Wednesday, December 21, 2016

Student Debt

Student debt is still exploding. Is it worth the economic risk? Should everyone have a college education, a college degree? Fifty years ago as we entered the Space Age it was still selective. The Government had programs to fund scientists and engineers. They even had programs to learn Russian. The Government spent money on college students via such things as NASA scholarships. Good students would qualify for financial aid in areas which benefited society and its needs at the time. Made sense. It did not fund liberal arts, literature, fine art. It did not even fund finance majors or law students.

Then what happened. I would argue two things.

First, the Government decided that everyone should get a college education. This led to two results. First it allowed massive numbers to major in subjects that allowed reduced standards and no jobs. Just how many fine arts majors do we need or even how many college educated graphics designers. Second, it motivated many to obtain debts that they ultimately had no economic basis to pay off.

Second, the Government backed massive college debt in direct and indirect manners. This meant two things happened. First students bought into the dream and surrendered to massive debt. Second, and this is the most serious problem, as the Government got more involved it drove up University overhead costs and thus tuition costs, with no appreciable increase in quality. In fact the quality I would argue has seriously suffered.

Thus we have a higher education system infiltrated by Government money and demands and universities responding with profligate spending and acquiescence to Government trends, demands, and dictates. University Presidents now talk as if they were managing some recovery center for orphaned and disadvantaged children. They tend to protect them from the fears of what may be happening in the outside.

In the NY Times, a college president states:

Donald J. Trump has made bold and provocative campaign promises on taxes, trade, immigration and infrastructure. These pledges are all in service of bolstering our economic future. While we hope these initiatives will help our economic prospects, there is one important measure missing from the debate. And it could have an even more immediate and direct impact on economic growth: student debt relief. Student debt now stands at $1.3 trillion. More than half of student borrowers are unable to repay their loans according to the original terms. In a well-intended but poorly executed effort to make college broadly accessible, the government has lent freely to students, with little attention to whether they can repay those loans. The result is millions of young people with debt they cannot afford. As a college president, I frequently hear from students who are anxious about their ability to repay their loans once they graduate. Many let student debt guide their career choices.

I gather that the NY Times mandates some Trump statement, and at least here the author got the demand out of the way in the first sentence. Now back to the facts. More than half the students cannot pay back the $1.3 trillion. Yes, that is a lot of money. But whose fault is it. I suggest the students. Namely they chose studies for which there is no demand. Further they committed funds to schools which may bring little to the job table. So why burden those making money to pay for those who may most likely never do so?

Then we have the authors policy recommendation. She states:

Mr. Trump should scrap debt financing of higher education and make the transition to true income share arrangements. Borrowers would fulfill their obligations to taxpayers by paying a fixed percentage of their income over an extended period of years. Think of this change as a shift in the government’s role from creditor to equity investor. When you lend to a business, it is obligated to pay you back with interest, but with a stock investment, your returns derive from the success of the company.

Yep! Indentured servitude to the Government.  This does not solve or even address the problem. Young people should choose a course of study to get a job. Later on in life they can worry about expanding their horizons if and when the have made enough to do so. This suggestion in my opinion would create a death spiral. Individuals have responsibility to make wise decisions. The young person who enters the military is making a decision to defend their country. A wise and respectable decision. Becoming an engineer, a nurse, a physician, even a banker means contributing to society in an enlightened manner. There is a demand and the investment by the student has a good chance of a return. 

One of the big challenges we face is the ever altruistic hand of big Government. It will destroy the entrepreneurial spirit. That spirit is one that takes risks. Government of the ilk of this author wants Government to burden all to minimize or eliminate risks. The result is the death of the entrepreneur.