All About College Debt

“Had the people who started Facebook decided to stay at Harvard, they would not have been able to build the company, and by the time they graduated in 2006, that window probably would have come and gone.” – Peter Thiel, co-founder of PayPal.

Ever since I can remember, I was inculcated with the belief that in order to truly succeed in America, you have to get at least a 4 year degree from a prestigious university; even if it means taking on a ton of debt that you may work your entire adult life to pay off.

I also came to believe that if you really want to stay on the top of the heap, then you need to take on even more debt and get a graduate degree, hence my own post-graduate alphabet soup, including law school.

In high schools across the nation, statistics are still being trotted out by guidance counselors to “prove” that young people have no chance of success without that high-priced sheepskin, or that, if they somehow manage to land a job without one, they will never get promoted and will be stuck in bottom-of-the-ladder limbo land for all eternity.

Twenty years ago, the idea that “you have to go to college to make good money” might have been more truth than myth.

Now, though,, the ever-escalating cost of tuition, fees, and books at America’s universities means that post financial collapse parents might want to take another, perhaps more jaundiced view of the entire higher education system even as the old school narrative continues to be shoved down their throats by university marketing departments.

As a financial educator, I have had numerous concerns about my own clients taking on the costly burdens associated with financing their child’s college education. Truthfully, it makes me more than a bit queasy when I see clients raiding their savings and retirement accounts to send Junior to a fancy private school.

This is especially true in a financial system in flux, where, for the first time ever, over 50% of the unemployed and underemployed have college degrees. To make matters worse, there is a bubble on the horizon; large, paper-thin, and waiting for one tiny pin prick to explode it.

This bubble comes in the form of easy-to-obtain student loans that many are finding are not so easy to pay back. A 2012 article on CNN’s website reported that, at a time of record high unemployment for college grads, student indebtedness had reached an average of nearly $27.000.

“… Two-thirds of the class of 2011 held student loans upon graduation, and the average borrower owed $26,600, according to a report from the Institute for College Access & Success’ Project on Student Debt. That’s up 5% from 2010 and is the highest level of debt in the seven years the report has been published.” (1)

Beyond the expense of college there is also the thornier issue of whether most college kids are learning anything of real value that can be applied to the new economy. The education cartel, always in need of fresh blood and fresh wallets, has systematically smeared those who work in the trades as “blue-collar,” or “uneducated,” and thus somehow inferior to those with Ivy League degrees.

Matthew B. Crawford, a fellow at the Institute for Advanced Studies in Culture at the University of Virginia, and author of the bestseller, Shop Class as Soulcraft: An Inquiry into the Value of Work, has posited that the degradation of manual labor and the rise of so-called knowledge-based jobs was wrongheaded and that the future will belong to those who actually know how to do things such as build custom furniture, repair a car, or install heating and air conditioning units.

Says Crawford:

“While manufacturing jobs have certainly left our shores to a disturbing degree, the manual trades have not. If you need a deck built, or your car fixed, the Chinese are of no help. Because they are in China. And in fact there are reported labor shortages in both construction and auto repair. Yet the trades and manufacturing are lumped together in the mind of the pundit class as “blue collar,” and their requiem is intoned. Even so, the Wall Street Journal recently wondered whether “skilled [manual] labor is becoming one of the few sure paths to a good living.”

Crawford also observes that “If the goal is to earn a living, then, maybe it isn’t really true that 18-year-olds need to be imparted with a sense of panic about getting into college (though they certainly need to learn). Some people are hustled off to college, then to the cubicle, against their own inclinations and natural bents, when they would rather be learning to build things or fix things… ” (2)

The Cartelization of Education

We need only look, says bestselling author and trend forecaster Charles Hugh Smith, to the advent of the higher education cartel to see the reason for our obstinate addiction to the “old school” higher education system and the instance that insistence that everyone needs to go to college. There is a lot of money to be made, says Smith, and an elite cadre of cartel bosses who stand to profit by promoting that myth.

“Why does the old style system still persist even though it is already demonstrably inferior? In addition to the financial disincentives, there is another reason: the current system retains a monopoly on assessing student learning and granting credit for demonstrated accomplishment. The schools are able to do this because they have arranged a monopoly on accreditation. This is ultimately a grant of state power.

As a result, modern colleges and universities have collectively become a rent-seeking cartel, an alliance of nominally competitive institutions that maintains a highly profitable monopoly of accreditation. To grasp the power of the cartel, consider a typical Physics I course even at MIT is almost entirely based on Newtonian mechanics, and the subject matter is entirely in the public domain. Only a cartel could arrange to charge $1,500 and more per student for tuition and texts, in the face of far lower cost and superior quality materials, for subject matter that is no more recent than the 19th Century.” (3)

Jeffrey Tucker, CEO of the startup Linerty.me and publisher at Laissez Faire Books, agrees with Smith and maintains that cartelization has ensured that a return on investment in higher education is far from a sure thing for most students and their parents.

… even if the teen does everything right-every test trained for and taken five times, every activity listed on the portfolio, a high GPA, top of the class, early applications and admissions-you are not home free. You are going to spend six figures, but there is also a high opportunity cost: you remove your child from remunerative work for four years, and this is after four years of no employment in high school. That means both lost income and lost job experience. College is costly in every way. (4)

Citing what economists refer to as “inelastic demand,” Tucker writes that the cartel is exceptionally aware of, and deliberately contributes to, parental unwillingness to forego a four-year college education for their children, even if it means putting themselves in the poor house.

“Parents would gladly step in front of a bus to save their children, so facing debt and financial loss for a few years seems just part of parental obligation. This is why, in economic terms, the demand for college is relatively inelastic: Parents keep paying and paying no matter how bad it gets,” he argues. (4)

I see a lot of angst concerning this issue among my own clients. As the parent of a high school student, I understand it. The idea of college “no mater what” is so ingrained in our thinking that when a child tells us they are considering postponing college or even not going at all, parents tend to panic.

However, the stakes are higher than ever before and the potential for damage to the parents’ own financial well-being is enormous, not to mention the contribution education debt makes to our national economic malaise.

Parents and students need to ask themselves honest questions about the value of a traditional four-year degree, what the potential return on that investment will be, and whether or not there are viable alternatives.

Student Debt and Wall Street

As of this writing, current student debt stands at around $1.2 trillion dollars, more than the entire gross domestic products of some nations, including Canada.

After what we’ve discussed in previous chapters, it should come as no shock to you that many banks have turned these college loan obligations into (surprise, surprise) “investments” and are busy shopping them on Wall Street as subprime debt.

The market for these educational loans is relatively small compared to the market for home loans, so I doubt that it will be as massive a bubble as we had during the housing market.

However, if the Fed continues to hold interest rates down, investors might be desperate enough to snap more of them up. Then we could have another potential economy-damaging event on our hands.

Teresa’s Takeaway: Alternatives to Traditional 4-Year Degrees

Many of my clients are able to fund their kids’ education without incurring any debt due to their diligence in creating and maintaining their own private finance system using specially-designed insurance policies. In fact, I set up many of these policies that have as their express purpose the funding of a university education.

That being said, however, I never think it is a good idea to spend money simply because you have it available.

If you are a young person considering college or graduate school, do your research and question your motivations. Before saddling yourself or your parents or grandparents with a lot of debt- consider alternatives to four-year colleges, such as online degrees, community colleges, and trade schools. Ask yourself if what you really love and want to do

Find out if what you want to do really does require a college degree in the first place. Amazingly there are lots of high-paying jobs that don’t require 4-year degrees.

Look into local and community colleges, where your expenses are often a fraction of what private universities charge.

If you’re a recent high school graduate, take a year to “cool off,” work, save and travel. Gain a better understanding of yourself, your strengths and weaknesses. Learn what you have to offer to the world. Contribute to the global conversation in a meaningful way as a volunteer.

A bright spot in all of this is the fact that there are some great alternatives to the traditional sheepskin; alternatives that might actually broaden a students’ understanding of the world and give them skills that are needed in the new economy without bankrupting mom and dad.

Bestselling author James Altucher, a longtime proponent of re-thinking college, provides a few real alternatives to college.

Altucher suggests that some college prospects might be better off taking their college savings and starting a business.

He also suggests traveling to a country such as India and immersing your self in a culture completely different than your own.

You will learn what poverty is. You will learn the value of how to stretch a dollar. You will often be in situations where you need to learn how to survive despite the odds being against you. If you’re going to throw up you might as well do it from dysentery than from drinking too much at a frat party, “he writes. (5)

For even more ideas of what to do instead of college, check the resource section of this book for a link to Altucher’s report “40 Alternatives to College.”