Sunday, November 09, 2008

Fix It, America: Let's Go To College.

"Shame On America Sunday" is no more; I'm proud of America for doing the right thing and electing Obama, and have opted instead to try to become more positive, so we'll go with "Fix It, America" from now on.

Without a college education, you can't get very far at all these days.

With a college education, you can get far enough in life to be able to pay for that college education.

That's the dilemma that faces most kids who are graduating from high school these days. Like the parents that work to avoid daycare, or the kid who works to pay off the car he uses to get to his job, high school graduates are confronted with the need to go to college in order to get a job to pay for the college they attended.

Leave aside private schools; those who (unnecessarily) go to private schools may be left aside for the moment. This is about publicly owned schools, those state universities that are the college destination of both choice and necessity for most high school graduates.

According to College Board
, 56% of all students attend a college that charges less than $9,000 per year. Also according to that source, the average price of a year in college is $6,585 per student. Averages, though, can be misleading; averages, of all statistical measures, can be especially misleading. If I have $100,000, and the other 9 people in the room with me have $100 each, then on average we have $10,090 each ($100,900 divided by 10). But that doesn't give a true picture of the way wealth is organized in our little group.

In 2005-06, according to the U.S. Department of Education, the highest priced public four-year college was Vermont, which had tuition and required fees of $9,279 per year. The lowest price was held by the District of Columbia, at $2,070.

Assuming that a student graduated in four years, then, that student would spend a minimum, on tuition and required fees alone, of $8,280 if she attended a DC public university, and would spend $37,116 if he went to a Vermont public university.

That was in 2005-2006, of course. To get an idea of what happened to tuition, since then, take a look at one school in particular: The University of Wisconsin. In 2005-2006, tuition and required fees averaged $5,672 per year for an in-state student. An average" must be used here because the University of Wisconsin, like most state schools, has many campuses, with some costing more than others. In the University of Wisconsin, those individual campuses have tuition and required fees ranging from $7,568.56 per year for the UW-Madison to $5,937 per year for UW-Oshkosh; some may be lower. The average tuition for UW schools, across the state, in 2008, is $6700 -- an increase of $1100+ since 2006.

That is a nineteen percent increase in tuition and fees in just 2 years. Tuition has increased at an average of 9.5% per year at the University of Wisconsin.

This is a problem because most high school students do not have $5,937 laying around, and that $5,937 does not include the cost of textbooks and other paraphernalia that colleges now require-- almost every college now requires that students have a computer; some require laptops. (I'll get to why they require it in a moment.)

Tuition costs of $5,937 amount to an added expense of $500 per month, year-round, to a family. I am unaware of a single family that could easily absorb a hit of $500 per month into their budget -- but I am sure there are such families. Even for them, though, adding a cost of $500 per month to their budget is not something that would be easily done. And state schools tend to be the school of choice for middle-class students whose families would have a harder time paying for that school.

So most students do what is easily done -- they borrow the money. Student loans are easy to come by and easy to qualify for, thanks to federal protections for student loans: Student loans are guaranteed by the federal government (and/or sometimes by private institutions), and student loans are virtually nondischargeable in bankruptcy. What that means is that a bank that lends money to a student for tuition purposes cannot lose money on the deal -- the federal government will pay them even if the student doesn't. And what that means is that a student who takes out a student loan will pay that loan back no matter what -- no matter how difficult it becomes, the overwhelming odds are that the student will pay it back or will die owing the money and the money will be taken from his or her estate.

The idea of federally-guaranteed student loans is a great one, but the practice of it has been to create a problem by making it easier for colleges to charge more for tuition.

When there is a demand for something, prices will usually rise. When there is a great deal of competition for that thing, prices will usually fall. When government underwrites something in whole or in part (as they do universities) prices will usually fall. When government provides money for something, prices will usually increase because making money available for something allows prices to rise.

I'll put it more simply: State colleges are free to keep raising tuition because whenever they do, student loan lenders will simply lend more money.

The best-known and most popular student loan is the Stafford Loan, a government-guaranteed loan that students can take out during college. A dependent student -- one under 25 -- in 2008 may borrow up to $5,500 as a freshman, and up to $7,500 as a junior or senior, per academic year. Because the $5,500 does not cover the full tuition in many schools, students can also turn to private lenders and borrow additional money -- money that is still guaranteed by the government and still nondischargeable in a bankruptcy. (Student loan lenders also enjoy greater freedom in collection efforts, a more complicated subject that deserves its own time in the future.) One source says that private student loans are growing at a rate of 25%, as opposed to 8% for Stafford loans.

Some private loans allow students to borrow up to $40,000 additional money per year, at rates much higher, sometimes, than federal Stafford loans.

Why have those lenders sprung up? Because there is a need for them, and there is a need for them because college tuitions have been rising faster than the federal Stafford loan limits-- even though the federal government has been trying to keep up. In 2005, the federal Stafford Loan limits were $2,625 for dependent freshman, up to $5,500 for dependent juniors and seniors. Those limits were raised, for 2007, to $3500 and $4500, respectively, and now are at the $5,500/$7500 limits.

That means, in 2005, an entering UW Freshman faced tuition and fees of $5,672, and could borrow only $2,625 per year, a shortfall of $3,000. In 2008, a UW Freshman can borrow up to $5,500 for his first year of college, but will pay, on average, $7,568.56 -- falling short nearly $2200 even though she is borrowing more than double what she would have if she had been lucky enough to start school just three years ago.

Those costs do not include room and board and textbooks and, as I said, computers and the like. Some sources say that there are as many as 150 schools that require students to have a computer; when I went to Law School many years ago, a computer was required of students, and when I asked the Dean of Students how I was supposed to afford a computer, he candidly told me that the school required a computer because making a computer a requirement made me eligible to borrow the money to buy it through the student loan programs; student loans are calculated based on need and if the "need" is higher by the cost of a laptop, a student will have an easier time borrowing the money to buy the laptop the school requires.

But requiring laptops is not the problem, and is not the reason why the cost of attending universities is increasing all the time. The cost of attending universities is increasing all the time because the money is there to pay for the cost of attending universities; as colleges raise their tuitions to cover their costs, as states reduce funding for colleges, the federal government steps in and the private lenders step in to cover the gaps.

Which is not the way it should be; those of you who as a knee-jerk reaction said Great, students should pay their own way for their education are missing the point. The points. The points are these:

1. It is desirable, as a society, that we have highly-educated people.
2. The students are not paying for "education" in the higher costs, they are paying for "administration," and
3. The higher costs of college are hamstringing students and society in an unexpected way.

Let me tackle those each briefly:

1. It is desirable, as a society, that we have highly-educated people. Is that even really debatable? How is an educated society not a good thing? I learned once of a high school that set out, in its handbook, that most of its students did not go on to college, so it did not bother preparing them for college at all. What kind of thinking is that? Even if everyone in the world was going to go on to a job that did not require any sort of advanced thinking or book-learnin', isn't it better if they are educated anyway? I would rather that we have a society of people working on assembly lines and mopping floors but quoting Descartes and able to understand economics, than the converse.

2. The students are not paying for "education" in the higher costs, they are paying for "administration." This article is in no way a rant against paying professors and other teachers a high salary -- within reason, of course-- because those professors and teachers are the ones who are providing the education to the students paying for it, and colleges need to attract high quality professors and educators, so they must be able to pay the going rate for them.

No, this article is about how much the administrators are paid. Let me pick on the University of Wisconsin again, since I live in Wisconsin. The UW just picked a new chancellor, Carolyn "Biddy" Martin. "Biddy" will be earning $437,000 per year.

I like to break things down, as you know. So "Biddy" will be earning:

$36,416 per month.
$1,197 per day.
$49 per hour.
83 cents per minute, every minute of every day of every month of the year.

When "Biddy" Martin walks out to get her morning newspaper, the money she will earn during that walk will pay for her paper and leave her a dollar left over.

"Biddy" Martin's pay, at $437,000. The median family income for a family of four in Wisconsin in 2008 is $74,885. "Biddy" Martin earns six times the median income of the state that pays her to watch over their children while they go to her schools. And "Biddy" Martin does not teach. She does not lecture. She does not grade homework or walk around a room full of Bunsen burners while your sons and daughters try to analyze the salt compounds they must study.

I don't know what "Biddy" Martin does but I do know that nothing she does will help Middle, who goes off to college next year, learn how to become a veterinarian.

"Biddy" Martin is not alone; in 2007, the median pay for administrators like her across the country was $397,349; remember, "median" is the middle, so in 2007, half of all college chancellors earned more than $397,349 for the year. And it's rising quickly; in 2003, only six public school executives earned more than $500,000 per year. By 2008, that number had risen to 43. The University of Washington's chancellor walked away from his old $590,000 per year job at LSU to earn $752,700 per year on the West Coast. Nationwide, executive pay at colleges averages 4% per year annually in increases and has grown faster than inflation for 11 consecutive years.

$752,700 per year, for a person who does not stand in front of a chalkboard and teach calculus. And that person gets raises that outstrip inflation, each and every year.

It's not educators who are driving the price increases. Not by a longshot.

3. The higher costs of college are hamstringing students and society in an unexpected way. So what, many of you are saying -- going back to let the students pay for it themselves, and also falling back on they can always choose to attend a different university.

But they can't; many students must attend their home state university or the cost is prohibitively higher. Middle has been accepted to both a couple of the University of Wisconsin Schools, where she'll pay about $7000 or so in tuition, and to Michigan State University, where she desperately wants to go -- and where she'll pay nearly $22,000 for tuition and fees alone.

Students often can't choose to attend a different school elsewhere, and often must make their decisions on where to attend before scholarships and other aid is awarded, meaning they must base their choices on what they know they can afford, with either parental help, or student loans.

But let the students pay for it themselves via student loans, is a poor option, too. If Middle, a representative student, opts to go to the University of Wisconsin, and opts to borrow only tuition (relying on working and our help for her other costs) she will borrow a minimum of $23,748 over those four years.

The current interest rate on Stafford loans is 6%, declining to 3.4% over four years, but then re-setting to 6.8% in 2012. Student loans are typically repaid over 10 years following graduation. Assuming Middle borrows her $23,748 one year at a time, and setting interest at 6%, she will borrow $5,937 in 2009 and pay back a total of $7,909.20 over 10 years, for each year. Her borrowing of $23,748 over four years means that she will repay $31,636.80 over 10 years; her college education did not cost $23,748; it cost $31,636.80.

What if she goes to Michigan State anyway, and borrows $22,000 per year? Each $22,000 loan, at 6% interest over 10 years, would incur interest of $7,310 per loan; each $22,000 loan requires her to pay back $29,310, so her education, originally priced at $88,000, instead costs $117,240.

Her monthly payments, on graduation, would begin at about $260 per month if she attended the UW-Oshkosh; if she attends Michigan State, then six months after graduating she can expect to begin repaying her student loans at a rate of $977 per month.

Now here's where the problem is: Middle wants to be a veterinarian. The American Veterinarian Medical Association says that most vets in 2006 (the latest year available) earned between $56,450 and $94,800-- which is very good, all things considered. But that's for all vets. Another source says starting salary for vets is less than $40,000 per year, on average. And Middle won't be saddled just with undergraduate debt; she's got vet school to go to, as well; but even if she didn't, she would graduate owing at least $31,000 and up to $119,000, and could expect to earn -- before taxes -- $40,000 to start out.

From that $40,000, or maybe $56,000, Middle would pay a minimum of $3,120 in student loan payments, and may pay as much as $11,724 annually.

And that's for vets; what about those who want to go to a UW school and become teachers (Wisconsin teachers earn an average of about $43,000 per year) or nurses ($44,948 per year to start), or civil engineers ($48,151 per year to start)? They'll pay the same costs of education, and earn less than veterinarians.

What about the student who wants to go to law school and dreams of helping the poor fight their legal battles? If that student, with stars in their eyes, goes to the UW Oshkosh and then the UW Madison School of Law (annual tuition alone $14,730 for in-state students) and that student borrows just the tuition, not room and board and books ($1860 per year for books alone at the UW Law School) that student would graduate having borrowed $67,938... and would repay $90,510, at payments of $754.25 per month for 10 years.

And that student, who dreamed of helping the poor fight their legal battles, could go to work for Legal Action of Wisconsin and earn... $26,277.

Now do you see the problem? Why would anyone go to college and spend all that money to get a job helping the poor when doing so would put them in the position of becoming the poor they are helping? More than one-third of the starting salary of Legal Action lawyers would go to service their debt. Who could afford to choose that route, especially when median starting salaries for big-firm lawyers are more than $60,000 per year?

I'll put it simply, again: high-cost college educations force students who want to be educated to choose careers based on what is best for their debt rather than what is best for them, their family, or their country.

And who is making that money on the back end? Who gets that $9,000 in interest, or more? Private student loan lenders, lenders who made a loan that had absolutely no risk. None. Those loans are guaranteed and are nondischargeable and are easier to collect than other debts.

If I had the money, I would become a student loan lender; it's far, far safer and more lucrative than any other kind of lending.

Everyone knows about the other financial dilemmas facing the country; those have been amply discussed and will continue to be. But the cost of a college education has been increasing faster than inflation, and is rapidly pricing students out of educations, out of choices, and out of the options of doing something good for the country once they graduate. These increases are coming from top-heavy administrators earning six and seven and eight times the median income, far too high for their services, and are being funded by ever-more-readily available funds guaranteed by the federal government and It will not be long before many students cannot afford to go to college at all, and we have already hit a point where those who can afford to go must, once they graduate, pick a career that maximizes their income to the exclusion of all other options.

Do we really want to be a country where people cannot afford to become school teachers, where people cannot afford to dream of working for a charity or in a low-income area?

The Fix: The federal government should institute new rules for any school which accepts any form of federal money (whether that is federal student loans for tuition, or research grants or other federal money.) The rules should be (1) Tuition increases for a given year may not exceed the average rate of inflation over the three previous years, and (2) Salary for any non-teaching, non-research position may not exceed the median income for the municipality in which the position holder resides. The federal government should also restrict the maximum interest rate charged on any student loan to the current Prime Rate minus 1% and eliminate origination fees on guaranteed or nondischargable student loans; lenders would be free to charge higher rates or origination fees if they waived the guarantees or waived the nondischargeability. A tax credit should be offered to families who pay a portion of their child's educational costs including room and board and books, even if the child does not reside at home.

What You Can Do Until The Fix Is In: Donate to a scholarship fund; here's one to get you started: I Know I Can; Charity Navigator rates it at three of four stars; the organizing philosophy for this charity is that every child deserves to go to college regardless of his or her economic status, and they work to prepare them for college and then help them in college, financially and by providing support.

1 comment:

Anonymous said...

Blaine - great post. The solution to the problem is to look to the private, for profit market to make the difference. Once more people realize that the cost to educate does not have to be astronomic.

In our 100% online model, I can teach students at a very low cost, but still provide high quality education. We get it!

Check us out at

Don Kassner
Andrew Jackson University