s savings account died hard in this economic meltdown – with primary and secondary education, particularly in this nation’s public school systems, deteriorating as education budgets are cut along with everything else, and with financial aid evaporating in our colleges and universities, many are simply dropping out. Young adults today are less educated than adults over 34. 42% of American adults read at a fourth grade level or less. Where is the required productivity-enhancement in these numbers?
On December 27th the Los Angeles Times looked at another anomaly among those students who braved the economic storm and chose debt as the path to higher learning. For those who did not qualify, exceed federal limits or otherwise could not secure a federally-backed student loan (6-6.8%), they had to turn to the private lender market (which is also contracting in this meltdown), where interest rates could reach 15% (even 18% if you count the fees), resulting in absurd post-graduation loan repayment levels that often exceed the graduates total earning power.
The Times: “About $15 billion in private student loans are expected to be funded this year, a 900% increase from a decade ago, according to the nonprofit College Board. Private loans are growing faster than federally guaranteed loans, which rose 59% over the same period, in part because of limits on how much students can borrow with the government's backing…Four years at a public university, including room and board, costs an average of $57,332, according to the College Board. The average tab for a private university is $136,528. Yet the maximum that can be borrowed under the federal loan program is $31,000.” Since 1982, college costs have increased by more than three times the increase in American earning power; the federal student loan limits simply have not kept up with that rise in costs.
In 1972, the federal government chartered Sallie Mae to administer federally-backed student loans. Eventually, Sallie was spun off as a publicly-traded lender (listed on the NYSE), making both federally-backed as well as the higher-interest, non-federal student loans. Many students approach this company for their loan package, assuming that since this is the source of federal-backed student loans, this is the best deal that they can get. It often isn’t. Other lenders abound, but no one is nearly as cheap as the federally-backed student loan.
It’s tough enough to understand this complex loan process as an experienced adult, but folks in their late teens or early 20s are probably the least qualified to understand the risks, not to mention that the information provided online (where students look for answers) often falls way short of full and accurate disclosure of costs, fees, and whether or not the rates can rise over time. In short, student loans are beginning to look a lot more like credit card debt than what most people who have not dealt with the system remember from days past.
What all of this means is that our current methods for funding education are broken, possibly irretrievably, even though education is the cornerstone of our survival. Whether it’s raw government grants combined with economically-appropriate loans, or the ability to pay for education by trading a pledge for government service or a few percentage points of lifetime earnings, if we do not solve this problem soon, we can watch as our national prestige plummets almost as fast as our standard of living. This is a RED ALERT! This is not a drill.
I’m Peter Dekom, and I approve this message.
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