Sunday, May 17, 2015

Cleaning up your own mess

Recently Corinthian Colleges announced that they were shutting down most (all?) of their schools.  They were basically ripping off their students, charging huge amounts of money for degrees that were pretty worthless and lying about their job placement rates to attract students.  The federal government (as well as various state and provincial governments) had filed lawsuits and finally the organization was shut down.  I have heard from some conservative commentators that this is an example of the federal government doing something right and wanted to disagree.

I argue that this is an example of the federal government creating a problem then fixing it, after thousands of people get screwed.

First of all, let's talk about the problem the government created.  Student loans are basically run by the feds.  They loan out millions of taxpayer dollars at super low interest rates in the hopes that an educated populace will improve the economy.  The federal government pretty much has a monopoly on student loans since they can undercut private lenders on interest rates and regulate out of business anyone who wants to compete in the loan business.  (Prior to the so called Student Loan Accountability Act student loans were processed by banks but subsidized by the fed, so there wasn't much accountability there either, but now there isn't even that little bit left).  However, since the federal government is not a business they have little to no incentive to carefully screen where the money is going.  Questions about the ability of the borrower to pay back the money do not get asked. 

Will the applicant earn enough money upon graduation to pay back the loans?  A degree in electrical engineering and a degree in social work are not created equal.  The first candidate is likely to earn enough money to pay back student loans, the second, not so much.  The federal government doesn't care and might, in fact, be more supportive of the latter since those running the program are federal bureaucrats themselves.

Is the price of the degree reasonable?  $25,000 in student loan debt for a motorcycle mechanic job that is going to pay you $10 an hour to start is not a reasonable investment.  This is not an exaggeration.  I worked at a Harley dealership with a new mechanic and this was his exact situation.  Running the numbers, even at 3% interest over ten years, your monthly payment is $240, unaffordable for someone just starting out and needing to buy tools as well.

So the fed loans out billions of dollars to students on the philosophy that education is good and will pay for itself with no concern or calculation regarding the efficacy of the loan program.

So here's a pool of free money with little to no control.  A situation ripe for abuse.  Big public universities jack up their tuition to account for the plentiful supply of cheap money.

Fly by night colleges (like Corinthian) set up shop to take advantage of the plentiful supply of cheap money.  Meanwhile the federal government funds them all by eliminating any sort of rational oversight mechanism that a free market in loans would provide.  If you had to justify to a bank that you would be able to pay back your loans, do you think that any banker in their right mind, any banker not subsidized by taxpayer dollars, would loan anyone $100,000 for a Masters in Puppetry?

I doubt it.

So the situation is now set up.  The federal government spends trillions subsidizing students to take degrees that are worthless from a financial standpoint.  Colleges (both for- and non- profit) then take advantage by providing expensive, non-financially viable degrees).

In swoops the fed to attack the non-profit colleges for ripping off their students and the colleges are shut down.  Hey, I'm not criticizing the federal government for shutting down Corinthian, but I am criticizing them for creating the atmosphere under which Corinthian operated and for failing to recognize that thousands of public universities are serving their students little better than Corinthian was.  You don't, however, see any lawsuits being leveled at the University of California, which has increased their tuition fivefold in the past twenty years (in inflation adjusted dollars) while granting unmarketable degrees to students.

I get that education is a good thing, but with the internet can't you educate yourself for free (or inexpensively) on many of the things about which you might want to learn?  Do you need two years of "distribution" credits to become an engineer at a cost of $50,000 or could you take your engineering classes in two years and become a "well rounded person" in your spare time while earning $60,000 a year at your entry level engineering job?

The federal government created this problem by dumping taxpayer dollars into the education system, removing any incentive on the part of the student or the parents to analyze the investment into their education and figure out if it is really financially feasible.  They removed a symptom of the system they created by shutting down Corinthian Colleges but they haven't done a thing to change the root cause of Corinthian.  The only true fix for the problem of excessive student loan debt and gouging by colleges at all levels is to return control to the free market.  Not everyone needs to go to college, not every subject needs a college degree, and most importantly, not ever child needs to be in debt for tens of thousands of dollars when they finally enter the workforce in a job that shouldn't have required a college degree in the first place.

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