Penny Wise, Pound Foolish

Tuesday 23 August 2011 - Filed under Uncategorized

The Grey Lady on the college tuition bubble and the increasingly high costs of a college education:

Why [are tuition costs becoming a burden]? Because most institutions outsource the management of their plans to private companies, which have to make a profit. They charge universities a fee for processing credit card payments, and the schools pass those costs on to students and families, amounting to over a thousand dollars or more per year in some cases.

For example, some of the top liberal arts colleges in America, including Williams, Amherst and Wellesley, use a company called Tuition Management Services, where the fee is 2.99 percent for each payment made by credit card. At Amherst, where tuition, room and board cost $53,370, that’s an extra $1,595 if all payments are made by credit card. Even at Swarthmore, which runs its plan in-house, the fee is 2.6 percent, or an extra $1,330 a year.

This hits the middle and working classes particularly hard. Struggling families often face rough patches during which they don’t have enough cash on hand to make such payments, and so have to go to their credit cards — and pay the fees. Meanwhile, wealthy families that can afford to simply write a check upfront each month avoid both credit card fees and interest payments.

So let me get this straight.

The $53,370¹ room and board doesn’t “hit the middle and working classes particularly hard” but the 3% credit card fee associated with paying tuition via plastic does? Can we cease in acting as if charging a 3% fee on top of credit card transactions is somehow unique to paying for tuition, and that it’s that fee which is punitive rather than the $50k+ tuition?

Apparently your college education hasn’t done its job if you can’t understand that it’s the eating out that’s the problem, not the tip you leave the waiter. There’s an old saying about that kind of warped financial thinking: Penny wise, pound foolish.²

But what would a NYT article be without placing the blame for a financial problem on everything but the demand for it. The higher education bubble can’t stem from the fact that more people are getting college degrees and competing for fewer jobs, many of which don’t actually require a college education. It’s rich people, or basic banking procedures, or ANYTHING to place the blame anywhere other than where it belongs.

Monthly payment plans, and prepayment plans, thus pack a double punch. On one hand, they make it more expensive for struggling families to send their children to college. On the other hand, they make it cheaper for wealthy families to do so.

Basic math anyone? The ability to pay for college in smaller payments, over longer periods of time is somehow a financial burden for lower income families? Yet wealthy families somehow benefit? Really? How the fuck did you editor read this and say “yeah, that’s good”?

So you’re going to blame the credit card companies for charging the fees that they charge for every transaction (not just college tuition) and call them punitive, the colleges themselves for offering a multitude of ways to pay tuition, (including up-front payment, extended payment plans, credit cards, tuition lock-in plans – not to mention grants, loans, and scholarships), as well as other payment schedules designed to meet the needs of families of varying income levels in your pursuit to address the burdens many middle class and low income families have in paying college associated costs, yet you’re just going to completely ignore the metric shitloads of free and very cheap cash that has been injected in to the higher education marketplace by government over the last 2 decades which directly created the circumstances for a drastic rise in college associated costs? In a recent article on the higher education bust, Doug French of the Mises Economics Blog writes,

Like all booms, higher education has been fueled by credit. In June of last year, total student-loan debt exceeded total credit-card debt outstanding for the first time, totaling more than $900 billion.

All of this credit has pushed the average cost of tuition up 440 percent in the last 25 years, more than four times the rate of inflation. But while the factors of production on campus have been bid up, just as they are in any other asset boom, the return on investment is a bust. In 1992, there were 5.1 million mal-employed college graduates. By 2008, the number was 17 million.

Not only are the returns poor, but the quality of the product is poor (as in the case of new-construction quality in the housing boom). According to the authors of Academically Adrift: Limited Learning on College Campuses, 45 percent of students make no gains in their critical reasoning and thinking skills, as well as writing ability, after two years in college. More than one out of three college seniors were no better at writing and thinking than they were when they first arrived at their campuses.

[. . .]

Similar to the government push for increased homeownership, government is foursquare behind having more young people attend universities. One of President Obama’s top goals is to increase the number of Americans attending college.

But why? “Among the members of the class of 2010, just 56 percent had held at least one job by this spring, when the survey was conducted,” reported the Times recently. “That compares with 90 percent of graduates from the classes of 2006 and 2007.”

And because they can’t find jobs, 85 percent of college grads move back in with their parents after they graduate. According to a poll by Twentysomething Inc., a marketing and research firm based in Philadelphia, that rate has steadily risen from 67 percent in 2006.

And those crazy libertarians over at the Mises Institute aren’t the only ones who see the inevitable collapse of the education market. Back in April, Forbes also noted the same cash injection problem in the college education market, only, due to virtually every student loan, including loans made by private institutions, being fully backed by the federal government (a la the housing market), more squarely, and correctly, points the finger at government distortion in the education marketplace:

Higher education is in a bubble situation—its price has risen sharply, fueled by cheap federal loan and grant money (sound familiar?) while the return on the investment has fallen. More and more college students are either not graduating or are taking jobs that do not require college-level skills and often pay mediocre amounts. In investor parlance, the price-earnings ratio on investing in higher education seems to be rising sharply. Where markets operate without external interference, there would be a correction. Sensing lower returns on their investment, the demand for higher education would fall and, with that, enrollments. Declining demand would lead to falling tuition fees, etc. Colleges would layoff lots of workers.

Yet market forces in this sector are grossly distorted by governmental and, to a much smaller extent, private philanthropic payments. Subsidies are propping up a situation that is unsustainable in the long run, but can be maintained at least temporarily without critically altering enrollment and pricing situations. Thus the way and timing of the bursting of the bubble is different than say, the housing or equity markets, but the bursting will occur nonetheless.

Economics 101: when you create demand for a product or service via an injection of cheap capital in to the marketplace (and trying to pretend that education isn’t a product just like any other is trying to argue that ice isn’t water), costs rise. This is not some mystical principle, or the banks, or a conspiracy on the part of rich people to keep those less fortunate from receiving a college education. It’s basic economics. And when educational institutions start to face life after tons of free cash fueling their growth and sustenance (by definition a bubble cannot last forever – see market, housing), as well as the ever-rising costs that educational institutions have incurred, they will suffer. They have become accustomed to operating with oceans of cash, and currently rely on it. Without it, they’re gonna be in trouble.

I’ve known for a while that The New York Times is nothing but a shill for the politically connected left with tired “TEH RITCH ARE TEH EEEEEEEEEEEEEEVUL” rants. If this opinion piece which is completely lacking in anything resembling basic logic isn’t proof to anyone with a brain, then I don’t know what to tell you.

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1. My college and graduate education COMBINED didn’t cost $53k (much less for 1 academic year). And I’m supposed to believe that those who go to these expensive, elite schools are somehow smarter than I am (especially when it’s becoming crystal clear that the education provided by colleges are increasingly less able to cover the expenses associated with paying for college.

2. Can’t you just see the irony dripping?

2011-08-23  »  madlibertarianguy