I decided to do this after a few discussions about the "Education Bubble" section from my previous blog.
I think it's important that people know the truth behind why college is so expensive, rather than just echo the propaganda that the government wants us to believe. This is another one of those "oh look! this is proof that capitalism doesn't work!" moments for many people, when in fact our college system is anything but capitalist.
The costs of tuition, the devaluation of the degrees, and the massive student debt bubble have all been caused by the government.
Below I will explain why.
Griggs vs. Duke Power Company
How did college tuition get so expensive in the first place? It all started with this Supreme Court Case in 1971.
In 1971, African American employees brought this company to trial on the grounds of discrimination.
The company required that applicants take an IQ test and have a high school diploma. Blacks on average, weren't as likely to have a high school diploma back then. Several black employees charged the company with discrimination, because there were higher paid white employees that didn't have a diploma and/or meet the IQ requirements.
The court ruled in favor of the prosecution.
What does this mean today?
The Supreme Court ruled that an IQ test and the high school diploma requirement were too broad based, and now employers had to administer tests or requirements that were directly calibrated to the job.
This ultimately lead to requiring a college diploma tailored to the specific job. Since other companies worried about facing similar law suits, they started doing the same.
The government dealt with this by making it so that everyone could get a college diploma. Since not everyone could afford it out of pocket, this meant government (tax payer) guaranteed loans for all.
What's wrong with this picture? Isn't it good that everyone gets a college education?
The problem boils down to basic supply and demand on a few levels.
College tuition costs have increased 1,000+% since 1978. Obviously, wages haven't risen accordingly. (There are many reasons for this, I listed a few in my blog about the Federal Reserve. I don't want to go off on too much of a tangent about that here, but I can elaborate on it if anyone asks.)
Why the massive price increase? Two major reasons:
1) Relatively fixed supply (we haven't opened that many more universities since 1978) and sky rocketing demand (going from a small percentage of the population going to college, to nearly everyone) means prices going through the roof. This is a basic law of economics.
2) The colleges also took advantage of the situation, by skimming the government guaranteed loans. They pay out exorbitant salaries, do research for companies in exchange for money and other benefits, install restaurants and other unnecessary structures, etc.
Prospects after college
Since more and more people have college degrees, the degrees have become less valuable. If millions of people have Bachelors degrees in say, Psychology, the degree now becomes less valuable. So now many of them go on to get their Masters and PhD's. They accrue even more debt. Supply and demand again, but this time in reverse:
Increased supply (more students with degrees) + decreased demand (lousy job market)= lower price (lower salaries and fewer job opportunities for those that have the degree)
Stefan Molyneux explained this well on one of his shows. He talked on his show about how we used to have a "pull economy" (businesses were out hunting for qualified workers as they expanded), and today we have a "push economy" (people are getting all sorts of degrees, hoping that it will qualify them for jobs, most of which don't exist.)
 |
| Stefan Molyneux |
For example: Molyneux's father got a PhD in Geology because a particular company was looking for people that had that sort of background. They were willing to pay for his degree, on the grounds that he worked for them for a few years. So he graduated with a job, was debt free, and could leave the company with experience.
Today it's the opposite scenario: Some people are just staying in school longer hoping that when they graduate, they will be qualified for a certain position that will exist in an improved economy.
Again, with this lousy economy, odds are very slim that the position will even exist. As I cited in my other blog, there were as many people graduating from colleges with Psychology degrees in 2009 as there were total Psychology positions overall (filled and unfilled) at the time. I'm sure that a recent update to this would reveal an even grimmer outlook.
Some of my personal problems with the current system:
- Many of the students in college don't belong there, at least right now.
If I had known what I know now, I would have worked awhile and figured things out before deciding to go to culinary school (you can read my other blog about changing careers if you want to know more of my thoughts on this). I personally needed real world experience, more maturity, more street smarts, and a better understanding of my strengths and weaknesses. I think it's wrong to pressure kids into college right away when they aren't serious about learning, and/or don't know what they want to do.
That point above may offend some people, but this is a fact. A lot of kids go because their parents make them, they want to get out of the house, they want to hang out with friends, escape the real world, etc. To many, college is just an excuse to party. Trust me, I (and I'm sure many reading this) have witnessed this many times over.
I always think of David Friedman's story of his home schooled daughter telling him how surprised she was when she saw that many people were happy that class was cancelled. It's very telling. What other situation can you think of where people pay for something, don't receive it, and are happy about it?
- Universities are offering worthless classes that have no real world value. There are classes being offered on:
Lady Gaga, the Simpsons, David Beckham, Beyonce, Surfing, Star Trek, Harry Potter, Elvis Presley, the Far Side (the comics), the "significance of television in our life", the "importance of Obama's presidency" and on and on.
You can look all of these up. They actually exist!!
I know that these classes are just designed for teenagers looking to easily satisfy their credit requirements.
- Other classes that universities offer are more serious and might be interesting to some, but again, have very little real world value. Such as:
Sociology, Gender Studies, Art History, Anthropology, Communications, Philosophy, etc.
I have nothing against people for wanting to learn about this stuff. I read about random stuff all the time.
However, to borrow tens (or hundreds) of thousands of dollars and just expect there to be a job that awaits you for having the degree without doing prior research into the career prospects really doesn't make much sense to me. And it reeks of entitlement mentality.
College is supposed to be an investment. The point of any investment is that you gain more than you put into it.
- Colleges have relaxed their standards immensely
I've seen all sorts of videos of college students being unable to answer questions like:
"What country was America originally a part of?"
"What states surround this one?"
"What are the three branches of government?"
"Who is our current Vice President?"
Yet, these same people can tell you everything about the major athletes, Kim Kardashian, and the Jersey Shore.
Ask most people of my parents' and grandparents' generation about those questions, and they would tell you that all that sort of stuff was common not too long ago. Considering the amount of money we have dumped into education since then, it's pretty pathetic.
And not to get too far off track, but spending on grade school has roughly doubled since the 70's, and the situation is that same. Chinese and Indian kids that pay much less than we do for education, are doing far better on the international tests. I know that on their math tests, they can't even use calculators, except for certain things. I run into people all the time that struggle with basic multiplication and division. We should consider this a national embarrassment.
Clearly, this isn't an issue of finance. It delves into greater cultural issues.
I love education. I want a well educated American population.
I think it's beyond obvious that the current system isn't achieving that.
Why this is unsustainable
The current college loan debt is $1 trillion and rising. It's surpassed both the mortgage and credit card debt.
Most of the graduates are working low paying jobs unrelated to their degrees. There's a video of Peter Schiff a few years back going around Bourbon Street in New Orleans, and asking various waiters, bartenders, security guards, taxi drivers, etc. if they had a college degree. They all did, and they had to take these sort of jobs rather than what they wanted.
 |
| Peter Schiff |
I read recently that 30% of the student loans have defaulted or are in forbearance. This is already starting to unravel.
This debt isn't just something that you can easily bankrupt either. These people that have defaulted will most likely have to live at home, and will have trouble getting an apartment due to a destroyed credit rating. Some employers will also check credit ratings, and not hire people with bad ones out of fear that they will steal. This has greater economic implications.
Housing prices are also being artificially propped up, and that combined with the student loan debt is preventing people from getting mortgages. This is driving up the costs of rent which hurts everyone, especially the poor.
The auto industry is starting to offer car loans to more sub prime borrowers ( borrowers with no credit rating, don't list their income,etc.) We did the same with housing in the 2000's, and we saw it blow up in our faces in 2008.
I agree with Mark Cuban's prediction too, that when more and more of these loans start defaulting, we will see colleges go out of business.
Some solutions that I have
For starters, we need to go back to a system of aptitude tests, apprenticeships, and certifications as we used to have.
It used to be, for example, to become a lawyer you just studied under a lawyer, assisted them, and read about the law. When you felt you were ready you went before the BAR, and they certified you if you were qualified.Once you were certified, you took on low level cases and worked your way up to higher and higher profile cases if you were successful.
Abraham Lincoln before being President, was the top lawyer in the country. And he had one year of formal education total in his entire life. He studied law on his own. The smartest people I find (and many others have said this too) are self taught.
I would also argue that this would enhance upward mobility, something that the government has completely wrecked in the last few decades. (The government needs to eliminate lots of barriers, but that's another story.)
Another strength of this would be that it would work much better than in the 19th century.
The reason for that is simply that the information is far more accessible. Nearly everyone has internet access, and there's always the library. MIT and other colleges also offer online courses for free. The information is out there, if people just take the time to learn it. For the amount of information that is easily available, we could have a highly educated population if people just took the time and made the effort.
Andrew Mellon, Steve Jobs and Bill Gates were college dropouts. John D Rockefeller's college education was a ten week business course. Dave Thomas was a high school dropout. Andrew Carnegie had virtually no formal education. These guys were some of the wealthiest men ever by the end of their lives. You could make it in America under that system.
I also loved David Friedman's idea of completely overhauling the whole university system. His system basically called for more specialist schools and a decentralized structure (like with the Berlitz Business schools). This would be very hard to implement, but if people can start at least beginning to consider this sort of idea, maybe it could one day be achieved.
 |
| David Friedman |
Just a few ideas I had. Let me know what you all think.
Thank you all for reading! I will write more soon!
-STK
