Sunday, June 10, 2012

George Will on Subprime College Education


George Will writes in his column today about the higher education bubble, subprime college education and "administrative sprawl":

"In his book “The Higher Education Bubble,” Reynolds writes that this bubble exists for the same reasons the housing bubble did. The government decided that too few people owned homes/went to college, so government money was poured into subsidized and sometimes subprime mortgages/student loans, with the predictable result that housing prices/college tuitions soared and many borrowers went bust. Tuitions and fees have risen more than 440 percent in 30 years as schools happily raised prices (see chart above) — and lowered standards — to siphon up federal money.

 The budgets of California’s universities are being cut, so recently Cal State Northridge students conducted an almost-hunger strike (sustained by a blend of kale, apple and celery juices) to protest, as usual, tuition increases and, unusually and properly, administrators’ salaries. For example, in 2009 the base salary of UC Berkeley’s vice chancellor for equity and inclusion was $194,000, almost four times that of starting assistant professors. And by 2006, academic administrators outnumbered faculty.

So taxpayers should pay more and parents and students should borrow more to fund administrative sprawl in the service of stale political agendas? Perhaps they will, until “pop!” goes the bubble."

HT: Warren Smith

48 Comments:

At 6/10/2012 8:46 AM, Blogger Larry G said...

" Reynolds writes that this bubble exists for the same reasons the housing bubble did. The government decided that too few people owned homes/went to college, so government money was poured into subsidized and sometimes subprime mortgages/student loans, with the predictable result that housing prices/college tuitions soared and many borrowers went bust."

while I do agree that the govt involvement in college loans has gone too far... I still think there is justification for involvement at a lesser level.

but I disagree with the sub-prime connotation especially about housing.

How long as the govt had multiple policies to encourage home ownership?

how come it did not blow up before?

what caused it to blow up this time?

was it any/all govt policies that caused the problem or was it one or more SPECIFIC new policies that caused the problem?

it's not the simple idea of govt involvement.

The govt has been involved in college loans and housing loans for a long, long time and until now, it was not responsible for meltdowns.

the narrative seems to be that any/all govt involvement of any kind is at the root of the problem and that's just not the case.

and no.. don't cite the CSA as the reason. most of the sub-prime loans were NOT made at FDIC banks (where CSA applied).

How come we had govt policies that favored mortgages since WWII and only now.. did it blow up?

Is the the overall policy of govt involvement at any level or is it something specific?

 
At 6/10/2012 9:00 AM, Blogger Jon Murphy said...

How long as the govt had multiple policies to encourage home ownership?

how come it did not blow up before?

what caused it to blow up this time?


That, Larry, is a very good question.

In the years leading up to 2008, you did see foreclosure rates start to creep up. This was an early warning sign the bubble was about to pop.

Then, in 2008, we had a perfect storm of events that caused the economic world to come crashing down: Skyrocketing oil prices, failing banks, bad stock performances, layoffs, etc. This, of course, lead to more people defaulting on their loans, which perpetuated the problem.

If the government hadn't encouraged sub-prime loans in the first place, this would have been a simple market correction (I do think a recession would have occurred one way or the other in 2008. Housing just made it worse). Of course, this is not to say that government is the only cause of the recession. hell no, the banks and mortgage companies deserve their fair share of the blame, too, as do borrowers. But we had nearly 20 years of poor housing policies prior to the crash, and have had three-and-a-half years of poor housing policies after the crash. Government wasn't the sole cause of these problems, but they sure as Hell didn't help the situation.

 
At 6/10/2012 9:05 AM, Blogger VangelV said...

I agree with Will but I am not sure that Mark really does. After all, it was not that long ago where his posting was claiming that the key to low unemployment was having a degree. Many others on this site agreed that it made sense to go to university and get that degree, debt and all, instead of looking to an alternative.

 
At 6/10/2012 9:06 AM, Blogger Larry G said...

" Government wasn't the sole cause of these problems, but they sure as Hell didn't help the situation"

well.. I do not think govt REQUIRED MBS and credit default swaps.

so if they "enabled" what was the nature of their policies - different from all the prior policies dating back to WWII ..that was at the core?

 
At 6/10/2012 9:22 AM, Blogger PeakTrader said...

So, what year did this so called higher education bubble start (1982)? And is it a bubble if it doesn't burst?

The housing bubble started around 1995, although the chart seems to show around 2003.

 
At 6/10/2012 9:36 AM, Blogger PeakTrader said...

If it slows to grow the same rate as the CPI, did a higher education bubble really burst?

 
At 6/10/2012 9:47 AM, Blogger PeakTrader said...

How much does it need to decline to declare it a bubble?

 
At 6/10/2012 9:54 AM, Blogger Jon Murphy said...

so if they "enabled" what was the nature of their policies - different from all the prior policies dating back to WWII ..that was at the core?

Well, First and foremost was the Community Reinvestment Act (CRA). The CRA was passed in 1977 to encourage low-income loans, but in the 90's it was changed to require a certain percentage of loans to be to low-income buyers, regardless of their credit.

Then, there is Freddie and Fannie. While technically not loan originators themselves, they would gaurentee bank loans to sub-prime individuals, either by buying the loan outright from the banks or by gaurenteeing banks payment on the loans. This is what lead to the AAA ratings on these mortgages that made MBS so enticing to the banks. Encouraged by these policies, you had mortgage companies like Peachtree who would make loans to every person who could sign his name (I'm being a tad sarcastic, but their loan standards were quite low).

So, you are right that the government did not require MBS. But what the government did do was make MBS viable by essentially promising they would not lose value.

 
At 6/10/2012 10:03 AM, Blogger Jon Murphy said...

I agree with Will but I am not sure that Mark really does. After all, it was not that long ago where his posting was claiming that the key to low unemployment was having a degree. Many others on this site agreed that it made sense to go to university and get that degree, debt and all, instead of looking to an alternative.

I think you may have misunderstood what is being said.

People with just high school degrees or less have higher unemployment rates than college degrees. No surprise there. This has largely always been the case. But that doesn't translate into "everyone should go to college, regardless of the cost." You want a natural price of college education to form so people can make informed decisions about what option is better for them. The costly rising cost of education (as well as lots of misinformation regarding college) is not allowing this to occur.

College education, just like home ownership, is not for everybody. There are benefits to both, but those benefits are not equally shared among all participants.

There is no contradiction going on here. It's a typical economics argument: let a natural price level develop and those who value the good/service at that level will participate. Those who do not, will not. And when you mess with the price, bad things happen.

 
At 6/10/2012 10:13 AM, Blogger PeakTrader said...

Jon says: "College education, just like home ownership, is not for everybody."

Spoken like a true elitist. I suppose decades ago a high school diploma, just like owning a car, wasn't for everybody too.

 
At 6/10/2012 10:36 AM, Blogger Larry G said...

" but in the 90's it was changed to require a certain percentage of loans to be to low-income buyers, regardless of their credit."

except that's demonstrably not true.

a very small percentage of sub-prime loans came from FDIC/CRA loans to start with.

second, CRA ONLY applied to loans in the SAME area that the bank took deposits.

Third, it specifically said to NOT make bad loans but to maintain the existing risk policies.

Fannie/Freddie I agree with.. by backing the sub-primes.

" But what the government did do was make MBS viable by essentially promising they would not lose value"

the govt did not pay the rating agencies to rate them as "investment grade".

but the CRA narrative is bogus:

http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html

http://money.usnews.com/money/blogs/the-home-front/2008/12/17/sheila-bair-stop-blaming-the-community-reinvestment-act

 
At 6/10/2012 11:03 AM, Blogger Jon Murphy said...

a very small percentage of sub-prime loans came from FDIC/CRA loans to start with.

second, CRA ONLY applied to loans in the SAME area that the bank took deposits.

Third, it specifically said to NOT make bad loans but to maintain the existing risk policies.


All those are correct. But when a bank was audited and they did not have a certain percentage of loans to low income folks, they come under increased scrutiny. While the law did say one thing, the explicit actions of government auditors were another. Trust me, I was on the receiving end of that.

I am sorry but that is the way many of the people who read Mark's posting interpreted it. There was no hint anywhere that one should do proper shopping around for a degree or that one should get a degree that is useful.

Check back in the comments. I think you'll find lots of discussion about unemployment by degree types, possible "signalling" from universities based on names, all that stuff.

 
At 6/10/2012 11:16 AM, Blogger Larry G said...

" All those are correct. But when a bank was audited and they did not have a certain percentage of loans to low income folks, they come under increased scrutiny. While the law did say one thing, the explicit actions of government auditors were another. Trust me, I was on the receiving end of that."

I take it as truth Jon but these banks - were not the primary players in the sub-prime debacle...most of those banks were NOT FDIC nor CRA... they were, in fact, unregulated banks.

"I am sorry but that is the way many of the people who read Mark's posting interpreted it. There was no hint anywhere that one should do proper shopping around for a degree or that one should get a degree that is useful."

and I agree... people USED to get a home-equity loan for their kids college but that option imploded so now they go after the next available option.. a "cheap" interest rate and they really don't care that the govt is footing the bill and yes.. there are many ways to obtain a quality higher ed degree without going into huge debt.

Back "in the day".. folks actually "worked" their way through school and/or had a day job and went to "night" school.

 
At 6/10/2012 1:51 PM, Blogger RyanFerraioli said...

I have always wondered, but never really be able to find a relative start date to the government subsidization/backing of college tuition loans. Does anyone know the date and exact bills/policies that have created this beast?

 
At 6/10/2012 3:25 PM, Blogger Buddy R Pacifico said...

"RyanFerraioli said...
I have always wondered, but never really be able to find a relative start date to the government subsidization/backing of college tuition loans. Does anyone know the date and exact bills/policies that have created this beast?"


Ryan, I think it is likely the Servicemen's Readjustment Act signed into law June 22, 1944.

It is better known as the GI Bill.

"This act provided tuition, subsistence, books and supplies, equipment, and counseling services for veterans to continue their education in school or college. Within the following 7 years, approximately 8 million veterans received educational benefits. Under the act, approximately 2,300,000 attended colleges and universities, 3,500,000 received school training, and 3,400,000 received on-the-job training. The number of degrees awarded by U.S. colleges and universities more than doubled between 1940 and 1950, and the percentage of Americans with bachelor degrees, or advanced degrees, rose from 4.6 percent in 1945 to 25 percent a half-century later."

 
At 6/10/2012 3:41 PM, Blogger PeakTrader said...

Ryan, maybe it started when the U.S. became a net debtor, in the early '80s, and trade deficits became increasingly larger.

Ultimately, more money flowed to the federal government and was available for education, health care, the military etc. rather than for tax reductions.

If the education bubble bursts, it may be because the Administration spent and squandered $5 trillion in four years, while the massive over-spending and over-squandering continues to the point when severe austerity measures will be the only choice.

 
At 6/10/2012 5:03 PM, Blogger Jon Murphy said...

Tuition has risen at twice the CPI for 30 years because the government contributes less and the student more.

Aside from the dubious economic claim that the entire sentence claims, I think you'll find The government is contributing more per student now than it ever has.

Second chart

 
At 6/10/2012 5:05 PM, Blogger Larry G said...

does anyone know if the college loans are no-recourse or not?

in other words, how much skin to the borrows have in the transaction?

BTW - good chart!

 
At 6/10/2012 5:12 PM, Blogger Jon Murphy said...

Third chart

 
At 6/10/2012 5:14 PM, Blogger Jon Murphy said...

does anyone know if the college loans are no-recourse or not?

in other words, how much skin to the borrows have in the transaction?


It doesn't matter. Student loans never disappear (except under very specific conditions, namely you work for the government for 10 years). Even in bankruptcy, they are never forgiven.

Besides, the Feds and Federally-backed agencies such as Sallie Mae usually are the ones who provide loans. Most banks won't touch it.

 
At 6/10/2012 5:29 PM, Blogger Larry G said...

the govt loans the money directly?

I thought banks did but the govt guaranteed them?

 
At 6/10/2012 5:59 PM, Blogger Jon Murphy said...

the govt loans the money directly?

I thought banks did but the govt guaranteed them?


It depends. The government does loan money either directly through grants or loans, or indirectly through GSEs like Sallie Mae. There are some banks which will provide student loans, but they usually have high interest rates and require some kind of collateral.

 
At 6/10/2012 6:27 PM, Blogger VangelV said...

I take it as truth Jon but these banks - were not the primary players in the sub-prime debacle...most of those banks were NOT FDIC nor CRA... they were, in fact, unregulated banks.

There is no such thing as an unregulated bank my idiot friend.

 
At 6/10/2012 6:47 PM, Blogger Larry G said...

unregulated with regard to MBS and credit default swaps for sure, eh?

 
At 6/10/2012 6:48 PM, Blogger marmico said...

This comment has been removed by a blog administrator.

 
At 6/10/2012 8:30 PM, Blogger www.pointsandfigures.com said...

check out alltuition.com for help with college costs

 
At 6/10/2012 8:50 PM, Blogger sethstorm said...

There are two choices to offset the costs:

* Push the cost onto internationals and have US students not pay more than a fixed fee.

* Have all costs be post-paid by citizens, pre-paid by internationals.


With either path, reverse the non-discharge provision to how it was before it was disallowed.

 
At 6/10/2012 11:20 PM, Blogger kmg said...

I say a disruption cascade happens in 18-24 months.

In a technological age, one constant is that the cost of information diffusion gets less and less. This is seen everywhere, from the dropping revenues of newspapers, to the obliteration of paper bookstores by the Amazon Kindle...

Yet, tuition costs are rising and rising, much faster than the salaries new grads can get?

There is going to be a massive reset in 18-24 months. Major employers like Google, Apple, Microsoft, etc. will unite and say that passing a 4-course sequence with a high grade from MITx is sufficient qualification for entry-level jobs that otherwise require a bachelor's degree. Combine that with the fact that MITx grads can accept 10% lower salaries due to not having huge student loan debt to begin with, and the endgame is clear...

 
At 6/11/2012 12:09 AM, OpenID Sprewell said...

kmg, I agree with you that that is how it will end, with many companies realizing the college scam and endorsing some online learning routes as where they will be hiring. However, do you really think it will be in 18-24 months and that those companies, ie Google, Apple, Microsoft, etc., will do it? I don't see that happening, as those companies, for all the people they hire without college degrees, still lean on academic credentials way too much. I suspect what will happen is a bunch of startups will realize they can get cheaper talent this way, as long as they're willing to do more work to manage the kids, but who knows when that will happen. The recent 60 minutes piece about Thiel had Wadhwa saying that the anti-college ideas swept through Silicon Valley, hopefully some of them will actually do something about it when it comes to hiring.

 
At 6/11/2012 1:21 AM, Blogger PeakTrader said...

KMG says: "Passing a 4-course sequence with a high grade from MITx is sufficient qualification for entry-level jobs that otherwise require a bachelor's degree."

I think, it'll be the opposite. More and harder classes will be needed to compete. Also, more above average schools will be top schools, like MIT.

 
At 6/11/2012 2:01 AM, Blogger kmg said...

Also, more above average schools will be top schools, like MIT.

For that to happen, they will have to shed tons of useless administrators, and entire useless departments ('XXXX studies', etc.)

They will not do that voluntarily. Only a shock event can force them into that.

 
At 6/11/2012 2:21 AM, Blogger PeakTrader said...

KMG, a lot of above average schools have already become as good as MIT, or certainly closed the gap substantially.

 
At 6/11/2012 5:51 AM, Blogger Aiken_Bob said...

Lots of good comments -- Something that I see in Mark's chart is that about every 18-20 years there is a change in the slope, naturally stepper. It also started in the earlier 80's, which is about a generation from all the crazy times of the 60's. I think you could make a case, a strong case, that lots of kids didn't go into business or government world then, but stay in colleges as professors and administrators. They saw it as a pretty good gig. They also created lots of 'XXXX studies' - classic positive feedback loop with a time constant of a generation.
Lots of comments claiming that we have more technology hence the need for higher costs, while it maybe true, and I doubt it, for the hard sciences and engineering -- it is bunk for the vast majority of liberal art and business class. As I said it is a pretty good gig and those on the inside want to keep it going.

 
At 6/11/2012 7:36 AM, Blogger marmico said...

Let's try this one more time.

College tuition has risen faster than the CPI due to 2 factors.

1. A college is not a household. It has a unique cost push deflator. It is called the HEPI. You can read a blurb about it here and a Table comparing it to the CPI here.

So the gap between the tuition rise and the HEPI is lower than the same CPI gap.

Perry's chart looks like it starts in 1978. The HEPI has risen 430% and the CPI 350% through 2012.

2. Real per student state and local government appropriations to colleges has fallen. The Rockfeller Institute has data in Panels 23-27 here. Therefore, student tuition has risen to offset lower government payments to tertiary education institutions. In 1986 students paid 23% of cost via tuition and in 2011 it had increased to 44%.

That's the explanation for why college tuition costs haven risen at double the CPI rate for the last 30+ years.

And it ain't dubious.

 
At 6/11/2012 7:51 AM, Blogger Jet Beagle said...

marmico,

Is it valid to compare changes in nominal prices - either HEPI or CPI - and changes in real dollar government appropriations?

 
At 6/11/2012 12:39 PM, Blogger morganovich said...

marmico-

notions that a reduction in government payments are driving the price hikes may be true at a few state schools, but it fails to explain why the schools that do not get such funding are also seeing such jumps in price.

my alma mater has risen in cost from $20k in 1994 to over $53k now. they are not getting public funding.

even more astounding, my high school, which no public funding has gone from 15k to $51k.

in the case of university, that's a 5.5% annual inflation rate.

as these schools are not being weighted not quality adjusted for their index, i wonder if we are not just seeing the difference in their unadjusted price moves and the post boskin CPI that manipulates the data.

if you plot this against pre boskin cpi, it looks to be moving at only about 1-2% a year more that overall prices and presents a much less dramatic divergence.

 
At 6/11/2012 1:20 PM, Blogger Aiken_Bob said...

Another interesting way to look at this is the difference between Baseball's farm system and how the NFL uses college football. Years ago major corporations had major labs were developed their own talent (Baseball Farm System), now they let the gov't pick up the tab for graduate work and the student for undergraduate work. It is a lot easier to understand it this way.

 
At 6/11/2012 1:26 PM, Blogger Jon Murphy said...

Another interesting way to look at this is the difference between Baseball's farm system and how the NFL uses college football. Years ago major corporations had major labs were developed their own talent (Baseball Farm System), now they let the gov't pick up the tab for graduate work and the student for undergraduate work. It is a lot easier to understand it this way.

I like that analogy. May I use it in the future (and credit you, of course)?

 
At 6/11/2012 1:27 PM, Blogger Jon Murphy said...

Real per student state and local government appropriations to colleges has fallen. The Rockfeller Institute has data in Panels 23-27 here. Therefore, student tuition has risen to offset lower government payments to tertiary education institutions.

That is a possibility. Or, the Federal government has stepped up its aid to counter the drop in state and local.

 
At 6/11/2012 3:02 PM, Blogger PeakTrader said...

Aiken_Bob says: "...it is bunk for the vast majority of liberal art and business class(es)."

I don't recall ever taking a "bunk" class in liberal arts (in economics, mathematics, philosophy, etc.) or in business (accounting, international finance, management, etc.).

In liberal arts, many students disliked being forced to think beyond their capacities to think, and learn to think properly, and lots of MBAs became very rich.

The U.S. has the best higher education, health care, and military in the world, partly because of government. Yes, prices are high. However, the U.S. is also a comparatively low taxed country.

 
At 6/11/2012 3:12 PM, Blogger Jet Beagle said...

Jon Murphy: "Or, the Federal government has stepped up its aid to counter the drop in state and local."

The portion of college students receiving Pell Grants has been growing.

 
At 6/11/2012 3:21 PM, Blogger Jet Beagle said...

Jon Murphy: "Or, the Federal government has stepped up its aid to counter the drop in state and local."

Researchers Neal McCluskey and Chris Edwards, in their paper Higher Education Subsidies revealed that:

"Federal aid for higher education soared from $10 billion in fiscal 2000 to $30 billion in fiscal 2008. ...

... From 1987 to 2007, there was a strong upward trend in average per-student costs of private and public universities (tuition, fees, and room and board). However, if you subtract from those costs federal grants, loans, and tax benefits, there has been only a modest increase over two decades."

 
At 6/11/2012 3:25 PM, Blogger PeakTrader said...

However, even before the last recession, less government spending, less taxation, and smaller budget deficits (or surpluses) would've been an improvement.

 
At 6/11/2012 3:30 PM, Blogger VangelV said...

I don't recall ever taking a "bunk" class in liberal arts (in economics, mathematics, philosophy, etc.) or in business (accounting, international finance, management, etc.).

The best class in university that I attended was Political Philosophy. It provided a blueprint that could be used to figure out what is gong on in government today and shed light on what the debate was really about. I did all the reading and attended every lecture but never officially took the course. The value was not the credit but what was learned.

 
At 6/11/2012 3:35 PM, Blogger PeakTrader said...

VangelV says: "The value was not the credit but what was learned."

Yes, that's the real value, although you want the credit to get out and move on.

 
At 6/11/2012 3:46 PM, Blogger VangelV said...

Yes, that's the real value, although you want the credit to get out and move on.

I was an engineer with a full course load. They would not let me take that course but I did not care because I wanted value, not another credit.

 
At 6/11/2012 4:34 PM, Blogger Jet Beagle said...

Peak Trader: "the U.S. is also a comparatively low taxed country."

Well, yes, when we compare the U.S. to Europe and Japan. According to the Heritage Foundation, though, neither U.S. government spending nor U.S. total tax burden is as low as that for the rising Asian economies:

Nation .. tax burden ... govt spend
U.S. ....... 26.9% ........ 38.9%
China ...... 19.0% ........ 20.8%India ...... 18.6% ........ 27.2%
So Korea ... 26.6% ........ 30.0%
Taiwan ..... 12.9% ........ 18.5%
Hong Kong .. 13.0% ........ 18.6%
Singapore .. 14.2% ........ 17.0%

All figures shown are % of GDP

From Heritage Foundation's 2011 Index of Economic Freedom as reported at wikipedia.

 
At 9/06/2012 2:45 PM, Blogger Milan Moravec said...

The public’s UC Berkeley harvests money, taxes, family savings from Californians. Cal. is nationally ranked #1 public university total academic cost (resident) with the Provost and Chancellor goal to ‘charge Californians higher tuition’. UC Berkeley tuition is rising faster than costs at other universities. Cal ranked # 2 in faculty earning potential. Believe it: Harvard College less costly.

University of California negates the promise of equality of opportunity: university access, affordability is farther and farther out of reach. Self-absorbed Chancellor Birgeneau, Provost Breslauer are outspoken for Cal. ‘charging Californians much higher’ tuition.

Birgeneau ($450,000) Breslauer ($306,000) like to blame the politicians, since they stopped giving them their demanded funding. The ‘charge Californians higher tuition’ skyrocketed fees by an average 14% per year from 2006 to 2011-12 academic years. If Chancellor Provost had allowed fees to rise at the same rate of inflation over the past 10 years they would still be in reach of most middle income students. Breslauer Bergeneau increase disparities in higher education and defeat the promise of equality of opportunity..

Additional state tax funding must sunset. The sluggish economy and 10% unemployment devistate family savings. Simply asking for more taxes to fund self-absorbed Cal.senior leadership, old inefficient higher education practices, excessive faculty staff compensation and burdensome bonuses, is not the answer.

UC Berkeley is to maximize access to the widest number of Californians at a reasonable cost. Birgeneau’s Breslauer’s ‘charge Californians higher’ tuition’ denies middle income families the transformative value of Cal.

The California dream: keep it alive and well. Fire (honorably retire) Provost George W Breslauer. Birgeneau resigned.

Opinions? UC Board of Regents marsha.kelman@ucop.edu Calif. State Senators, Assembly members.

 

Post a Comment

Links to this post:

Create a Link

<< Home