Breakdown of Higher education

[DTEJD1997]

Hey all:

 

I am based here in the great state of Texas.  One of my interests is education.

 

I am starting to come to the conclusion that higher education is breaking down in the USA.  WHY?

 

In a lot of schools, the cost of education has become so great, it almost does not make sense to get it.  I realize there are secondary and tertiary benefits, such as finding a spouse and making friends.  I am discussing this from a purely economic standpoint.

 

Of course, everybody knows that law school is terrible investment, and that private liberal arts colleges are not rewarding...but now it is spreading to "regular" state schools.

 

An example.  A good friend's daughter is going to "Big State University".  This is a well regarded school, with a good reputation.  Probably not a first tier school, but still an excellent choice.  This young lady desires to become a nurse.  She is bright, but not bright enough to secure a scholarship.  She is also reasonably hard working.  I am reasonably confident she will do well in her studies.  At this point in time, nursing is a good profession. 

 

Here is where problems come up.  She & her parents have been saving for school for several years now.  Unfortunately, they waited a bit too long, and simply saved with no investing.  They amount they have set aside will be exhausted before her first semester is up!

 

For you see, "Big State U" with a reasonable allowance for room & board is projected to cost well over $100k for 4 years of her education.  Probably about $115k or $120k, but who knows?  Costs are still going up.

 

To fund her education, they are going to borrow substantially all of the money.  This young lady does not have a credit history, so her parents had to co-sign.  This was required.  In the USA, student loans are not tax deductible, nor are they dischargeable in bankruptcy. 

 

So here is the problem.  This young lady, while receiving a good education, will have $100k+ in debt when she gets out of school.

 

A nurse is a fine job, and it pays relatively well.  The debt this woman will have will be 2-3 times her starting salary.

 

What happens if it takes her 6 months to get a permanent position after graduation?

 

Under the BEST reasonable circumstances, she will have a difficult time in life.  Her parents think the interest rate on the loans will be about 7% or so.  Her monthly interest payments ALONE might be $700 to $800 a month.

 

She will have to live very, very frugally for many years after graduating to get this debt paid down.  She will most likely have to defer buying a new car, buying a house, getting married, or starting a family.

 

I question whether her getting this education makes sense from an economic standpoint.  This is assuming that everything goes well.  She has to graduate, she has to get a job quickly.  She has to stay employed.  If she runs into any extended length of unemployment she is in serious, life altering trouble.

 

This is also for a degree in which there is ready opportunity for employment.  What of Journalism, English, History, Art majors?

 

I don't see how this ends well.  What of students who are going to school 5-6-7 years from now?  Are they going to owe $200-$250k when they graduate?

 

Any thoughts on this?

[LC]

I have no idea how it will play out...perhaps hyperinflation will occur and that will take care of it...but I do think it's a pretty disgusting system...credit risk has been removed from the loan equation, and schools that have no business charging 50k per year can do so. Essentially it's a government approved LBO of America's future...with no option for a bankruptcy reorg if it fails.

[DTEJD1997]

LC:

 

You have a very interesting, very good way of apprising this situation...

 

In my instance, the young folks I know are going to state schools and small, lower priced private schools.  I have heard stories that there are small, liberal arts schools that are indeed charging $50k a year that are primarily in the North East.

 

For example Wellesly College website projects that the cost to attend for 2013-2014 will be approximately $57k.

 

This amount makes me giggle.  It is so beyond the pale it boggles the mind.  I suppose if you come from an exceedingly wealthy family, it is OK.  I just don't see how this makes economic sense under any reasonable circumstances.

 

$228K at a MINIMUM for an undergraduate degree?  You will be paying well over $1,200 a month just in interest!

 

If I am not mistaken, student loans are now variable rate, and could rise in the future.  What if interest rates go to 10%?

 

There is something called "Income Based Repayment" in which the government covers your payment if your income falls below a certain threshold.  The problem with this, is that it lasts for 20 years.  So you will be in your mid 40's before your student loans are taken care of.  How are you going to save for your children's education?  Your house? your retirement?

 

Something's gonna blow out...

[boilermaker75]

http://www.wishtv.com/dpp/news/local/north_central/tuition-freeze-official-at-purdue1369319934259

[giofranchi]

Hey all:

 

I am based here in the great state of Texas.  One of my interests is education.

 

I am starting to come to the conclusion that higher education is breaking down in the USA.  WHY?

 

In a lot of schools, the cost of education has become so great, it almost does not make sense to get it.  I realize there are secondary and tertiary benefits, such as finding a spouse and making friends.  I am discussing this from a purely economic standpoint.

 

Of course, everybody knows that law school is terrible investment, and that private liberal arts colleges are not rewarding...but now it is spreading to "regular" state schools.

 

An example.  A good friend's daughter is going to "Big State University".  This is a well regarded school, with a good reputation.  Probably not a first tier school, but still an excellent choice.  This young lady desires to become a nurse.  She is bright, but not bright enough to secure a scholarship.  She is also reasonably hard working.  I am reasonably confident she will do well in her studies.  At this point in time, nursing is a good profession. 

 

Here is where problems come up.  She & her parents have been saving for school for several years now.  Unfortunately, they waited a bit too long, and simply saved with no investing.  They amount they have set aside will be exhausted before her first semester is up!

 

For you see, "Big State U" with a reasonable allowance for room & board is projected to cost well over $100k for 4 years of her education.  Probably about $115k or $120k, but who knows?  Costs are still going up.

 

To fund her education, they are going to borrow substantially all of the money.  This young lady does not have a credit history, so her parents had to co-sign.  This was required.  In the USA, student loans are not tax deductible, nor are they dischargeable in bankruptcy. 

 

So here is the problem.  This young lady, while receiving a good education, will have $100k+ in debt when she gets out of school.

 

A nurse is a fine job, and it pays relatively well.  The debt this woman will have will be 2-3 times her starting salary.

 

What happens if it takes her 6 months to get a permanent position after graduation?

 

Under the BEST reasonable circumstances, she will have a difficult time in life.  Her parents think the interest rate on the loans will be about 7% or so.  Her monthly interest payments ALONE might be $700 to $800 a month.

 

She will have to live very, very frugally for many years after graduating to get this debt paid down.  She will most likely have to defer buying a new car, buying a house, getting married, or starting a family.

 

I question whether her getting this education makes sense from an economic standpoint.  This is assuming that everything goes well.  She has to graduate, she has to get a job quickly.  She has to stay employed.  If she runs into any extended length of unemployment she is in serious, life altering trouble.

 

This is also for a degree in which there is ready opportunity for employment.  What of Journalism, English, History, Art majors?

 

I don't see how this ends well.  What of students who are going to school 5-6-7 years from now?  Are they going to owe $200-$250k when they graduate?

 

Any thoughts on this?

 

Hi,

unfortunately, I am not from the big state of Texas… I am just from the small state of Italy… Yet, I can think of a solution that could be fine in Texas too: force the costs of higher education down. It will be possible to do it dramatically, and still retain profitability. Not only profitability, but also a good return on investment.

 

My firm manages the operations of a master school inside the Politecnico of Milan. With financial aid from Italcementi SpA, we can charge 6,000 Euros for a professional master in engineering which lasts 12 months. This year I have insisted on and personally supervised the offering of online courses, giving people the opportunity to achieve the master diploma for almost half the price: 3,500 Euros. The enrolments have doubled. They are now the cheapest professional masters, offered by a university, that I know of. And, believe me, they are useful.

 

People on this board hear Mr. Buffett suggest to read 500 pages a day, and think: sure, I will do that! And I will enjoy it greatly! And people on this board will surely build up a great amount of knowledge and wealth. But education is not for the smart and the fast, education should be thought out to help those who smart and fast are not. The simple truth is the great majority of people out there are different from the people who regularly meet on this board: they won’t read 500 pages a day, they won’t even read 50 pages a day, I even doubt there are many people out there who read 5 useful pages a day… unless they are somehow forced to do so. And that’s where the usefulness of a higher education and of obtaining a degree still lies: to give people a schedule and to compel them to follow it in order to build at least some knowledge.

 

Take for instance our masters: we have architects who have never studied engineering before, but acknowledge it would be very useful for their future career. And yet, they will never study engineering, if left by themselves! We have engineers who have never studied economics before, but acknowledge it would be very useful for their future career. And yet, they will never study economics, if left by themselves! (The course on value investing I teach is worth the ticket alone! ;D ;D ;D)

When they finally meet companies to get employed, those companies very often let us know there is a real gap between those who have followed our professional masters, and those who instead have not. And that they are truly happy to offer a good job to our students.

 

So, imo, the solution is not to do without higher education, but just to bring its costs way down. If we somehow managed to do it in the small state of Italy, you surely could come out with some very effective ideas in the great state of Texas too! :)

 

giofranchi

[obtuse_investor]

You are right-- this can't go on. I am thinking of some ways that this problem will end up resolving itself over next decade or two.

 

1. Kids graduating college just can't take the burden (especially with interest rates rise) and simply default. They don't have much to loose. Or they leave the country, taking the talent with them. The lender is left holding the bag.

 

2. Some kids take the austerity path and slave through a decade or so, slowly getting out of the debt hole.

 

3. Enter the MOOCS (https://en.wikipedia.org/wiki/Massive_open_online_course). MOOCS gain a lot of credibility and evolve into a form that can take on the established universities. Universities devolve into just another credential rewarding authorities. Also, universities revert back to what they are _really_ about. They are about advancing and preserving human knowledge. They were never meant to help students get a job.

 

Another advantage from the MOOCs will be democratization of knowledge, which will be a great boon to the planet as a whole. It would spark up billions of current preoccupied brains. Not to mention, this will bring down the cost significantly.

 

 

[ExpectedValue]

I don't think the cost of education is as much as you make it out to be, at least in the state of Texas. Your real issue is the cost of living.

 

For reference, I graduated from UT in 2009, so I've got some recent experience with this (and I used full loans during my time at UT).

 

Tuition at UT hits an upper limit of around $10k a year. The remaining $15k of costs you cite (to get to $100k for a year) come from mostly room & board and other things related to costs of living. Most students do not incur the entire $100k debt burden on their own. In most cases, for students from middle class families, the parents will use federal parent loans to cover the costs associated with room & board, which will might be $13-16k a year. The student's loans will usually cover tuition and books, so call it $44k for the entire 4 years. Contrast that with a school like Baylor, where tuition is likely to be $30k a year or $120k the entire 4 years.

 

--> Note that in Texas, there are programs like the Be-On-Time loan through the state, which should be applied for for financial aid. This is a really good program because it will cover at least some of tuition in the form of a loan (0% interest, fixed) that is converted to a grant if you graduate within 4 years.

 

If the student graduates with $44k in debt I don't think it's too bad. The only time I think you end up with cases were the student is taking on $100k in debt is if their parents have some kind of poor credit or are simply unwilling to help shoulder the burden by taking on parent loans for costs of living. In this specific case, the student really ought to make different arrangements. This might include going to a commuter school, using community college to do their first 2 years of college, working while going to college, something like that to reduce the costs.

 

The costs of living expenses are a highly variable aspect of all of this. Even though the school might forecast $15k a year on this, it can be dramatically reduced, depending on how frugally the student wants to live during college. For instance, after a year in the dorms at UT I opted to go to an apartment with friends. My dorm's monthly fee was $850 for rent and a meal plan. Living with friends shifted that to $400 rent and $200 in food, so a savings of $250 per month. I was still within walkable distance to campus too.

[stahleyp]

She can always live at home and/or go to community college for 2 years and then transfer to get the 4 year degree.

[Packer16]

If she wants to be a RN there must be alternative ways for her to obtain the RN through community college and other programs?  Can she first get a PA certificate then go out an do the job for a few years to see if this is what she wants to do before spending $100k on something she may not end up using.  If she really likes it then she can get an RN with practical experience where she can really learn alot.  Similar to MBA with work experience versus not.  These kids are going to live to 80+ the one thing they have in abundance is time so why not use it to their advantage?

 

I am in a similar experience with one of my kids.  He was getting ready to do the college thing and me and wife said wait a minute.  We all know (including him) that he needs to go to college but at this age he is not excited about any if the classes he has takes.  So he is going to work and take a few courses at the local CC until he has a motivation and focus. 

 

I think a big part of the issue is some kids do not have focus until they are in their early 20s so why spend tons of money until they are ready?  In other words, you are spending money to send an immature kid to a school and what do you get (the college experience).  For some kids college out of high is the correct way to go but for most it is not.  The resulting high debt with no way to pay it off is symptom of a problem that many have been told and are willfully ignoring (like buying homes in the housing boom).  If this plays out like that what you will see is plummeting enrollment with some colleges going bankrupt or cutting back massively and cost declining.  I think you will see less tolerance for party schools and more focus on return on the high investment (which is the way it should be).  The marketplace is forcing folks to be rationale with what was a "free" good in the past. 

 

One area I think that does need to be changed is college loans.  The loan amounts should be given based upon the ability to pay off the loans.  If the gov't wants to give need based grants that is one thing but giving loans to folks who have a low probability of paying the debt back is dumb and adds stress to situation that should not exist in the first place.

 

Packer

[Guest deepValue]

Don't worry, Rick Perry is busy turning UT and A&M into diploma mills. The cost-value relationship may stay the same, but both will come down substantially if Bill Powers gets kicked out.

 

College does not make since for people who simply want to make a good "investment." If you want value for your money, go to a vocational school. I did not have to worry about paying for my education, so spending four years partying and learning things of questionable economic value made sense for me. But it doesn't really make sense for most people.

[ERICOPOLY]

She can always live at home and/or go to community college for 2 years and then transfer to get the 4 year degree.

 

I did 2 years at Foothill College (community college) and then 2 years at UCLA.

 

It currently costs about $1,200 per year for tuition at Foothill College vs $12,700 per year for UCLA.

 

The "crisis" is greatly exaggerated.  The total tuition costs for a 4 year degree from UCLA are less than $30,000.

[SharperDingaan]

Many 1st year college kids should not be there. Most are there as an alternative to boarding school, or 'gap' year travel; because mommy/daddy will not cut the apron strings, and going to college is viewed as an acceptable interim 'parking lot'. Most kids will be living at home, mom will do all the cleaning/cooking/etc, & dad will happily pay the bill to keep mom happy.

 

In many cultures the real reason for sending their kids is to attract a husband while the daughters are as physically attractive as possible. It is a family effort, and the economic utility of the education is largely secondary. Having the degree is important, not what it is.   

 

Unrealistic expectations abound. Decide what you want to do with yourself by your early twenties?, get  educated up over the next decade (bachelors, masters, professional designation)?, & then do very little other than 'maintenance' over the next 30-40 years? Where you went, & who you know, being all important ? Crock of Sh1te.

 

A sheepskin is just a technical certification. 5-7 years on it is how you have applied your training; the training itself may be largely obsolete, as the technology has changed or become commonplace (you can now simply read how to do it on the internet). You do Harvard because the 'contacts' are valuable, long after the technical material you learnt became obsolete; and Harvard charges accordingly.

 

You have no idea how employable you will be 20 years out, or even if you will be employable. The function may be routinely off-shored (accounting, IT), contracted for versus made-in-house, not pay enough for your needs, or you might even dislike it intensely. It may well also be that you will actually need to go back to school in your 40's/50's to retrain for something else, and that it will be commonplace.

 

In the modern age, you either get your degree on-line, or via a co-op program. You work in your field a couple of years, & then go back to a specialized college/university in the area you love. You are mature, experienced, & your employer will usually pick up a good chunk of the freight.

 

The stigma to it is purely counter-culture ....

a) This is cutting the apron strings. Mom has no purpose until there are grand-kids, & not happy.

b) Daughters can no longer be married off just on looks. Now they need brains too.

c) Independent kids are harder to control. Pressure is less effective if they don't need your $.

d) Envy. Mom/dad did not have the strength to buck the system, & you successfully have.

e) Low cost, effective, competition is definitely not in the Harvard business plan.

 

What matters is what you the student decide. You either cut the apron strings and live your own life, or forever suffer indecision. Scars, dents and bruises are just part of life ;).

 

SD

 

 

 

[boilermaker75]

I am a professor in an engineering department at a major public research university. When I look at what a typical faculty member spends his/her time on in my department it is 80% research and 20% teaching. In my department 90% of the faculty salary funds come from the university (tuition, state appropriations, and gifts) and 10% from external research contracts. So at research universities a large portion of the undergraduate tuition is going to support the research efforts of the faculty.

 

There has also been a major shift in the demographics to provide additional funds, in-part because state appropriations have declined. 30-40% of the undergraduate students in my department are international, the rest split between in-state and out-of-state students. The international students not only pay out-of-state tuition, but an additional international fee. When I was an undergraduate at a major public research university I had no fellow international students and over 50% of my fellow students were in-state.

 

[ERICOPOLY]

30-40% of the undergraduate students in my department are international, the rest split between in-state and out-of-state students. The international students not only pay out-of-state tuition, but an additional international fee. When I was an undergraduate at a major public research university I had no fellow international students and over 50% of my fellow students were in-state.

 

I have a brother-in-law who is an administrator at a major private university (everyone knows the name of this university).  He tells me in the 1980s this university made a major push to bring in international students under the cover of "diversity".  His view is that the "diversity" angle is completely BS spin, and that the only reason for the drive to bring in international students is a revenue grab.

 

Why take a US student when the dollars are so much greater for bringing in an international student that adds "diversity"?

 

This leaves fewer spots at the table for US students -- even if they can pay the tuition, will they be more desirable to the admissions officer than the international student who brings in more money?

 

[boilermaker75]

Universities have been in intense competition on both the athletic and academic side. The salaries being paid to some football and basketball coaches is ridiculous, up to $5 million per year. The argument for the high salaries is the resulting ticket receipts, the extra donations, and the extra applications, which increase rankings through the component of selectivity. But this is probably only true at the top 10-20 athletic programs. Most athletic programs are not self-sufficient and require infusion of cash from the academic side. The only university that made the rational decision regarding college athletic is the University of Chicago, a founding member of the Big Ten and once the top football university in the country. They dropped out of big time athletics and it does not to seem to have hurt as they are one of the top universities in the world.

 

There has been a similar competition on the academic side for high rankings with the salaries paid to some professors. (I should not be complaining because I am a beneficiary of this.) As an example, one of the inputs in these rankings is often how many National Academy members are on the faculty. So universities, in order to attract a National Academy member on the faculty, will pay $250k salary for the nine-month academic year (note this is the number reported as salary but usually does not include additional summer support, extra pay from their chair endowment, etc.) , a start-up package of several million dollars to set up a lab and hire research assistants, and often with a reduced teaching load. So an additional faculty member needs to be hired to cover the teaching.

 

[Green King]

looks like they are playing the wrong game.

[shalab]

The problem is administrative staff

 

http://online.wsj.com/article/SB10001424127887323316804578161490716042814.html

 

 

[boilermaker75]

The problem is administrative staff

 

http://online.wsj.com/article/SB10001424127887323316804578161490716042814.html

 

That is definitely another component. Although some of the increase in administration is the result of additional federal  requirements.

 

I don't have a WSJ subscription so I could not access the article. Here is one, which is probably similar that anyone can access at Bloomberg.

 

http://www.bloomberg.com/news/2012-11-14/bureaucrats-paid-250-000-feed-outcry-over-college-costs.html

[shalab]

boiler -the article you attached is in the same spirit. The addition of pensions/health benefits makes it more expensive.

[twacowfca]

Hey all:

 

I am based here in the great state of Texas.  One of my interests is education.

 

I am starting to come to the conclusion that higher education is breaking down in the USA.  WHY?

 

In a lot of schools, the cost of education has become so great, it almost does not make sense to get it.  I realize there are secondary and tertiary benefits, such as finding a spouse and making friends.  I am discussing this from a purely economic standpoint.

 

Of course, everybody knows that law school is terrible investment, and that private liberal arts colleges are not rewarding...but now it is spreading to "regular" state schools.

 

An example.  A good friend's daughter is going to "Big State University".  This is a well regarded school, with a good reputation.  Probably not a first tier school, but still an excellent choice.  This young lady desires to become a nurse.  She is bright, but not bright enough to secure a scholarship.  She is also reasonably hard working.  I am reasonably confident she will do well in her studies.  At this point in time, nursing is a good profession. 

 

Here is where problems come up.  She & her parents have been saving for school for several years now.  Unfortunately, they waited a bit too long, and simply saved with no investing.  They amount they have set aside will be exhausted before her first semester is up!

 

For you see, "Big State U" with a reasonable allowance for room & board is projected to cost well over $100k for 4 years of her education.  Probably about $115k or $120k, but who knows?  Costs are still going up.

 

To fund her education, they are going to borrow substantially all of the money.  This young lady does not have a credit history, so her parents had to co-sign.  This was required.  In the USA, student loans are not tax deductible, nor are they dischargeable in bankruptcy. 

 

So here is the problem.  This young lady, while receiving a good education, will have $100k+ in debt when she gets out of school.

 

A nurse is a fine job, and it pays relatively well.  The debt this woman will have will be 2-3 times her starting salary.

 

What happens if it takes her 6 months to get a permanent position after graduation?

 

Under the BEST reasonable circumstances, she will have a difficult time in life.  Her parents think the interest rate on the loans will be about 7% or so.  Her monthly interest payments ALONE might be $700 to $800 a month.

 

She will have to live very, very frugally for many years after graduating to get this debt paid down.  She will most likely have to defer buying a new car, buying a house, getting married, or starting a family.

 

I question whether her getting this education makes sense from an economic standpoint.  This is assuming that everything goes well.  She has to graduate, she has to get a job quickly.  She has to stay employed.  If she runs into any extended length of unemployment she is in serious, life altering trouble.

 

This is also for a degree in which there is ready opportunity for employment.  What of Journalism, English, History, Art majors?

 

I don't see how this ends well.  What of students who are going to school 5-6-7 years from now?  Are they going to owe $200-$250k when they graduate?

 

Any thoughts on this?

 

Good post.

 

The main problem with schooling is that it is all too infrequently truly educational.  Our government in the US has the bad habit of spotting a good thing and then ruining it by throwing too much money at it.  Someone recently published a statistic that recent college graduates with BA degrees earn about $20,000 less on average in their first jobs than recent graduates of trade schools.

 

The emphasis on schooling in our culture prolongs childhood status beyond the late teenage years, often into the 30's. Household formation is delayed and this sad situation is exacerbated by tuition  debts, leading to a birth dearth among young adults who own a piece of paper to prove that they can pass often dumbed down tests by regurgitating or cut and pasting pat answers.

 

These comments are made by one who grew up in an extended family with many teachers where true education was prized.  These remarks are not intended to disparage the best aspects of modern education involving motivated students and dedicated teachers.

 

However, the best model for true education may be facilitating the Zen Master idea, as Giofranchi is doing, that when the student is ready, the teacher will appear.

 

 

[giofranchi]

However, the best model for true education may be facilitating the Zen Master idea, as Giofranchi is doing, that when the student is ready, the teacher will appear.

 

twacowfca, too kind of you! Thank you! :)

 

Cheers!

 

giofranchi

[One World Trader]

As a recent graduate, I totally agree with Giofranchi. As much as we want to believe that higher education teaches us, we have to also recognize that it teaches us, more like forces us, to teach ourselves a great deal. The habit and skill of teaching ourselves is gained with whatever the subject matter is! The more one is willing to learn, the more one is taught!

 

 

"Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria" - Sir John Templeton

[mcliu]

My university experience has been going to the first class, getting a course syllabus, and then spending the rest of the course at home reading textbooks and going to exams once in a while. Classes have added minimal value.

 

In this day and age, if you really want to learn, all the resources are easily available online/offline. Wikipedia should save the day. The only thing missing, as most of you mentioned, is the willingness to learn.

[JEast]

Classes have added minimal value.

 

Maybe to you personally, but not to the hiring manager.  I have thought for sometime that online classes were somewhat suspect.  I now have examples.  One example is of a local lady in my area that makes $200k a year - cash - by taking tests for people.  Her biggest clients are taking tests for would be nurses!!

 

True that educational resources are available, just like any resource.  The question has always been how you use that resource, is it not?

 

Cheers

JEast

[mcliu]

Well society seem to value credentials over knowledge.

 

From a strictly knowledge perspective, there's really no need to pay over 5 figures a year to learn in a classroom, when information is broadly available over the internet. Most professors (there are some very good ones that enhance your understanding, but those are few are far in between) merely regurgitate information anyways.