This article first appeared at The McAlvany Intelligence Advisor on Wednesday, June 18, 2014:
Mr. Obama has never been very good at math or in getting his facts straight. His misunderstanding of basic laws of economics, however, is breathtaking. Last week, on Tumblr, he announced his latest plans to make it easier for high school graduates to borrow their way into college. First he’ll cap their debt repayments at 10 percent of disposable income. Second, if they default after 20 years, their debts will be forgiven.
Often in error but never in doubt, the president said:
A higher education is the single best investment that you can make in yourselves and your future, and we’ve got to make sure that investment pays off….
In America, higher education opens the doors of opportunity for all….
He repeated the shibboleth that may once have been true decades ago, but isn’t true any longer:
The typical American with a bachelor’s degree or higher earns over $28,000 more per year than somebody with just a high school education – 28 grand a year.
That’s another way of saying that a college sheepskin is worth a million dollars. He added that with that very expensive piece of paper, the freshly minted graduate will find work:
And right now the unemployment rate for workers with a bachelor’s degree is about half of what it is for folks with just a high school education.
He’s wrong on both counts. The average college graduate makes just $17,000 a year more than a high schooler, but that doesn’t take into account interest payments on his student debt. At present some 20 million students are enrolled in college and 12 million of them had to borrow to get there. By the time they’re out from under that debt, many of those 12 million will wish they hadn’t.
And because there are four million jobs waiting for qualified workers going begging because the businesses can’t find them, the unemployment rate for college grads between 24 and 30 is actually higher than the national average.
With his new plan, called PAYE (Pay As You Earn), repayments will be capped at 10 percent of disposable income, while Sallie Mae will be pressured to refinance the 37 million students and former students still trying to make payments on more than a trillion dollars of debt. Knowing that, new borrowers – estimated by the president to approach five million – are expected to ask for government money to chase the million dollar dream.
Reality suggests otherwise. If a college graduate can find a job, he’ll be making payments which would otherwise be directed into savings, investments, a home, a wife and kids, and a retirement plan. Once out from under, however, he’ll find himself way behind his peers who managed the trick without going into debt. As William Elliott, director of Assets and Education at the University of Kansas explained:
If you graduate with a B.A. … and you get the same job at the same place, you make the same amount of money.
But that money [after paying off your student debt] will actually mean less to you in the sense of accumulating assets in the long term.
The student loan program began in the 1950s following Sputnik, which persuaded the powers that be that the US was falling behind the Soviet Union. Never wanting to let an opportunity to expand government power go to waste, Congress passed the National Defense Education Act. It was expanded, as always happens with government spending programs, in the 1960s under the Higher Education Act. Under Bush II, student loans grew from $68 billion in 2001 to $119 billion by 2009. From there, under Obama, student loans went exponential, to nearly $750 billion. And that’s just what the Treasury shows on its balance sheet. The total of all student loans exceeds a trillion dollars.
The basic laws of economics have been working their magic. Tuition rates have grown an estimated three to four times faster than inflation, reflecting the increased demand for schooling. There are now 20 million students in college, up from fewer than 14 million in 1990.
But the question remains: are they getting a good return on their money? Two remarkable studies by PayScale.com, one released last year and the other in April, show that the “return on investment” for going to college has been dropping, sometimes to below zero. While an investment in Harvard yields a whopping 15 percent annual return over the next 20 years, an investment in Murray State University in Kentucky is actually negative. According to the Economist, which reviewed the studies, “An arts graduate from Murray State … can expect to make $147,000 less over 20 years than a high school graduate, after paying for his education.” The other PayScale.com study shows that out of 2,700 4-year schools in the country, only 72 of them show a one-million-dollar lifetime earning advantage over a high school diploma.
What about those four million jobs for college graduates that aren’t being filled? According to the Hechinger Report, “large numbers [of students don’t] learn the critical thinking, complex reasoning, and written communication skills that are widely assumed to be at the core of a college education.” It added:
Forty-five percent of students made no significant improvement in their critical thinking, reasoning, or writing skills during the first two years of college.
After four years, 36 percent showed no significant gains in these so-called “higher order” thinking skills.
And why is that? Because many of the students spend more time on video games and hanging out than they do studying:
Combining the hours spent studying and in class, students devoted less than a fifth of their time each week to academic pursuits. [Instead,] students devoted 51 percent of their time – 85 hours a week – socializing or in extracurricular activities.
When left to their own devices, the students selected easy classes as well, thus increasing their chances of learning little while in college. Noted Hechinger:
In a typical semester, a third of students took no courses with more than 40 pages of reading per week. Half didn’t take a single course in which they wrote more than 20 pages over the [entire] semester.
There it is: the laws of economics at work. Making money cheap and available brings in more students, many of whom won’t benefit from or take advantage of the opportunity. When they graduate they can’t find work. When they can’t find work they default on the loans. That leaves the taxpayer – ever and always the taxpayer – to pick up the pieces.
When something is dear, it is valued. When it is made cheap, it is held in low esteem. These are all laws with which the president is not acquainted.
The Art of Manliness: Is College for Everyone? Part II: The Pros and Cons of Attending a 4-Year College
Finance.Yahoo.com: $1 trillion student loan debt widens US wealth gap
The Economist: Is college worth it?
Lumina Foundation: Fifty Years of College Choice