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Monday, January 25, 2016

Loan Sharking for Academia

While Bernie Sanders and Hillary Clinton are engaged in a bidding war to raid the federal treasury to meet the spiraling cost of college education Republicans have yet to enter into that fray. Like most federal program student aid was begun with presumed good intentions and very little thought. There is a parallel to federally financed housing which was marketed as tool to help middle income families afford modest housing but which has evolved into a taxpayer funded Frankenstein that allows Fannie and Freddy to loan up to $938,250 to put the truly needy into the Virgin Island vacation home they justly deserve. The end result of the expanded supply of credit means more money to borrow leading to larger homes for each succeeding generation as family size declines.
Higher education has embraced the federal credit bubble with uncontrollable delight. When the federal government allows students to borrow more colleges have a remarkable propensity to charge and spend more. There is more to spend on professors to teach advocacy courses, climbing walls, luxury dorms, more administrators and preposterously overpaid presidents. Why? Because they can. Non profit institutions are the least efficient users of scarce resource let alone copious resources. Since they cannot retain funds the only legal option is to spend funds.
Readers of the Washington Post must be especially gullible with no grasp of economics. manages to get everything wrong in this post. First he observes " Students demand more services outside the classroom and colleges are providing more amenities to attract applicants." Wrong. People in hell want ice water. We all like 4 star restaurants but most of us eat at fast food emporiums most of the time. Students who demand more should pay more but the cost inflation is spread over the entire price range and is not segregated to the elite schools. Does Selingo expect us to believe the students at Oakland City College are as demanding as students at Princeton?
The writer follows up that lapse in common sense with, " Students are shouldering much more of the cost of their degree at public colleges and universities." Wrong again. The cost is not diminished just because the taxpayer picks up the tab. Paying Janet Napolitano as head of the California University system $600,000 per annum and leasing her a home that rents for $9,950 per month is the same whether it is borne by the taxpayers or the students. Following Selingo's logic education would be free if the taxpayers picked up 100% of the tab. This guy would have a real future in a Sanders administration.
Probably the availability of federally insured loans is the prime driver of the education bubble but let us visit one other probable culprit namely financial aid obtained through the institution. Parents of the prospective student are required to disclose their income and some of their assets. In other words the institution want to know how much the applicant has to spend before it offers financial assistance. How much money you got to spend, kid? Curb your eleemosynary instincts. The lofty sounding " based on the student's ability to pay" is a clever way of saying that they intend to extract the maximum each student can pay all the way up to the sticker price. Would you care to have a cable bill based on your ability to pay and what would be the sticker price for the basic package? Not to worry the FCC would have the cable provider on a crucifix for such a pricing scheme.
Fortunately there is some guidance from a study by the Federal Reserve Bank of New York albeit the conclusions are politically painful. They are even too painful to be mentioned in the popular media as they point to the federal student loan programs and Pell Grants as the prime drivers of academic price inflation. Damn near a micro aggression! Below is the abstract of the study.

When students fund their education through loans, changes in student borrowing and tuition are interlinked. Higher tuition costs raise loan demand, but loan supply also affects equilibrium tuition costs—for example, by relaxing students’ funding constraints. To resolve this simultaneity
problem, we exploit detailed student-level financial data and changes in federal student aid programs to identify the impact of increased student loan funding on tuition. We find that institutions more exposed to changes in the subsidized federal loan program increased their tuition disproportionately around these policy changes, with a sizable pass-through effect on
tuition of about 65 percent. We also find that Pell Grant aid and the unsubsidized federal loan program have pass-through effects on tuition, although these are economically and statistically not as strong. The subsidized loan effect on tuition is most pronounced for expensive, private
institutions that are somewhat, but not among the most, selective.
In a nutshell, each federal dollar available to be borrowed results in a $.65 increase in aggregate tuition. I would strongly encourage the reader to read the report as it's impossible to do justice to a 50 page report in this space but allow me one more surd quote.
From a welfare perspective, these estimates suggest that, while one would expect a student aid expansion to benefit its recipients, the subsidized loan expansion could have been to their detriment, on net, because of the sizable and offsetting tuition effect.

Pell Grants also seem to have driven tuition higher, but the net cost of attendance for a student declined because the pass through was less than one and grants do not require a repayment of principal.
So by upping the caps on the loan limits Congress in its infinite wisdom has made the students but not the institutions worse off. The institutions are doing just fine. Harvard, for example, has bulked up its endowment to a hefty $38 billion even while paying Faux Cherokee Elizabeth Warren $300,000 to teach a single class. It was the students, not Harvard, who bore the high price of her cheap hypocrisy.
Before we give it up for all the moderate Republicans who crossed the aisle to inflict undue financial stress on an entire generation lets explore the difference between student debt and housing debt ie mortagages. A housing loan goes toward the purchase of an asset. An educational loan is a capital investment. It is not a store of wealth. It is a personal investment made to enhance income therefore the higher the cost the lower real lifetime income. Think you want to spend an extra hundred grand and 4 years to earn a PHD in Advanced Vegan Studies? Then that additional debt must be recouped over a shorter working span. If the cost spiral in higher education continues only the very rich and the very dumb will attend college. The smart money will figure they are better off to start a career right out of high school than to pay what will eventually be a 6 figure annual cost for a degree.
Sooner or later someone is going to have to tell Hillary she is full of shit. There is no logical or moral reason to continue this failed model. It is debt for the sake of debt and if the Fed study is to be believed it is to the detriment of an entire generation. Would a Cruz or Trump find the courage to blow the whistle on this failed policy? Who knows? Debate on matters such as this are long on platitudes and short on logic. Who wants to tell the precious millennials that they been suckered with the help of their congressman?
Ain' t it great to be old?

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