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escrito por nada

escrito por nada
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I've lived a good life studying people and gathering wool. My apologies to the Spanish speakers among us. My screen name might have better been "escrito para nada". Anyway you say it I'm not getting paid for writing.

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MAY 3, 2012 3:12PM

Bailing Out Student Loan Debt the Smart Way

Rate: 8 Flag

“Only the mind cannot be sent into exile.” Ovid.

 The Problem:

The issue of student loan debt has been at the forefront of the news as Washington looks at a self-constructed election year showdown over whether to keep interest rates at their current low rate or let them return to about double the current rate.  This is not a trivial discussion.  Doubling the interest rate would have the effect of about tripling the amount of interest students will ultimately pay through the miracle of compound interest.

About 3% of the U.S. population now has a student loan.  The average student is reported to graduate owing $22,000.00. Students graduate and can’t find jobs. Increasingly, students are defaulting on their debt.  These defaults are ruining credit ratings, affecting the ability to find good jobs, to become licensed in professional fields, to get into graduate schools, and are breaking up marriages. What will be the fallout from an education collapse?  There is one huge way in which the housing bubble and the education bubble differ.  In contrast to housing, there is no tangible asset in education.  There is nothing to repossess.  This is the reason that congress, when it reformed the bankruptcy laws, during the presidency of George W. Bush, excluded educational loans from bankruptcy protection.  You can’t short sell your mind.  There is talk of forgiving all student debt.  This would add an additional $1 trillion to the national debt.

We may have to bail students out in the way that we bailed the banks out; just pay off their debt and pass the cost along to the taxpayer.  Naysayers will object at this point that there are no taxpayers.  That problem needs to be addressed.   

The Cause:

We could spend a lot of time and waste a lot of words talking about who the students are and whether they deserved loans.  We could also spend a lot of time talking about the value of a college education without reaching any consensus.  We need to ask how we wound up with so many college students and so much debt.  Why do we have 8.5 % current unemployment? 

 There was a time in the not-so-distant past that college life was very different.  On-line students didn’t exist.  There was no “line”.  Everyone who went to college did so on a physical campus.  Some were there because their parents wanted them to get something that they never had; a college education.  Others were there to have fun (that fun was typically short lived), and many were there because of intellectual curiosity.  They just wanted to know more.  This was never a large part of the population.  Most high school graduates went to work after high school.  They found local jobs in sales or working on a factory line.  It was not a necessity to have a college education to find a job.  There were jobs for the uneducated as well as the educated.  A college education was not a training ground. 

 University students were expected to learn how to think.  They were expected by the companies hiring them to have enough general knowledge and writing skills to bolster the analytical skills that a university education gave them.  Businesses hired history majors.  Philosophy majors went to medical school.  The important thing was that the college graduate had a good work ethic and could think. 

What I would like to raise is the question of whether the availability of loans for continued education has, in itself, created a setting in which Universities have become industries, for-profit schools have appeared which exist only to make a profit for their owners, preparing graduates for careers that can’t pay for their loans.  These loans have fueled a rise in the cost of tuition that is double the rate of inflation; a rise that is becoming logarithmic in scale.

In other words, that education is, as housing was, in an accelerated phase of growth fueled by inexpensive loans.  And, as the housing bubble burst, the education bubble is about to burst.  Banks hold the note on loans prior to 2010.  More recent Stafford loans are government loans.

The education bubble and the housing bubble have the same root cause, a decline in middle class jobs, and a decline in the middle class.  Previous members of the middle class, faced with being forced into the ranks of the poor, have attempted to regain their status through investment in a home and selling that home for aa significant profit in the case of the housing bubble, or borrowing money to go to school in hopes of finding a job with enough earning power to allow them to pay off their loan and escape the ranks of the poor. 

The development behind both of these strategies is the loss of U.S. manufacturing and the out sourcing of those and service jobs to 3rd world countries. 

In most cases the businesses behind this development have been international corporations with no loyalty to America.

The Solutions:

FinAid.org reports that there are ways to repay Stafford loans through volunteer service in VISTA, the Peace Corps, or AmeriCorps. Some occupations allow for loan forgiveness through community service.  This applies to the Medical profession and Law as well as law enforcement and nursing.In some loan forgiveness programs there is a requirement to live and work in an area of low income, or rural setting.  For example, State Troopers in Alaska can get their loans for schooling in law enforcement, penology, and similar studies forgiven.

Not everyone, though, can find a route to loan forgiveness.  Those who borrowed money from banks, for example, owe the bank, not the government.  Some former students who have gone into default can’t get jobs because of legal actions against them.

Taking advantage of this loan forgiveness might be hard or impossible, for example, for a single mother of two, whose kids are in school, and whose ex-husband has visitation rights that require the mother to live nearby. 

Bloomberg Business Week reports that for-profit schools give instruction to their students about ways to avoid repaying loans while not appearing to be in default.  This advice is, of course, self-serving on the part of the owners of the schools.  

Assuming that a large number of students will be unable to find jobs that will pay enough to retire their loan debt, or pay the debt off directly, there will have to be a loan forgiveness program. 

We need to learn from the banking disaster.  Not the failure and bailout, but the fact that no reforms were put in place to prevent the big banks from playing dice and requiring Americans to pay off their losses again.  If we pay off the loans to students we need to reform the system, in a way that we did not reform the banks.  We also need to reform the schools and Universities that have benefitted from the loans.  If the government is going to be responsible for paying for college education the deal should be directly between the federal government and the recipients of the loans.

For-profit schools should be allowed to take only as many students as they can reasonably assume to be able to find good paying jobs in that field.  There are many stories about individuals who sign up for Chef School, or Truck Driving School, or Massage Therapy school, who can’t find a job or can, only, find an entry level job paying minimum wage.  One example recently cited in the New Jersey Star-Ledger by Deborah M. Figart and Susan Niemiec, involved a young man who went to a restaurant school.  On graduation he owed $30,000.00.  The only job he could find on graduation was a job peeling potatoes for $20,000/year.  There is nothing unusual about this.  The kitchens of restaurants are run in a highly hierarchal manner.

I’m not sure when or how this idea came to me.  Some of you might think – outlandish as the idea might seem – that I was in a chemically induced altered state.  I can assure you that that was not the case.  I have a suggestion for reforming the current system of graduate education. Universities, particularly state universities, should be restored to institutions of higher learning.  The large state universities now are money making machines that exist around their sports programs.  This is the part where you may think I’ve lost my senses. 

College and University sports should be limited to intramural contests.  Intercollegiate athletic programs should be split off, turned into farm teams for professional sports teams, and the owners of professional teams should be responsible for training and paying athletes and managing the operation. No more free lunch for professional team owners.

Ultimately, the cost would be borne by advertisers and sports fans, of course.Scholarships could then again be reserved for scholars.  Money paid into universities for tuition would be used to buy, say, new laboratory equipment instead of a new stadium.  Today, there are few manufacturing jobs.  Students go to college to get job specific training.  They get degrees with majors in things like “information technology”, or “law enforcement” or “health sciences” or “nursing”.  Many get out of college unscathed when it comes to having their mind broadened.There is a need for this kind of education.  It should not, however, happen in Universities.

There will be no relief in the current jobless malaise until manufacturing returns to the U.S. allowing those with no intellectual curiosity to again get good jobs that don’t require a college education.  The return of U.S. manufacturing is a must. 

The idea that trees are cut down on the West Coast, floated across the Pacific, turned into toothpicks, shipped back across the ocean and sold to Americans is preposterous.  We have been reduced to a source of natural resources and a consumer market on many fronts by corporations who just crunch the numbers. 

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This topic is so large. I just couldn't discuss everything.
It is really a chicken and egg question. Students and parents will have to make more difficult choices. Many young people just go to college and then figure out that LATER they will figure out how to pay for it. Unfortunately more thought is going to have to go into it. I've also been upset by the amt of money spent on college sports. I grew up around the Big Ten my entire life, and I don't see it changing any time soon. Football and basketball drive the boat.
This should be on the front page. You covered the problem well and provided some viable solutions. I have long been concerned about the student loan conundrum. In the same way mortgage brokers suckered in low income families wanting a piece of the American dream--a home of their own, for-profit training programs...and some community colleges, colleges, and universities have played upon those who bought into the hype that you have to have our brand of education to get ahead in this country. I know this first hand. I have taught in several state universities and one private college. In retirement, I taught a class or two at several community colleges. Those advising students often push student loans. Some out of an egalitarian agenda, others who have already drunk the koolaid themselves, and others to fill the classrooms and keep their jobs and institutions alive. In my role as professor or instructor, I have tried to help students see the down side of the apparently easy money. Some of them took student loan monies to support their families because they had no other means of putting groceries on the table and gas in their vehicles. Today's demands are met, putting an even heavier demand on future earnings. They find themselvs between a boulder and a hard place.
I believe the finance idiom for an appropriate solution to the bank loans is called a "haircut."
JMac1949, you are right. The banks need to "take a haircut".

Beauty1947, your experience as a college instructor and professor makes your comments especially pertinent. We talked about this topic in a discussion group last night and one of the attendees worked in financial aid for a University. She had some interesting stories and a lot of insight, as well.

Amy A, thanks for your visit and comments. This is a problem that is multifaceted and needs to be looked at from all angles. You are right about the students lack of awareness. I have a granddaughter who could have easily gotten a scholarship to a major university, but didn't get her applications off in time and is now going to school on loans. Fortunately, an advisor told her she needed to tailor her major to something that would actually provide employment when she graduated... Seventeen year olds just do not usually possess much foresight.
Though I don't know much about them, it seems the for-profit schools that train students for a very particular job are indeed the true rip-off. Paying that much in time and money to learn largely technical skills, or skills that are very narrow in any case, would seem to be something of a gamble. At least with a broader background, be it in liberal arts or science, you are being trained to think. Is that still a valuable commodity? Time will tell, I guess.
There are a lot of good issues raised here. I can't see schools getting rid of sports programs, and actually wouldn't like to see that, but I'd sure like to see coaches getting paid on a par with professors instead of huge sums that have no relation to academic salaries. But this may just be my own beef. Nice post with lots to think about.
Excellent post on a very complex issue. I agree that this should be a front page piece.
The topic is huge and you covered it well.

Rated.
Allan Green and Beauty1947, thank you for the compliment. I'm not sure how anything lands on the front page. Some of the article there are excellent. Others...?
jlsathre, I'm just tired of the tail wagging the dog. Many years ago I had an interview for a position as a medical examiner for the State of Arkansas. The interview went well until we got to the subject of salary. As it turned out, the top paying job in the state was that of President of the University of Arkansas - $44,000/yr - and the chief Medical Examiner made less than that. So, I asked, "what about the athletic director at the University?" "Oh, the atheltic director and coaches are excluded from those rules. That is just their base."
The issue is that wealthy alumni donate large sums of money to Universities to go to the sports programs. They just want a winning program and don't give a crap about the fate of Bubba or Billy Bob after they can no longer play. It just gives me great pleasure to imagine Alabama or Ole Miss or Auburn football being farm teams for pro football franchises. Imagine tail-gating in BP stadium yelling "Roll Oil Slick?"
OR...we could just do what Europe has done for centuries...make universities free. Eventually the party idiots and numbskulls just go away because the atmosphere is so totally serious and academic it bores them to death.
Mary Ann Sorrentino, thanks for the European perspective. A German kid who stayed with us for a few months (and who was really pissed about the system) said that he was tested in middle school and placed on a track to become a tradesman. He became an auto mechanic for Mercedes-Benz but wanted to go to University. Apparently, the choice is made on the basis of aptitude - what a strange concept - and the kids who go off to a University are already preselected and prepared for an academic career. I understood "Wally's" anger, but the system apparently works. Wally was just angry. He wanted to join the Bader-Meinhoff gang, but couldn't find them...
I know what you mean, escrito. The topic is so interconnected that it's hard to even properly express the situation. It has to be pulled apart and examined from several aspects, like the way Auto Shop presents the concept of internal combustion engines. We know that all the parts work together to make the motor run, but we can still discuss the piston cycles independantly of the clutch or the crankshaft and ignition timing. So that we may understand the parts and their role in the whole operation.

In this case, you make an interesting point on the financing angle and the comaparison to the housing bubble and the way it collapsed. You make another interesting point regarding the sports programs. Here in Texas, sports is so big they play intramural football and baseball in Elementary School. The stadium and stadium parking lot usually comprise over half the entire footprint of the High Schools here.

So that professional sports be tasked with fostering the growth of professional athletes doesn't sound too crazy, but there's definitely going to still have to be some sort of regulation so that it doesn't turn into a true "farm" system for athletes without academic minimum acceptable standards. The last thing we as a country -- and people as individuals -- need is a non-literate has-been sports professional bloc of people in their earning prime as PEOPLE in society.

And as to the education for individuals and matching them to the market, well I find I'd have to discuss that one in detail alone. Suffice to say the US has to reform primary and secondary education in so many ways that creating focused core college or university curricula shouldn't be too tricky inside that reformation. Vocational and Techincal Colleges are one thing and Community Colleges are another. They should recognize that one is supposed to be exactly as you describe: A career training path that should lead to employment in a specific, well-paying and in-demand position in your area for Vocational and Technical Schools, who's primary funding should come from businesses and companies who'd rather fund targeted education through paying into education with a dollar for dollar deduction against their tax bite. If you made this the only way they could reduce their tax hit, then I'd be willing to bet vocational schools and technical schools that provide proper certification or accreditation would be much cheaper for the student. Should the student get such education for free? Maybe not. They alone, however, shouldn't have to bear the entire cost of training to a specific industry -- that industry profits by having a better, more competent worker to begin with and that should be something they'd be willing to pay for as an expense.

Lastly, the exodus of American Manufacturing was driven by companies that are, if in name only, American based. I see this as a complete sellout on the part of our government. No American company that sells products with it's name on it should be allowed to offshore their production. Change their business to Importer instead of Manufacturing and slap the proper Import Tariffs on Foreign Manufactured Goods and I'd be willing to bet that factories for American Companies will start sounding like a really good idea again.

Every country should be weighed and measured by it's internal structural soundnes. Yes it is good to compare our wages and earnings to those of others in different places, but the relative SCALE and MEANS of those wages have to also be understood within the context of what it takes to live in each place, all other things being equivalized in earnings vs cost to live, not simply the difference between the comparitive difference in exchange rates of Dollars to Yuan, Marks, Pounds, Euros (better get a collection of Euro coins and bills, ten years from now they may not be much more than a numismatic collector's item -- maybe.)

The other issue is that in farming out this work overseas provides no reduction in cost to the consumer here -- who now is having a much harder time even affording to make purchases that don't involve stacking on even more debt across the backs of the US consmer.

Adam Smith, the literal founder of modern economic theory believed that competition is good, but that for Capitalism to survive and thrive under competition that transparency and local sustainable commerce is necessary. In order to achieve the sustainable portion of his ideas, he felt that the employed required to earn not just enough to live, but enough to live and prosper. He also believed that large business and commerce required that the worker be paid well enough to eat properly, maintain health, be able to pay for schooling his family, including of possibly sending one or two children to University. In other words, Adam Smith felt that companies had to be open and honest in their dealings, not only with each other, but with those who were employed to generate the profits that allowed the businessman to prosper and survive.

Adam Smith proposed this model in "The Rise of the Wealth of Nations," which was published in 1776.

This is not how "Capitalism" is working today. Today the world economy runs on credit and debt payments, overproduction in order to put competition under by flooding a market, paying less for the work, while pocketing the profits, instead of also reducing the price relative to a strong percentage of those saved costs. Adam Smith would have been extremely upset at the current state of affairs.

We can come up with solutions that can and will work. The real question is, will a workable solution actually ever be implemented when such a solution requires that those who profit enormously through suborning the system to stop doing so? I hope so.

--r--