Ode To An MBA...

Many of you probably have noticed the lack of posts over the past few months. The wave of the last class and last semester of grad school finally overwhelmed life and swept over me…so naturally some things had to give. The good news is that I’m done! I also have a backlog of thoughts and things I want to share with you in addition comments on current events and developments (and oh my goodness, is there a lot going on!)…

To start with, in honor of the past year-and-a-half of the pursuit of higher education, I thought I’d take a post and lay out some stunning things you may or may not know about the quest for higher education.

To begin with, viewing the graph below, you’ll notice household debt broken down into categories. What’s interesting to see is that student loans (in red) are just about equal to other “minor” consumer spending debts (credit card, auto loan, etc.). Aside from owning a house, education debt is one of the next largest debts households face. What you don’t see in this chart are the previous charts before this one. Student loan debt has slowly been creeping up. This is kind of the “official chart” (haven’t found a more updated version than the below), but according to recent information I’ve read, student loan debt has already eclipsed credit card debt in January of this year (student debt: $851B, credit card debt: $828B). Regardless of its size in the household debt category, student loan debt is much worse than having credit card debt or a mortgage.


Before we go any further, we’ll pause and have some history regarding the pursuit of a college education…

Lyndon Johnson (LBJ) in 1965 signed the Higher Education Act (HEA) as part of his “Great Society” undertaking. Students could go to college with federal guaranteed loans and scholarships.

However, in 1978 an interesting trend was uncovered. Many doctors and lawyers began discharging their student loan debt by filing for bankruptcy immediately after graduation…thus legislation was enacted (Bankruptcy Reform Act) to disallow a discharge of such debt for 5 years after the first payment on a loan was made. In 1990, the period was extended to 7 years. In 1998, congress completely eliminated the ability to discharge student loan debt in bankruptcy.

Yes, you read that right – loans for education are the ONLY type of loan that has a federally backed “no-escape” clause. Keep in mind, this was on federal guaranteed loans and scholarships. It didn’t take long; however, until in 2005 the bankruptcy code extended the same “no escape” stipulations to private student loan lenders. ALL student loans are impossible to discharge now.

In addition, and more disgusting is that many protections were removed from student loans. Miss a payment and you could have your wages garnished without a court order, have your state professional license suspended, have social security or disability income garnished, even have any tax refunds owed withheld (no! not my refund!).

“Why on earth were protections removed?” you may ask?

Here’s my best attempt at a short answer – each bullet cascading and building on the next point:

• Sallie Mae is the largest originator of student loans – federal guaranteed loans, mind you.
  
• If you default on your loan originated by Sallie Mae, the government pays Sallie Mae the balance plus interest (they guaranteed the loan, remember).
  
• Thus, the government is now out on the deal. They WANT to get their money back and have made it so that they WILL. The collections agency can get it in whatever way they can, thanks to the changes in legislation and removal of protection.
  
• The collection agencies add 25% to the loan as a collection fee and get a 28% commission on the loan (out of your pocket, of course).
  
• Oh, by the way, Sallie Mae owns the collections agencies they send after you. How convenient.

To further the problem, the Obama administration enacted changes to the student loan program within the past few years (Education Reconciliation Act). And wonderful changes they were (insert tongue in cheek) – they cut lenders out of the loop, effectively allowing all loan profits (that used to go to the lenders) to go to the government. So, the government now makes more money than before by cutting out the middleman. Of course, there still isn’t any consumer protection for the graduate who defaults and that graduate is in debt to the government until they take every last penny to pay off the loan, plus fees, plus commissions, etc.

So really, “how bad is the student loan situation?” you may ask?

• 25% of government student loans default (on average)
  
• Those in school at community colleges have a 30% default rate
  
• Those in 2-year colleges have a 40% default rate

For perspective, consider that at the height of the subprime mortgage crisis in 2008/2009, default rates on mortgages were 25%. In contrast to student loans, these were mortgage loans that people could walk away from in bankruptcy. But, no one defaulting on a student loan gets such a luxury.

Let’s think about an even bigger implication here. Since defaulted school loans are a net gain to the government and its collection agencies, where is the incentive to keep the cost of tuition at a reasonable level? Answer: there is none! Higher prices for education = bigger loans. Bigger loans = more defaults. Bigger defaults = more profit. Think the government wants to step in a put a collar on the rising costs of education – thus slowing and capping a stream of revenue?

Another nugget of information: The cost of going to college in the U.S. has risen ten-fold during the last 30 years (compared to a six-fold increase for health-care and three-fold for inflation) – see below chart.

Here’s some more numbers:

• For 2010-2011, an in-state undergraduate degree at a four-year university (including room and board) averaged $16,140 (up 6.1% from last year).
  
• To go out-of-state, expect to see an average of $28,130 (up 5.6% - including r&b).
  
• To go to a private four-year school was $36,993 (including r&B – up 4.3%).
  
• 2/3 of college graduates (bachelor’s degree) graduate with school debt.
  
• The average college student graduating has $23,000 of debt.

Wow.

Oh, but wait... A report based on the book Academically Adrift: Limited Learning on College Campuses found that after two years, 45% of students learned little to nothing. After four years? 36% learned almost nothing.

Double wow!

“How can that be?” you ask? “How can over 1/3 of students learn next to nothing?” How about a multiple choice test and you choose the answer:

1. Professors spend too much time on research in order to be published, gain recognition, and get grants for the university and their departments – neglecting students and/or delegating teaching to graduate assistants.
   
2. The use of lectures, reading PowerPoints as a means of lecture, and giving multiple choice tests promote passive learning and promote one of the lowest levels of learning – see cognitive domain
   
3. Students are spending more time experimenting with biochemistry – practicing turning alcohol into urine.
   
4. All of the above

So, we’re paying all this money and not getting any results or learning much. Yet, employers and the world at large seem to view getting a degree as a good thing – and those with degrees, who learned mostly nothing over four years, earn higher wages than those without them.

How can things get more backwards?

Stuff like this makes me stop and wonder about my own children and the future of their higher education. With education rising ten-fold, will my kids be able to attend college with that kind of price tag? With the money we are trying to save for them, will it be enough to allow them to attend a college of their choice and not have to take out student loans? Even if they go, will they learn anything?

Even deeper though, I find myself stopping and asking: “at what point did attending college become the norm? It seems as though high schoolers about to graduate believe they are entitled to a college education. Isn’t getting an education a privilege and not an entitlement?” Perhaps students would learn more if they actually valued the opportunity instead of took it for granted. Perhaps my own children need to “have skin in the game” and should consider the following should they want to attend college:

• Postpone going to college, work, and save up money to pay for it.
  
• Bust their tail academically and earn scholarships.
  
• Work part-time or full-time while attending school.
  
• Go to a two-year school or community college to cover core classes and transfer in to a four-year school to specialize in a degree.
  
• Utilize online education.
  
• Don’t go to college and instead, specialize in a trade.

I know, I know. I may just be overdramatic on this. But I want my kids to value an education and actually learn something if a boat load of money is going to be spent on said education. In today’s world, that seems to actually not be the norm. If that’s the new “normal”, I definitely want my kids to be counter-cultural.