Debt and the Higher Education Crisis
Colleges are selling people the American Dream telling them that they have to obtain a college degree to enter the middle class. It's causing major problems.
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The Romans and other ancient cultures were cautious about debt. The Roman proverb "Felix qui nihil debet" means “happy is he who owes nothing.” We have quickly abandoned these principles with the desire of getting what we want now and dealing with the payment later. This creates fragility because a disruption from the planned has the potential to break the debtor. Debt relies heavily on prediction and forecasting. “If I borrow this money, I will get this degree, make this much money, and pay it back in X years.” This implies a great deal of confidence in the future and the stability of your predictions. Nassim Taleb is critical of debt and explains this concept of debt fragility in The Black Swan.
The United States, the land of opportunity, has an obsession with capital. And for a good reason. Managing capital has asymmetric returns compared to the effort exerted. Taleb explains how unlike a dentist who must limit their expertise to the number of people who can sit in their operating chair that day, the banker can leverage their expertise with money. Money scales better than patients - you can move a million dollars in a day but never treat a million patients. Add leverage (debt) to the equation and you can make even more. Using money as leverage has enamored America with debt and its possibilities. The banking sector has grown dramatically in the past hundred years as institutions have found more creative ways to package financial products and lend money.
We have become relaxed about the dangers of debt in every part of society. Business, the government, and individuals have concluded that debt is a way of life and everyone does it. They see the skilled (or lucky) make it big using leverage and conclude that everyone should have that opportunity. Unfortunately, the most vulnerable to the consequences of debt, individuals, suffer the most. In addition, it must be noted that the rise in inflation (and stagnation of wages) has all but forced people to take on more debt.
Large corporations have helpful rules in place to free owners from liability and personal consequence of their actions. Deep in debt, executives can feel confident that at worst they will be fired (and keep their money) and at best they will be bailed out by the government or bankruptcy court.
Legislators know that when they pass a $2 trillion dollar stimulus new leaders will be in place to deal with the consequences and they’ll be dead and gone. Individuals on the other hand, have been convinced (or coerced?) to take on more debt. They have been told that this is normal. They are told that they will get a great rate and now is the time to act.
There are certainly cases to be made for debt. Debt is an excellent way to start a business or jump start a career. Bankruptcy court enables people to take risks and pursue their dreams. This is a general critique about how debt has gotten out of control.
The 2008 housing crisis displayed how the growing financial services sector took advantage of normal people and exploited the normalization of debt. Banks convinced people of the American Dream to sell them houses above their means. They told people that their house was an asset and the price would not go down. These people were decimated when the housing bubble burst. The banks were bailed out and executives kept their bonuses. It was a perfect wealth transfer from many normal people to a few people and institutions.
The college debt crisis has eerie similarities to 2008. It is another exploitative transfer of wealth. Colleges are selling people the American Dream telling them that they have to obtain a college degree to enter the middle class. They have normalized massive amounts of debt for a generation that will be tied down to debt payments for their early life. The years when previous generations were saving and building wealth, my generation is paying back loans.
The college tuition problem has evolved over decades. I try not to pin these problems on individual evil actors knowingly manipulating the system. However, we’re here now and we must act - the model clearly does not work for most people. While the “economic return” of college has remained constant (or decreased) over the past 30 years, the price has skyrocketed. With this increase in price, however, colleges are not being forthright about the return on investment. They are repeating the same lines “pursue your passion” and “find your way” that have worked for the past 50 years. Unfortunately, with the increase in price, we need new tag lines.
Colleges have used their name recognition and historical success to convince young adults to indebt the next 10 or 20 years of life to them. With this debt, these students are unable to take risks like starting their own business or taking a more risky job (not to mention beginning to compound investment returns). Students have a false sense of security in college. They see that their parents went to college and successful people in industry all went to college. When college and graduate degrees were a clear cut decision 30 years ago, the world has changed. Many students have been set up with two risky options: first, do not attend college and find your own way to distinguish myself. Or second: take on mounds of debt and hope your career choice pays off. (Note, specialty career paths like a doctor or a lawyer are a separate conversation.)
Charles Hugh Smith, takes this a step further. He argues that college acts as a legal racket: “'Legal' rackets have two essential components: a public-relations 'cover' that obscures the racket and the mechanism that extracts the wealth from the 'marks.'” The wealth extraction comes through student loans guaranteed by the taxpayer. Debts fully guaranteed by the government are a very nice asset to have. Smith shares the following graph in a post with some colorful commentary:
More accountability must be put on the institutions that are allowing this to continue. We must continue to pressure colleges and universities that have profited with extraordinary tuition prices and hedge fund sized endowments to address this situation. There are countless studies and articles addressing the reason for the rise in college prices, but I will focus on the cure.
When Ford looked to transform an expensive, upper class product into a product every family could afford, he did not ask his buyers to take on mounds of debt. He standardized the product, lowered the cost, and increased the efficiency of production.
The internet will help to solve the high costs of higher education. I wrote in a previous post that the internet is excellent at efficient information distribution. With freely distributable bits, we are able to broadcast the best lectures on the internet for free.
There are many barriers to moving away from the college tradition that has been engrained for hundreds of years. Currently, one problem is that employers do not want to take on the risk of someone without a traditional background - accredited from a reputable institution.
With the impact of COVID-19, everyone in the education system has now had the experience of learning online. These classes online are now very similar to the classes offered online for free. Massive Open Online Courses (MOOC) offer many of the classes people are currently taking online for free.
While colleges are doing great work by putting their lectures online for free, another step is shifting employers to seek credentialing without the massive price tag. This requires creativity from people attempting to credential themselves outside of the traditional system.
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