Conquering Your Financial Empire

Student Debt: What Politicians Get Wrong

Published July 22, 2016 in Budget , Government , Policy Analysis - 4 Comments
Child looking at student debt

I was reading in the news the other day that the White House was tooting their own horn when it comes to education.  This particular tooting was specific to the student debt currently in the economy.  The thing that struck me as particularly odd was that the White House said that student debt is, in fact, great for the economy!  A foul toot indeed.

This report, published by the Council of Economic Advisers, was chock-full of graphs and statistics to validate their claims.  I read through it and it seems to present a fairly straightforward argument.  My problem with the published report is that it just repeated the same benefits of education over and over.  Everyone knows education is good in some aspect.  This report just feels like Ivory Tower academics who are unable to see that what may be good for them, is not good for everyone else.

More and More and More Student Debt

This isn’t the first time I’ve harped against higher education.  I highly encourage every high school student approaching the end of school to thoroughly evaluate their options before blindly choosing college.  Why?  Because you should never pay more for the same thing.  Education has remained fairly stagnant.  The economics education I received is very similar to one received 10 years ago because the core principles have been set in stone for the last 200 years.  Not to say the field is stagnant, but the type of education you receive in a Bachelors education will not be groundbreaking.  Yet, just since the year 2000 tuition has doubled.  That’s a 6.2% increase in tuition per year!  That 6.2% includes the Great Recession as well.  So even as prices were being depressed everywhere, tuition was still rising.

Child looking at student debt

She Has No Idea What Lies Before Her

This leads to another point – interest rates.  The CEA applauded the White House and Congress for getting rates down during the Recession.  Ironic since the cost to finance student debt was still over 5% until 2010.  Even today the government charges a 2.05% premium on top of the 10-year Treasury Bill rate.  For this current school year, they are charging 4.66% — it should be noted that today rates are a full 1% lower than they were at the school year measurement date.  What this means is that the government is able to buy money (by selling these 10-year T-Bonds, currently at 1.57%) and sell them back to student borrowers at 4.66% a year.  That leaves them a cushy 3% return.  Generally, that 3% would be eaten by inflation; however, our government functions on a budget deficit, so they don’t have inflationary losses.

The Inconsistency of the Job Market

The main focus of the CEA report is that college grads make more than high school grads.  I think this deserves a large “duh”.  The problem, at least how I see it, is that college grads with bachelors aren’t doing better – high school grads are just doing worse.  Do a quick search and you can find article  after article  describing how younger generations are worse off than previous generations.  Stagnant wages, oligopolies claiming more and more market share, and the requirement for all new hires to have a bachelor’s degree (read: go into debt to get the same job a high school grad could have gotten 10 years ago) all lead to the same bad scenario.  College grads have trouble surviving and high school grads get left behind.

The job search is also highly inefficient.  Human Resource divisions are overloaded.  They’re in charge of regulatory compliance, ethics discipline within a company, benefits management and contracting, as well as filling job openings.  I’m sure there are a multitude of other duties as well.  What this leads to, as far as job search is concerned, is the reliance on technology to filter out applicants.  Qualified applicants are never making the interview round because they didn’t have the right catch phrases.  You also have someone educated in regulatory compliance acting as a gatekeeper to filling technical positions.  I do not believe than an HR employee can understand the nuances of a “good employee” for every division within a company.

Ultimately, even if you’re a great fit for the company, you may never even get an interview.  If you get offered a job, it’s probably not going to be for much money.  If the money is suitable, count your blessings because you’re an engineer!

The Fallacy of Higher Education and Student Debt

The CEA report was so saturated with footnotes and citations, it was amazing.  Incidentally, one VERY key piece of information that they stated did not have a citation.  The CEA noted that the average Bachelor’s degree graduate left with $17,900 in student debt.  A far cry from the $20-40,000 that multiple other studies have estimated.  I don’t know how they can reasonably ignore that.  Furthermore, assuming that $17,900 is correct, it ignores that each graduating class is leaving with more and more debt.  The 2015 graduating class is saddled with just over $35,000 in student debt.

Another piece of information, that I feel would be incredibly useful, is to know the average salary of a graduate sorted by state.  There are many detailing the average income of graduates, but it’s a national average and thus rather useless.  Strangely enough, I couldn’t find a study that looked into that.  It seems like such a simple dataset to compile by matching social security numbers on W-2’s with Department of Education numbers.  You could then benchmark all of those numbers to a cost of living index to get an idea of what you may realistically make coming out of college.  That way you don’t have the high cost of living areas skewing the data upward.

To be perfectly clear, the White House is being disingenuous on this topic and should be ashamed.  Student debt, in the manner that it is being accrued, is not good for the economy.  Students are being forced to go to college to get the most basic of jobs for less and less money.  If they don’t, they run the probable risk of never eclipsing $40,000 a year.  Meanwhile, politicians and school administrators are constantly increasing the tuition to bolster their salaries and revenue generation entities like athletics.  Yet Harvard and Yale are able to give nearly free tuition to students coming from less than $65,000 a year and a prorated discount for those making more.  It’s a tragic prioritization from state and federal politicians.

The Takeaway

Nobody dismisses the benefits of higher education.  It creates an intellectual work force, and that’s good for GDP.  What graduates are mad about are the policies Congress (this includes state as well) put in place, and then the White House tells us we should be thankful for everything.  I’m thankful I went to college.  However, don’t expect a thank you when basic clerical jobs require a bachelor’s degree and offer $29,000 a year for it, plus a vague “there might be room for promotion”.  Student debt isn’t the problem.  It’s that many graduates aren’t receiving value in taking on the debt anymore.  When value gets restored, maybe graduates will be more enthusiastic about being forced to hold off on life due to loans.

 

Readers, how do you feel about our current student debt?  The government feels that because it’s only 9% of total income in the country, it’s not a problem.  Discuss in the comments below.  Don’t forget to like Cash Flow Celt on Facebook.  If student loans are pinching your budget, be sure to read how you can cut your phone bill in half!

4 comments

FinanceSuperhero - July 22, 2016 Reply

This is a topic that makes my blood boil, but I was glad to see you write about it, CFC. I’m shocked that the study you referenced dropped that $17,900 figure without substantiation. Ironically, that is roughly the amount of student loan debt I accumulated in undergrad. However, I just don’t think it can be accurate.

One of the biggest problems I have with the whole college/debt trend is that students are led to believe that the worth of their education is directly tied to the amount paid. If that were ultimately true, attendees of in-state universities would not be nearly as successful.

    Cash Flow Celt - July 31, 2016 Reply

    Student loans irk me a bit as well, not so much that some (or most) take them, but rather that they’ve been forced. Sure, people don’t have to college; however, employers are increasingly making a Bachelor’s a requisite to basic employment. Yet, both state and federal legislatures make college more and more un-affordable.

    I’m quite a bit higher than your student loan total. I’m at $40,000 because I chose to neglect my studies in high school and was ineligible for most of the aid available in college. However, I was still shocked that 1. the study pushed statistics about statistics, and 2. failed to cite a number on their $17,900. For such an important number, it seemed the one figure that REQUIRED a cite.

Jack Catchem - September 16, 2016 Reply

I despise the knee jerk reaction of our society to demand everyone get a college / post graduate degree. It is sad to say but there are many people I’ve met in junior college and at a four year institution who should not be there. They don’t care, they don’t perform, and they have no hope, but are accruing debt because they believe they need that piece of paper.

I got a Master’s degree because the GI Bill (Post 9/11) paid for 90% and my job paid for the other 20%. My job gives a bonus and enhanced promotion probability for having it. I would be stupid to not have gotten one.

But that’s my scenario. Plenty of other people will drop 20k for a degree that will not be subsidized, contribute to bonuses, or a promotion. But this is America! We have the freedom to make bad choices.

    Cash Flow Celt - September 23, 2016 Reply

    I couldn’t serve in the military due to a back injury; however, I’m super jealous of the GI Bill. In your case, you really would be just lazy to not go ahead and take advantage of the education offered. But I’m curious on your math. Your company paid 20% and the GI Bill paid 90%…so you received a 10% stipend just to be there? I’m super jealous now!

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