Friday, December 12, 2014

If you want to know the truth, Follow the Money

According to the Consumer Financial Protection Bureau about 18% of all Americans believe they will never get out of debt. 43% believe they will escape the debt trap but at age 61 or later.

The same survey reveals that 31% of Americans aged 61 or older will never get out from under debt.

If this was a post encouraging the reader to get up and fight against debt slavery I might begin with the well known quote by Henry Ford, “Those who think they can and those who think they can’t are both usually right.”

But this is a post about staying out of debt by analyzing the motion of money; not what you want to happen; not what the people who want your money are telling you; not what the politicians are dreaming; instead, follow the money.

Look at student loans, a well intentioned Government program that promised easy access to higher education to lower and middle class students graduating from high school. What has actually happened could have been predicted by analyzing the motion of money.

Start with the colleges and universities. In this scheme they get all their money up front with no strings attached. They don’t have any contractual requirements to actually teach anyone anything. They get their money if the student can’t learn from a particular professor. They get their money if the student drops out for any reason whatsoever. By the way, according to the U.S. Government the six year graduation rate was 56% for males and 61% for females. Somewhere around 40% of those who start college don’t finish college.

The universities have no responsibility to provide the student with a job that requires a college education. The most recent figures indicate that 36.7% of recent graduates are working at jobs that only require a high school diploma. Their presence in jobs like waiters and baristas denies appropriate jobs to those with less education. The colleges and universities don’t care they already have their money.

With easy access to unlimited Government and Government guaranteed loans the colleges and universities were free (over the last 30 years) to raise the cost of an education at 5 times the rate of inflation! That is 500% higher! The presence of this money caused a disconnect between cost/value analysis. As long as the student could get access to those loans, it didn’t matter how fast the university raised the cost of tuition.

What have universities done with all that extra money? Well, they build a lot of pretty new buildings. They have more than doubled the number of administrative and support personnel who don’t teach in the classrooms. They have raised the salaries of just about everybody except for the graduate assistants and non-tenure track instructors who actually do the teaching.

They have also used some of that money to fund research. Isn’t that special, taking money from seventeen year old children to fund some tenured professor’s pet project, allowing him to better avoid his classroom responsibilities? Why can’t that professor go out and get grants from traditional sources like the government, foundations, or wealthy patrons based on the merits of his proposals?

How about the banks or Government agencies that actually made the loans. Well, their money is guaranteed. A student that can’t find a job is still on the hook. These loans can’t be discharged in bankruptcy. In some instances if a parent cosigned they can’t be discharged with the death of the student.

How does that work for the lenders? Consider the rule of 72. If you want to calculate how many years it takes double your money all you need to do is divide 72 by the interest rate.

For example, a 6% student loan doubles the lender’s money in just 12 years.

An 8% student loan doubles the lender’s money in 9 years.

Guaranteed by you, the taxpayer.

Let’s look how that works out for the teaching profession:

A full time teacher who graduates with a four year degree might run up $52,596 in college debt. This graduate is looking at a median salary of $43, 400. Given a 10% repayment rate of $4,340 a year this teacher can expect to be debt free in 21.8 years if she doesn’t get married, buy a house, have children, take out a car note, or otherwise play by the rules of a system that wants her to remain a debt slave for the rest of her life.

If you are interested in more examples for different professions, check out this article by Angela Johnson of CNN.

College Degrees With the Best Bang for Your Buck

There are a lot of assumptions in these numbers, but they seem realistic. The assumptions aren’t really important. You can make up your own assumptions and plug them into any of dozens of loan calculators available on the Web. The take away is the same.

The school gets its money up front—Guaranteed!

The bank will at least double it money—Guaranteed!

The student and/or the parent who signs the loan takes all the risk with no guarantees of anything.

Do you want to bet the next twenty years of your life on the outcome of a game played by these rules? If you can’t get a scholarship to Harvard, apply for a scholarship to Duke. If you can’t get a scholarship to Duke, try your state university. If you can’t get a free ride at your state school, go to your local community college on a Pell Grant. If you kill it at a two year school, your chances of getting a scholarship at a four year school will dramatically increase. If you flunk out, at least you won’t be paying for that mistake over the next twenty years of your life. You will be free to try again.

1 comment:

  1. When I went to school, I got student loans from a bank. All the government did was subsidize the interest rate. I believe the bank still took the hit if I defaulted. The current system is nothing more than a huge money laundering scheme. One thing not mentioned in the article is that college professors tend to be liberal. And support liberals politically.