Degrees of Debt

By John Mantia, GSB ’13

What am I paying for?

This is a question I ask myself constantly, be it at the gym, a concert, speech or restaurant. Lately, I find myself asking this question as I sit in classes at college. I recall my days in high school; tuition at St. Louis University High, a private, Jesuit, Catholic school in St. Louis was about $11,000, near the average for what public schools pay per student, and within the mid range for private schools in the Midwest. My school week consisted of over 30 hours of class with 5 or 6 different courses on topics ranging from Theology and Calculus to Mandarin Chinese.  Paired with this was 2 to 3 hours of homework a night. For well over 8 months out of the year, school, along with whatever extracurricular I had, filled my life. Yet somehow I still had time to be social and get decent grades.

At Fordham University, my current university, an average school week is 16 hours. Many times my peers have days off. Yet, even though we spend far less time in the classroom than in high school, the tuition here is well over $40,000 and approaching $50,000.  Here again, I have to ask what am I paying for?

Before we go any further, it’s worthwhile to analyze some of the costs of college. For a private college, the median annual tuition is roughly $40,000. If students on average take 16 credit hours of class per semester, that’s 32 credit hours per year, which comes out to a cost per credit hour of $1250. If the average course is 4 credits, then the cost per course is $5000. If, going further, the average course meets twice a week, and an average semester has about 17 weeks, that’s 34 class periods per semester per course. So $5000 over 34 sessions comes out to a cost per session of about $147. An average class lasts about an hour and fifteen minutes, so about $117 per hour spent in a class period.

The goal of any University is to educate students and prepare them for the “real world” by providing them the skills and tools to be effective workers and aware citizens. In addition, and perhaps more importantly, colleges must cultivate in their students the essential critical thinking tools, which solve problems, question the status quo, and move the world forward. But as I sat through my classes, particularly in freshmen and sophomore year, I found myself bored. The topics were often dull, and I found that I learned far more by watching videos on YouTube for free or reading a book than I did sitting in a class I paid $147 for. Why spend two years taking 4 language classes to fill a language requirement, spending over $20,000, when I could purchase Rosetta Stone, and learn nearly any language in 6 months for just $1,000?

The Internet has knocked down nearly all the barriers to higher learning that exist, and colleges have failed to realize that their business model is fundamentally changing.  Students are not buying the education, but rather the degree, the piece of paper that says they are certified in a certain field from a certain institution. But are these pieces of paper really worth upwards of $200,000? Especially for degrees in fields like social services or visual design, which, while important, seldom generate the incomes which make such a price worth the investment. A copy of Adobe Digital Editor and a well structured online tutorial would be far more valuable to a design student than a year spent going over basic computer functionality.  The Internet and computers has blown the lid off many traditional methods of education, yet the universities and employers still use the degree system to sort the best job candidates.

The worrying part about these costs is how rapidly they have and are getting worse.

The cost of college has gone up faster than nearly anything in the economy, more than food prices, energy, technology and even healthcare. Since 1982, tuition has increased roughly 9% per year.  There are few investments in the world with that kind of long-term high rate of return. Yet is the quality of a college education improving at the same 9% a year? Has a basic calculus course really changed that much in 30 years?

The key driver, more so than demand, comes from the relationship that higher education institutions and lobbyists have with the government. Year after year, Congress, the President, and university administrators, claim to have our best interests in mind as they lobby and pass legislation for more grants, guaranteed subsidized loans, and student aid programs. Yet the same universities, which lobby the government to intervene and “help students” by making more money available, simultaneously raise tuition, negating the effect any increases in grants or aid would have. However, while zeroing out the effects of the programs, the absolute effect on the cost of education is punishing. As colleges raise their tuition further and further, students must take on more and more debt. As students decry the cost of college, their administrators claim to help them, by sending throngs to lobby Washington D.C to finance more programs. Congress bows to the political pressure, increases the grants, and the same administrators at colleges who were suppose sympathetic to the plight of students then raise tuition. Students then have to take on more debt, and the process repeats. The fact that the government guarantees students loans and continually raises their grant allocations provides an irresistible incentive to colleges to raise their prices.

It has even gotten to the point where student loan debt is outpacing credit card debt.

The average student at a private college graduates with over $18,000 in debt, many with levels much higher.

Student loans also have a unique feature of non-severability. This is the key reason why the student loan bubble is different than the housing or tech bubbles of the past. With most other kinds of debt, if the debtor declares bankruptcy, the creditor loses out on a good chunk of their investment. The debtor pays back a fraction of the debt previously owed, and has their credit score severely impacted for a certain length of time. Bankruptcy is an important part of how the American economy works and allows people to recover from mistakes. However, student loan debt is different. Even if the student declares bankruptcy, the debt still follows them, regardless of how miserable their income level may be.

But what is to be done? The president has called for extending the low rates of interest for student loans, which will compel more students to go to college and only prolong the problem. The political problem on this issue is immense, for what politician could be against “helping students”? Few things go up forever, and programs on unsustainable paths either are reformed externally, internally or collapse all together. The student loan bubble is on that unsustainable path. The likely outcome will be the emergence of online schools/curriculum focused on specific tasks. Peter Thiel the founder of PayPal, offers entrepreneurial students $100,000 to not go to college and pursue business paths. Large corporations like GE, Exxon or Bank Of America, seeing the opportunity to influence young minds, might open up training programs and schools of their own. 1 or 2 year intensive programs on specific areas of study to prepare students for the real world issues and problem they will face while giving them valuable hands on experience. As these new forms of competition emerge, the top heavy, bureaucratic universities will become flatter organizations. With this will come the elimination of waste and superfluous departments, returning the focus to the student-professor centric relationship which is the essential instrument of higher learning.

The present generation will be a generation defined by debt. Debt from student loans, of course, but also the growing entitlement costs of our federal state and local governments. Rather than create a culture of dependency, I think this will create a culture of strong independence and dedication to fiscal responsibility. The vast, technological knowledge and intuitiveness which our generation possesses will allow us to use the tools we have now in ways as yet unimagined.

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