“Getting a college degree has long been integral to the mythic promise of American opportunity. Yet for millions, it’s become exactly that, a myth---and a very expensive myth at that. The average student leaves school carrying $30,000 in debt. More than 40% of students who enter college fail to earn a degree within 6 years, and many of them wind up in the workforce lacking the credentials and practical skills required to get ahead.” - Bloomberg
A few weeks ago, following an exhaustive investigation by the FBI, dozens of privileged individuals including some public figures were charged by the United States Department of Justice with crimes that included racketeering, fraud, money laundering, obstruction of justice and conspiracy to defraud the United States. The offenses encompassed parents creating fictitious profiles of their children in order to bolster their chances of gaining admissions to selective universities, including highlighting athletic achievements for sports they did not participate in. Some high schools didn’t even field a team for the sport the prospective student was being profiled for! Other despicable actions included paying college entrance exam proctors to supply answers to tests, and outright bribery. Subsequently, both liberal and conservative factions of the mainstream press have had a bonanza highlighting the legitimate inequities regarding the college admissions process.
The Quintessential Centrist agrees that the college admissions cheating scandal is newsworthy. A few in the media have even written about how ultimately, it’s the children who will bear the brunt of their parents’ maleficence. That’s true; however much more widespread problems warranting investigation, thoughtful debate, and corrective action are the overbearing cost of a college education which has consistently outpaced inflation, the increasing amount of debt students incur to secure a college degree, and the fact that a growing number of employers (and students) maintain that the education our colleges provide is not commensurate with the skillsets they are seeking in new hires.
In an effort to frame this slow-moving crisis – and make no mistake, it is a crisis – consider these jarring statistics:
• In 2018, ~70% of college students took out loans to pay for their education.
• “According to figures from the Federal Reserve Bank of St. Louis, between January 1989 and January 2016…the cost to attend a university increased nearly eight times faster than wages did…”.
• Since the late 1990’s, colleges and universities have raised the price of education faster than any sector except healthcare.
• There is $1.56 trillion dollars of student loan debt outstanding. Aside from home mortgages, student loan debt represents largest consumer debt segment in the United States. To put $1.56 trillion dollars of student loan debt in context, consider that total credit card debt in America totals ~1 trillion dollars; and keep in mind, there are many more credit card holders in The United States than student loan borrowers. Hence, not only is the notional value of student debt roughly 50% larger than credit card debt, the dollar amount of student debt per borrower (~$30,000 per person) is exponentially higher than for credit card borrowers (~$5,700 per person).
• “Just 38 percent of students who have graduated college in the past decade strongly agree that their higher education was worth the cost…Among those with debt, the perception of their degree’s value was even lower. Just one in three strongly agreed that their education was worth the cost…”.
• Because of the Bankruptcy Abuse Prevention and Consumer Protection Act passed in 2005, student loan debt is almost impossible to get discharged, even in personal bankruptcy.
• The average 30-year-old today is experiencing “downward mobility.” Added Bloomberg News, “The U.S. system of higher education isn’t the main source of economic inequality in America. But it’s almost certainly making things worse.”
Too many young borrowers are well on their way to digging their own economic graves before they can even start their careers. They are left little choice but to gorge on student debt despite the broader impact of those liabilities. Payments on student loans ultimately force many students to turn to credit cards as an additional source of spending power. That of course means more debt, which forces borrowers to spend more of their disposable income servicing that debt. This translates into at best a mediocre credit score. A lower credit rating often equates to higher interest rates and a vicious cycle of more debt.
What can be done about it?
The most important thing a child and adolescent can receive aside from love is a quality education. The Quintessential Centrist believes strongly in the value of education. We recognize the amazing educational institutions this country has to offer. Certain benefits of being armed with a bachelor’s or master’s degrees are obvious: on average, wages are materially higher and unemployment rates are materially lower for those with a bachelor’s degree than for those who hold only a high school diploma. That said, TCQ's position is that the module of higher education has become ingrained in our society to the point where we do not challenge its merits when balancing the associated costs.
A potential pragmatic solution we have researched and are warming to is something called Income Sharing Agreements (ISA’s). ISA’s are currently offered by a few universities. The concept – in theory - is simple: students do not pay tuition to attend a college or university that accepts them. Instead, they forego a fixed percentage of their future earnings for a period of time after graduation, and only once their income exceeds a certain level.
A quick, oversimplified example to illustrate the math: John Doe is accepted to Public State University Z. Tuition is $10,000 per year or $40,000 for the standard four-year tenure. Instead of taking a standard student loan and paying out of pocket, John Doe agrees to pay Public State University Z 12% of his future salary for 8 years. John Doe graduates in the standard 4 years. After graduation, John Doe secures a job that pays $50,000 per year. In year one he pays Public State University Z $6,000 (12% of $50,000). Assume John Doe is a dodo and never secures a raise. $6,000 x 8 (years) = $48,000. In this example, John Doe will end up paying Public State University Z $48,000 over eight years in return for his degree. John Doe never has to take a standard student loan. Public State University Z is paid $8,000 more than what they would have received from the financial institution that offered John Doe a student loan.
The immediate benefits for the student are clear, they include: transferring their financial risk to their college or university in exchange for giving up a small amount upside for a limited amount of time if they are successful, a lower barrier to entry for college, and the opportunity to earn a college degree without crippling debt load.
Universities would have an added incentive to prepare students for rigors of the working world. Their budgets would shift from a fixed, guaranteed revenue stream (tuition) to a variable, deferred, and non-guaranteed revenue stream. This could put existing operating budgets in jeopardy and force major changes to stalwarts of the higher education model such as the thorny issue of tenured professorship, which is beyond scope of this article but certainly merits its own introspection.
Like most arrangements, the devil is in the details. What percent of future income does the student forego? For how long? Can the payments be made using pre-tax dollars? Does the student end up paying a "premium" over what it cost them in tuition plus interest payments on the student loan? Higher earning students could end up paying more via ISA’s than traditional federal student loans. The inverse is true as well; “unsuccessful” students would pay little or nothing. We do not pretend that sorting out these details will be easy. However, the return on investment from doing just that might be saving a generation of young Americans from financial ruin. It certainly merits us trying.
Another more controversial idea is to force universities with endowments over X amount, say $10 billion dollars, indexed to inflation, to pay a small fixed percentage (5%) of any investment returns into a federal pool that would subsidize the tuition of most public universities that don’t have large endowments of their own. The following link shows the largest endowments in the county.
Let’s take Harvard University as an example. Harvard is a “not for profit” institution. Regardless of what Harvard chooses to donate to the greater Cambridge / Boston area, without debate it gets monstrous tax breaks from the Federal Government. It also has a $36 billion-dollar endowment. The tax breaks it receives from the government certainly help Harvard grow its wealth. Let us assume Harvard’s endowment has a good year and returns 10% net of fees. Well, 10% on $36 billion dollars is $3.6 billion dollars. And 5% of $3.6 billion dollars is $180 million dollars that could be transferred into a federal pool to help bring down the cost of tuition at community and public colleges throughout America. The five largest college endowments in the United States have over $100 billion dollars in assets. Those institutions all enjoy “not for profit” status, which enables them to garner significant tax breaks from the Federal Government. Those tax breaks help these highly selective schools maintain and grow their wealth. If we extrapolate the Harvard example above and add Yale ($27 billion), Stanford ($24 billion), Princeton ($23 billion) & MIT ($15 billion) to the equation, there would be a pot of ~$103 billion dollars with which to work. A 10% return on $103 billion dollars is $10.3 billion. And 5% of 10.3 billion is $650 million dollars that could be allocated into a pool to lower the cost of a college education for most of the rest. After all, if part of the holistic idea of education is to create a better potential opportunity for everybody, shouldn’t a select few of our richest schools allocate a small amount of money where their mouth says their missions are and help the rest of those students who are less fortunate, but willing to work hard to advance themselves?
We understand and appreciate that university endowments are a driver of what helps schools operate. We would never propose or advocate schools having to transfer a percentage of their investment returns so high that it would threaten their own missions. That said, data clearly shows that just a tiny fraction of the largest endowments are spent annually. Additionally, these schools have a large sticky donor base and continue to benefit from their tax-exempt status. As such, 5% of any total returns is simply neither prohibitive nor restrictive. Furthermore, to fend off government intervention regarding how endowment money is managed and spent, it would behoove these institutions – especially in the light of the recent admissions cheating scandal - to strike preemptively and collectively to allocate some portion of their endowments into federal pool. By voluntarily agreeing to this strategy, colleges and universities could both reduce the level of regulatory scrutiny while also avoiding demonization.
One article cannot possibly offer definitive solutions to the student loan crisis, but we hope that, at the very least, it stokes meaningful discussion as this is an issue that affects broader society. Education is not supposed to lead to income inequity, but rather do exactly the opposite. We as nation have the monetary as well as intellectual resources to start combating this problem.