khyron4eva
New member
Posts: 2
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« Reply #1 on: May 29, 2009, 04:07:39 AM » |
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Thank God!
The increase in cost of higher education seems to be directly attributable to the largest factor which led to this "economic crisis" - a 27 year credit bubble which started in 1982.
That 440% over 25 years is not a mistake. It is a direct result of the free flowing monies made available for parents to pay for college, and a great marketing job by the higher education system. The US Federal government must be held largely responsible, for the following reasons:
1. Cheap credit due to persistently low interest rates. Rates definitely lower than what the market would price those funds at.
2. Pell Grants and other public forms of financing, based on US taxpayer generated revenues. With the government giving away money for people to pay for college, is it any surprise that more people applied and more people took out Stafford Loans and other financing arrangements made available by the US government. With such wide access to funds, colleges raised tuitions accordingly. Classic price inflation (not real inflation; the difference is explained below).
3. Market distortions. Sallie Mae and the Department of Education both actively worked to reduce the cost of college, just as Fannie Mae and Freddie Mac worked to reduce the cost of "home ownership", and using many of the same methods. We see how well that worked for houses; why would we think the outcome would be different for college costs. Had these entities not existed, the funds would be much more expensive to acquire and conversely, you would expect to see lower tuition costs due to a lower supply of money available. Same for #2 above.
Obviously, there are other factors involved in that 440% over 25 years. However, when cheap money (credit) is available, prices will be bid up by those with access to it. It happened with houses and it happened with the best spots at good schools (and of course trickled down to less well known and worse schools).
Basically, the Federal Reserve generated inflation thanks to the easy money policies of Alan Greenspan, and this led to price inflation in many sectors of the economy, education among them. (Inflation is an increase in money and credit. Price increases are an effect of inflation, but they are NOT inflation themselves. The cause was cheap money.) More dollars in circulation means each dollar is worth less which means all things being equal, more dollars are demanded to acquire goods. The good, in this case, is a Bachelors, Masters or professional degree.
Colleges increased their tuitions. They paid faculty more, if faculty weren't demanding increases in pay. Staffs were probably paid more. Funds were directed into capital projects - new buildings, dorms, research facilities, athletic facilities. Not all of these projects can be, or were, economically viable. That is being shown now.
At the same time, the selective colleges became more selective, pushing demand down the curve toward "lesser" schools. (So if you didn't get into Harvard or Yale, maybe you become competitive at flagship schools in your state and others.) Once this tier filled, the next tier of students were pushed down the curve to the 3rd tier of schools, and so forth. More demand for limited supply of seats in a given academic class at each tier means, all things being equal, costs for those seats should increase.
You had large numbers of students -- Generations X & Y -- being sold a bill of goods that they make so much more money (income) over their lifetimes with a Bachelors degree. Then of course professional degrees and MBAs. Pursuit of those degrees have saddled many students with 6 figure debts. Well, debt is the other side of the credit coin; if you accept credit, you then owe a debt equal to the amount of credit you used.
So this bubble is long overdue to burst. Will it return to the kinds of numbers we saw when my parents were in undergrad in the last 60s/early 70s? Probably not. (My parents paid about $2000/year to attend the college that I went to. By the time my sister made to the same college, tuition was $13000 annually.) I do hope sanity returns to the market for education, and parents and students make better economic decisions across the board. Attending community college for some period of time, compressing your career by a semester or year via summer school and other means, and online classes are just the beginning. I hope they won't be the end.
There will be, and there should be, massive deflation in this space. The economics of obtaining a Bachelors degree stopped making sense a long time ago, IMO, for large swaths of the population. It did for me, and that occurred back in 1997. (I refused to take on debt to attend college. Maybe I'm spoiled, having grown up middle class, but my younger sister is drowning in her Bachelors and Master's debt.) However, many people continued playing the game, sheep being led to slaughter, without thinking.
I personally have little sympathy for these people -- which is most people -- for not THINKING and being manipulated by the marketing machines of the colleges and universities. No one puts a gun to a student's head and forces them to pay $30000, $40000, or $50000 to go to college for a year (or even $15000 from loans). Similarly, no one told insurance companies, banks, broker/dealers, investment banks, or hedge funds to buy slices of crappy mortgage backed securities originated during the boom. No one told private equity managers to try to financial engineer deals then overpay for the companies they bought in leveraged buy outs during the same time period, taking out obscene amounts of DEBT to do so. Finally, while corporate boards may have said they represented shareholders in these transactions, there were no guns at their heads - no lives at risk of being lost - to sell out to the PE shop that overbid the most. The boards encouraged these bidding wars, for whatever reasons, and the companies and their constituents (employees, customers, vendors) suffer as a result when the company goes (back?) into restructuring or liquidation. Soon, there will be colleges facing similar restructurings, having taken on too much debt. There are students restructuring their lives, in various was, to deal with the debt they took on to pay for their degrees. (Or worse, took on without obtaining a degree.)
All of these debts must be reconciled, written down, and wiped out. Debts that should never have been taken on, but which were made easy to take on by the machine. The easy money is now gone. This is a how deflation is made. And it is healthy; painful but healthy. I would be imminently surprised if college tuitions did not drop at all. It may not be a lot, or it may be a significant drop, but I see deflation in college tuitions coming just like debt deflation in the finance world.
Also consider all the lost time and emotional currency of people who went into fields they did not care about -- that they lacked passion for -- because of the need to service debt. That's an immense waste of energy, of time, and a huge psychological drain on society that has to be released in other ways. Who knows how those issues manifested in the real world. Alcoholism? Suicide? Career changes? Being disaffected, drained, disengaged, cynical, disillusioned (and God knows what else) at your job which you hold only to pay the bills, or has otherwise left you emotional unfulfilled, dissatisfied and bitter.
Simple math here. Historically, over long time frames, GDP growth has averaged something like 6% annually. So discount the average college tuition back to 1982 dollars, then calculate what that tuition would be today at a 6% annual growth rate. Basically, if college costs had grown in line with GDP (or even better "headline inflation" which has commonly been reported as 3%), what would that average cost be today? There's a question for someone to answer.
(To make you feel even worse, consider that "headline inflation" of 3% has been, and will continue to be, seriously underreported by the BLS due to all manner of statistical trickery like substitution and hedonic adjustments, owner's equivalent rent, and absurd weights for products in the BLS basket against which prices are compared. Of course, the irony is that one part of that basket is education costs, which were growing at a rate higher than every other component in the basket. However, I'm sure education costs were weighted much lower to help keep "headline inflation" low. Think about it. [IIRC, components in the basket are weighted geometrically.])
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