Thursday, February 25, 2010

It's Time to End the Student Loan Rip-Off

Student loans are a classic simulacrum of "helping the citizenry:" the real purpose is to support bloated bureaucracies and create highly profitable debt instruments.

The time has come to end the student loan charade/scam/rip-off. Cloaked in the language of "helping the citizenry get a higher education," the entire student loan system is instead a classic simulacrum: behind the propaganda, it is nothing but a highly profitable funding mechanism for bloated, bureaucratic "higher education" fiefdoms and yet another debt instrument which profits Wall Street and banks while indenturing the citizenry in a perverse form of lifelong servitude.

I am not saying this to be contrary; it's simply stating what is "obvious."

Here is the key to understanding the fundamental fraud at the heart of the entire U.S. financial system and one of its offshoots, the student loan industry: lowering interest rates and providing limitless credit does not make a good or service "affordable," it only raises the price.

Lest you think I am making this up, please consider the cost of housing in the past 35 years. Mortgage rates slowly fell from 10% to 5% while the "ease of borrowing" (FHA 3% down, option ARMs, etc. etc. etc.) went through the roof. Lower rates and easy lending standards were supposed to make housing "more affordable"--instead, the exact opposite occurred--housing doubled while wages stagnated.

Here are the statistics for income, drawn directly from Census Bureau data and adjusted for inflation, which I prepared for Why We Keep Getting Poorer: High-Cost Housing (February 4, 2010).

Bottom 20%
1975: $12,664
2001: $14,021
increase: $1,357
percentage increase from 1975: 10.7%

Middle 20% a.k.a. "the middle class"
1975: $39,807
2001: $51,538
increase: $11,731
percentage increase from 1975: 29.4%

Top 20%
1975: $91,848
2001: $159,644
increase: $67,796
percentage increase from 1975: 73.8%

Top 5% a.k.a. "the wealthy"
1975: $134,735
2001: $280,312
increase: $145,577
percentage increase from 1975: 108%

Now let's look at housing. Our statistics are once again drawn directly from U.S. Census Bureau data: median house prices 1975-2009.

The average house price in 1975 was $39,500. Using the Bureau of Labor Statisticsinflation calculator, we find that comes to $158,000 in 2008 dollars.

The average (mean) house price in December 2008 was $301,200--almost twice the 1975 cost. To be exact, 90.7% higher.

Thus we can see that only the top 5% of households actually gained enough income to match the rise in housing costs. Even the "upper middle class" in the top 20% of households only gained 74%, substantially less than the 90% rise in housing.

The lower 3/5 of the households were completely blown out of the water by housing's 90% rise; obviously, their ability to afford a house was essentially destroyed by this asymmetric rise in the cost of housing.

I submit that the exact same mechanism is at work in the "affordable education" student loans scam: the cost of education has far outpaced wage increases, for the precise reason that cheap easy money was now available to feed the system.

Just using my own education at a state university as an example: my tuition and student fees in 1975 (the year I graduated from the University of Hawaii at Manoa) were $235. (Books were of course extra.) Since I was self-supporting and was working as many hours as possible in a six-day week, I recall the exact numbers: $89.25 for tuition, $27 in student fees per semester.

In 2010 dollars, the 1975 tuition and fees is about $950 per year. Meanwhile, the 2010 tuition and fees for UH-Manoa now $4,000--four times higher than the 1975 costs.

Why have higher education costs skyrocketed? Since my brother-in-law has worked on the teaching side of things at UHM for the past 37 years, and since I visit the campus often and follow Hawaii politics and budgets a bit, these reasons pop out as "obvious" (and thus highly unpopular within the status quo)--and I suspect they hold true at every institution of higher learning, public and private:

1. Since "cheap" essentially limitless student loans are available, then there is no incentive to rein in costs; the students will borrow more.

2. While teaching staff is being squeezed, administration costs have ballooned-- from outrageous salaries for top administrators in the hundreds of thousands of dollars, and from an increase in administrative headcount which has far outpaced any rise in the number of students.

3. On the teaching side, endless meetings now suck up more time than teaching, curriculum development, etc.--the classic signs of bureaucratic bloat/inefficiency.

4. Non-teaching staff (grounds crew, security, etc.) routinely underperform; there are no incentives to work hard and no way to get fired.

5. Non-salary benefit costs--healthcare and pensions--have skyrocketed, as they have for all public employees.

Even though the employee might not see a wage increase for years, the total cost of their position (the "overhead" non-wage benefits and pension costs) has soared.

The incentives in the student loan scam are all perverse. Universities face little competitive "market pressure" to completely revamp their bloated, inefficient structures, and students just sigh and tack on another $20,000 to their stupendous student debt.

Meanwhile, Wall Street and the banking industry love student loans, especially after the Republican White House and Congress passed the "No Banker Left Behind" bankruptcy "reform" which leaves student loans as collectible until death (and beyond)--essentially a form of debt servitude for life.

So what's not to like from the Status Quo point of view? Lifelong debt serfdom is the entire raison d'etre of the American financial system and Savior State, and student loans are just one nasty little piece of the total debt-serfdom/servitude package.

I propose these solutions. Yes, I understand these can be contested on ethical grounds, and that like every other "solution" which starves the Protected Fiefdoms of the Savior State and the rentier-financial Power Elites, they are "impossible." Nonetheless, I propose them anyway:

1. Take the TARP funds which were supposedly "paid back" by the "too well-connected to fail" banks and pay off the entire $550 billion in outstanding student loans. Yes, I know this penalizes those who didn't take on loans, but the system is rotten to the core, ethically and morally, and it needs to be liquidated and shut down.

No penalties or collection fees would be paid; the parasites would get the principle due and nothing else.

2. The entire student loan system is shut down, with the exception of $1,000 a year for a maximum of four years. I can already hear the screams: "That's impossible! Who can afford to pay for college without loans?" Precisely.

Sorry, Protected Fiefdoms; your "protection" just vanished. If only 10% of the students can afford the tuition and fees, then the institutions will have to survive on the fees paid by 10% of the students. The other choice is to re-tool the entire institution, from the ground up, such that the costs align with what the citizenry can afford without lifelong debt servitude.

Some institutions will adapt to reality. Students will flock to affordable schools, and they and their families will start saving for education.

I know that many families do save for education, but the typical middle-class American efforts leave a lot of room for improvement. Let me sketch out the path to saving for education:

Times you eat fast food: 3 times a year, not 3 times a week.

Times you eat at "fancy sit-down" restaurants: twice a year.

Feature films at theatres: zero or once for your birthday.

Lavish vacations: none.

New vehicles: none.

New anything: none. Buy it used (usually it's barely used or new)

Can't afford the dorm? Live at home or find some family who has a spare room you can trade labor for: yardwork, babysitting, etc. I did this for a year when work was scarce in the 1973-74 recession.

Find the cheapest room in the entire city. My landlady in 1975 strung a few Christmas lights in the hallway to avoid the tremendous expense of 60-watt bulbs. The house had been untouched for decades but the wiring and plumbing still worked. Good enough.

Work at whatever menial job you can find; it isn't "career-building," it's for the cash. The harder and dirtier the work, the less competition you'll find.

I know that this is not a popular solution--lower the costs of education via brutal competition, institutions either adapt or perish, and eliminate debt from the picture entirely--but they are solutions.

What is ironic is that this "solution" worked in 1975, when interest rates were 10% and nobody borrowed a fortune to go to college. (I paid my own way with low-moderate-wage jobs and exited, degree in hand, with savings and zero debt--and I was not alone.)

If the "cheap easy borrowed money" vanished, then the costs would come down and people could get a degree without the lifelong servitude/debt serfdom of student loans.

Is it "impossible" to provide higher education for 1975 costs? Why don't we eliminate student loans and find out? I suspect innovation would blossom once the student debt-serfdom machine was smashed.

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