And Yet More ...

My friend, JC, professor in the Univ. of California system and lecturer in Germany, writes:
"Fletch, thank you for your comments and passing on those of Hedrick Smith. The tuition fee at UC Berkeley is now $12,864 per semester for in-state students and $22,878 for out-of-state students. The other UC campuses are on the quarter system but the yearly tuition is the same.  In sharp contrast to the UC tuition fee are the fees or lack of them in Germany. In two German states (Bavaria and Lower Saxony) the yearly fee is 500 Euros; in the other states there is no fee."

And DS passes on this:

Fletch -- Read and weep, ...if you haven't already.   David

http://www.huffingtonpost.com/michael-b-fishbein/9-striking-similarities-b_b_5062840.html?ncid=txtlnkusaolp00000592

Yet More on Student Debt -- from Hedrick Smith and others

My friend Hedrick Smith (Who Stole the American Dream?) responded to my post this way:
"Hi Fletch,

       Thanks for sharing your student debt thoughts with me. 

       Couple of ideas pop up, which I may have missed, but did not see raised in your item:

     1-What portion of  the $1 trillion in student debt is generated for students in public state-run institutions across the country where most state legislatures have been cutting appropriations to their university systems, causing the institutions to raise tuition, imposing greater student debt burden on the millennial generation because our generation is not prepared to foot enough of the cost of higher education to keep it affordable for middle class  youth?

     2-Why don't we see the current generation of students as our nation's seed corn who are going to make our country more competitive in the decades ahead and are therefore worthy of an investment in their future?  China is investing in the STEM skills of its millennial generation, and the Chinese millennials will be eating our lunch unless we invest equally in our own young people. The economic future of the bulk of the millennial generation is far from assured, but if we help them do better by educating them better, they will become the generation that will be able to help pay for the retirement costs of the Baby Boomer generation, half of which is headed for poverty in their so-called golden years?

    3-The issue is: Do we think austerity or do with think Growth? So what about another GI Bill, in which we accept a public obligation to pay for a much larger part of the higher education - of kids who come from families which are getting priced out of the opportunity for higher education by our generation's refusal to keep the costs reasonable? 

      Conservatives keep talking about the fear of imposing debt on future generations - well, we are already doing that by refusing to pay the bill now and dumping it on these kids.

     Looking forward to seeing in three weeks or so - on April 21st and 22nd

    Cheers,

    Rick"

Hedrick Smith is speaking at Town Hall on the evening of April 21st; tickets are still available.

Another correspondent writes:

"Fletch,

Absolutely correct…  What about the 4 profit schools that suck money from the feds and give the student little or nothing?    The student can’t get a job to pay back the $ and they go bankrupt, but the loans haunt them for the rest of their life while the 4 profit schools get rich."

RC

More on Student Debt...

This from another correspondent, in response to the morning paper's article on $1 trillion of student debt burdening 37 million young Americans:

"..., to continue another conversation, there is an article in today's Seattle Times, page A12, headlined, "$1 trillion in student debt is weighing down 37 million," which outlines the staggering nature and consequences of this situation.  It also went on to say that out of 20 million students who attend college each year, an estimated 12 million (60%!!!) will incur student debt.**

"So this gets to the point of your question to me in Sun Valley about what I thought of your idea of simply forgiving the $1 trillion and having the US Government absorb this debt.  You didn't accept my response, that while it might benefit the 37 million and perhaps much of the rest of the economy by freeing the debtors to begin saving as well as buying, that it simply was not workable and inherently unfair to those who already paid their debt, those who are able to pay their debt, and all of those(**see above) who will start building that debt up again because they are now in school or will go to school in the future.

"However, you certainly are on the right track to be raising the question and pondering solutions, and the extent you encourage others to also ponder, and ultimately to come up with solutions will be the true benefit of raising the question.  I read some of the other responses you included on your blog, mostly saying why they also thought it was a bad idea, but here are a couple of ideas I have on your question:

• What are the causes and how do we address and solve the causes?  E.g. 
• Why have college tuitions gone up faster than the rate of inflation?  
• Are students really getting an education that will help them be productive and self-sustaining members of society?  
• Why aren't we as a nation creating jobs that require those college educated people to fill?

• How did this situation get to this level?
• What role have the banks played in enabling and/or promoting student debt?  How have government policies promoted student debt?
• Why are student debt interest rates so high?  Maybe there is a partial solution here, e.g. how about setting interest rates to zero?  In all cases of bad debts, the banks are lucky/grateful to get their principal back.
• Should all educational programs be "fundable" by debt?  Should a history/art/music/etc. degree be something banks should (be allowed to) lend money to pay for?  In a business loan, a bank will evaluate whether or not a loan is likely to be repaid.  With government protections, banks don't have to worry about the first source of repayment which is the job and the salary the borrower will get upon graduation as a source of repayment.
• As with all bank and credit card debt, the less likely the loan is to be repaid, the higher the interest rates the banks charge the borrower.  If the banks could only charge zero interest on defaulted loans, they would be less likely to make them in the first place.

• Other questions:
• What effect would less educational credit have on the situation?
• Would colleges charge lower tuition or make more of their endowment funds available to fund students' tuitions if the students had no other way to pay for their educations?
• Would businesses take up more of the burden of helping to educate the work force?  
• How do immigration policies affect this situation when Indian and Chinese college graduates who may have gotten a less expensive but sufficient education can come into America and take jobs that might otherwise go to American graduates?
• Many foreign students are educated in US universities, and then remain to take up jobs here.  How are their educations paid for - by their governments?  -by scholarships?
• How do government and tax policies encourage American business to export jobs to India and China, leaving many college graduates without a job?

"I don't know the answers, Fletch, but thank you for raising the issue.  Maybe with more conversation like you are trying to promote, and people actively working on real and long term solutions to all of these issues (and even others I haven't thought of),  we can find an answer to this really, really important disaster that is bubbling to a head.

"All the best,"

DP

Feedback re Student Loans

Some of my correspondents do not comment on the blog; rather than signing up for a Google account, they instead respond by e-mail.  I tried to post a couple of those as comments, but apparently Blogspot does not allow me to comment on my own post.  So here are a couple of interesting responses:

From friend TW:
Fletch:

With a daughter getting near the end of residency, medical student debt is horrific. She will have borrowed approximately 250K. And - it is not just the debt, but the interest that accumulates on this debt.

I appreciate your thoughts - interesting dilemma for all medical, dental, legal folks, and graduate students who have to borrow funds for their higher education. Our graduate students at XXX borrow on average about $125/145k for their 5/6 year doctoral degree. 

And from DW, a committed Libertarian friend::
Why is This a Bad Idea?
Obviously, because it entails expropriating the property of some, not for the common good, but for the benefit of a select group, i.e., debtors.  That's theft and immoral.  I'm surprised you asked the question, Fletch.

The moral hazard argument is persuasive when it comes to bankers and speculators, but I don't think these ambitious, employed graduates would generalize relief from their debt burden to an expectation that society will step in and bail them out of any sort of future troubles.  This generation of young "debtors", unburdened, will become an engine of growth and the pool from which our future leaders will be drawn.

Why Is This Not a Good Idea...?

Consumer debt overhangs the US economy, causing the Fed to fret, economists to natter, and Republicans to lecture.  The largest component of consumer debt is, of course, the home mortgage, which totals $7.8 trillion.  But second largest?  Not auto loans nor credit card loans nor home equity loans; student loans total more than any of those, with over one trillion dollars outstanding. By one measure, over 30% are delinquent; another report says 11%.  Whatever, delinquent or not, these loan balances, which average $29,000 per, strap some 340,000 potentially productive citizens.

What if we could relieve the banks of the worrying about and reserving for those loans; free up those indebted students to begin spending their discretionary income; and let the Fed encourage banks to do more local, commercial lending?

 

How?  Have the US Treasury assume student loans of those indebted graduates who have a full time job.  The Treasury could service the loans at existing interest rates, accelerating the principal amortization, to over five years, so as to reduce total interest payments and spread the fiscal hit. The Fed would relax and not pressure banks for extra reserves, freeing up loan capacity for the rest of the economy.

And those indebted graduates?  Unlike auto, credit card and home equity loans which recycle back into the economy in the form of spending, student loans are to buy product from  a very narrow segment of the economy -- colleges and universities -- with limited multiplier effects on the broader economy.  Free up working graduates from their debt burden and watch them move out of their parents' house, repair their car or buy new tires, treat themselves to a new outfit, dine out more often, maybe even set the date and buy that engagement ring.  These young adult, working graduates are potentially our most powerful cohort of consumers, but many (not all) are now hamstrung by debts their jobs can't support because the economy lacks sufficient demand to create more and better paying jobs.

So what's wrong with this idea?  Moderate Republicans and Democrats should love it, though deficit hawks will squawk.  Banks should like it; they get repaid from a reliable creditor and their costs of administering loans drops to near zero.  The Fed relaxes.  No government handouts to dodgy recipients for talking heads to argue about.  True, the budget gets hit with another $250 billion or so for five years.  But Chambers of Commerce will feel more vibrancy in this consumer driven economy, and tell their representatives.   And the deficit will continue to fall.  So what's not to like?

Some problems to solve: how to handle current and future students who will still need loans to complete their studies.  And where to trim other spending to satisfy the deficit hawks who will demand their pound of flesh. 

Is this doable? Perhaps; tough but feasible.  Is it a cure-all for our economy, which stumbles along at about a 2% annual rate of growth?  Hardly; we need to address minimum wage, the tax code, retraining, Pell grants and lots more to get things moving again.  But why not start by unburdening these recent and valuable graduates as one major step in the process? 

PS.  There must be something wrong with this idea, or it would have been done by now.  But if it's only the difficulty of convincing Congress and finding the will to undertake it, then let's get at it!

(These thoughts mulled over while waiting for my wife at Murphy's Bridge, skate skiing in the Wood River Valley of Idaho.)