college

0

How to Solve the Student Loan Problem

Posted on by David

Last week we discussed the smart way to do college. The college system isn’t perfect, so it’s up to students to pursue college in an intelligent way: decide on a good career first and then pick a major that will equip you to excel in that career. Then after those decisions are out of the way, choose a college that is well-equipped to teach you that major. But none of this actually solve the root issue. Here’s my proposal for how to solve the student loan problem.

My proposed solution: Just make student loans illegal

It may sound dumb, but I've got a rationale.
Wait, what?

No seriously. It’s illegal to give predatory loans for mortgages or cars, so why is it legal to prey on college students? According to debt.org, Predatory lending can be “any practice that convinces a borrower to accept…a loan that a borrower doesn’t need, doesn’t want or can’t afford.” Based on our imaginary conversation with the loan officer in part 1, it’s hard to deny that the student borrower can’t afford a student loan.

Imagine you’re about to graduate high school and you go to the bank and ask for a $100,000 loan.

Loan Officer: What do you have for collateral?

17 year old: I’ve got an Xbox and that’s about it.

Loan Officer: OK, let me see your bank statement.

17 year old: I’ve got a thousand dollars in my checking account

Loan Officer: Um, do you have two months of pay stubs?

17 year old: Yep, I’ve been working part-time at McDonalds for the past year making about $600/month

Loan Officer: HAHAHAHA good joke. REJECTED.

If we make student loans as difficult to obtain as mortgages, then only those people who are credible will be able to obtain them. It won’t completely eliminate defaulting on student loans but it should decrease it significantly.

I can hear you complaining about it already:

But that would make it harder for poorer families to send their kids to college!

Yes, yes it would. It should be harder for poorer people to buy expensive things. I know that’s not a particularly empathetic position, but that’s just how life is. It’s harder for poorer people to buy houses, cars, and luxury trips to Europe. The reason college is so expensive is because everyone can pay for it whether they can afford it or not. Predatory student loans deceive poorer families into believing they can afford a small private liberal arts college when they can’t.

Now I’m not saying that poor people don’t deserve to go to college. But I am saying that lying to people and telling them that they can have everything they want, all they have to do is take on $50,000 in debt, is not kind. Saddling poor people with student loans that can last multiple decades is not helping them. It’s a hindrance. According to the National Consumer Law Center, over 2 million federal student-loan borrowers have been repaying their debt for at least 20 years.

But college is a means to raise yourself above your current economic condition!

Yes, it is–or at least it’s supposed to be. The problem is that having recurring student loan payments makes it really hard to rise above you current economic condition. According to EducationData.org, 30% of black college graduates with student loans default in the first 12 years of repayment. For 1/3 of black graduates a college degree didn’t even make them enough money to pay their college debt!

College is only useful if it teaches you marketable skills. Otherwise it could bankrupt you for life!

Interest on student loans is a killer
It’s crazy how long it takes to pay off student loans when you pay the minimum payments.

Eliminating student loans will make college cheaper

EducationData.org reports that 30% of college students obtain student loans. So if we outlawed student loans, then college enrollment would drop by 30%. This would put a strain on colleges, pressuring them to lower tuition if they want to attract more students. Remember that at the end of the day colleges are just businesses looking to make money. They’ll follow the laws of economics and set prices at the optimum level to attract buyers (students). The reason tuition keeps outpacing inflation every year is because people keep paying for it (with student loans).

We have seen how the availability of loans increases prices. Until recently car loans were usually 3-5 years in length but within recent years 7 and 8-year car loans have become the norm. This increase in loan availability has causes the automobile market to outpace inflation. Put plainly, the reason cars are so expensive now is because car loans are more easily available. An 84-month car loan will have lower monthly payments than a 60-month loan so consumers then opt for the more expensive car.

The same thing has happened to the housing market. Housing has skyrocketed past inflation because of the relative ease of getting a mortgage. I know we discussed how difficult it was to get a mortgage in part 1 of this series (and it is), but compared to any other type of loan a mortgage is really easy to get. 30-year mortgages were virtually unheard of before the 1950’s. Now nearly every mortgage is a 30-year mortgage. Because of the ease of getting a 30-year mortgage, home buyers often end up buying much more house than they need.

In 1950 the average new house was 983 sqft. (source) as opposed to 2020 where the average new house had 2,333 sqft. People are able to “afford” more house because a 30-year loan has lower monthly payments than a 15 or 20-year loan. But are they really able to afford it? With a 30-year mortgage you will end up paying more interest than the initial value of the house. According to nerdWallet “37.6% of households headed by people age 65 to 74 had a mortgage on their primary residence in 2019.” If you still don’t own your house by the time you’re 70, could you really afford it?

Student loans just allow you pay for that increasing unaffordability for the rest of your life.

Allowing huge loans causes prices to go up, because consumers think they can now magically afford it. But all that does is saddle them with crippling debt. This is the same as college! Student loans don’t make college more affordable, they make it less affordable. Student loans just allow you pay for that increasing unaffordability for the rest of your life.

Eliminating student loans will make college degrees more valuable

Eliminateing student loans would also have the effect of making college degrees more valuable. If fewer people were able to obtain a college degree then it becomes more valuable. In 1950 only 6% of Americans had college degrees, as of 2020 37.5% of Americans have college degrees. You have people going to college who don’t care because “a college degree is required to get ahead”.

The reason that’s true now is not necessarily because a degree helps you get ahead. It’s because not having a degree gets you left behind. College nowadays is like high school was in the 1800’s. Only so many children went to high school so a high school diploma was valuable. Then by the 1900’s when high school became mandated, a high school diploma became less valuable.

The more people who receive a college degree, the less valuable it becomes. That’s why you now need advanced degrees in many fields. If we make college out of reach for a good portion of the population that will increase the value of a college degree. This will also give employers a much-needed kick in the pants to show them that maybe a 4-year degree shouldn’t be required for most jobs. Maybe a B.A. in English doesn’t make you more qualified to be an administrative assistant than anyone else.

Many employers require 4-year degrees for roles that don’t need a 4-year degree. They are still super important for technical positions, but hiring a kid with a bachelor’s degree in psychology over someone with an associate’s degree and 20 years of technical experience for a supervisor position needs to stop. And maybe making college degrees rarer will show employers that they’re often not really necessary.

The Incredibles is always on point.
It’s just basic economics.

A Less Extreme Solution

So I know outlawing student loans entirely is an extreme solution that will probably hurt people, but I think it’s a good starting point for conversation. Maybe don’t outlaw them altogether, but what if we did require the kind of rigor for student loans that we do for mortgages? What if we required a sort of collateral for student loans? High school seniors may not have something valuable enough to ensure a $50,000 loan, but what if we put the student’s decided major down as a way to ensure the loan?

The loan shark (I mean servicer) can check the student’s major against the median salary for recent graduates with that same major and offer a loan accordingly. Students that go into engineering or some field that traditionally pays a lot will be able to qualify for a larger loan amount because the loan servicer has a greater assurance that they will be able to repay the loan. A student who picks a major that traditionally pays less will qualify for a lesser amount because they are more of risk to the loan provider.

Another idea would be to not offer student loans to students. Offer them to the student’s parents who have a job. car loans require a job, mortgages require a job, shouldn’t student loans require a job as well? And this kind of loan already exists; it’s called a parent PLUS Loan. Maybe these should the main type of student loan rather than some fringe option.

Conclusion

Anyway those are some ideas I’ve had to try and tackle our ever-increasing student loan problem. And it is a problem. Student loan debt in the United States totals $1.73 trillion and grows 6 times faster than the nation’s economy. I believe the main culprits behind the student loan problem are the predatory lending practices of the loan servicers and the fact that the federal government guarantees all student loans.

And this isn’t to say that college is stupid and all student debt is bad. I know many people who got student loans to go to college and when they graduated they worked really hard to pay them off. If you pursue college with a solid plan and a clear goal it can be a great tool. The problem is that predatory student lending has made it possible for everyone to go to college whether they can afford it or not. And if someone can’t afford college letting them take on a lifetime of debt won’t help their situation.

What do you think? Is my proposal to outlaw student loans crazy? How would you solve the student loan debt problem? Let us know in the comments below!

0

The Smart way to do College

Posted on by David

In last week’s post we talked about how college is stupid, in that we go about college all the wrong way. As of 2019 41% of recent college graduates work jobs that don’t require a degree (source). College is sold to us at every opportunity, but for the wrong reasons and at entirely the wrong price. The silver lining is that if there’s a wrong way to do college, there must be a right way also. Let’s talk about the smart way to do college.

Pick your Degree before you pick your School

Boiled down to my most salient piece of advice, if you want to do college smart you should pick your degree before you pick your school. If the most important criteria when picking a college are academics, job placement, how it looks on a resume, and cost, then your major should be decided before even looking at colleges.

I know many people change their major while in school, but most of those are people who didn’t have a plan going into college. Usually these are people who just signed up for college and decided on a major without giving it much thought.

There should be lots of thought put into a decision that costs this much money, but sadly that’s often not the case. Deciding where to go to college before deciding on a field of study is like taking an expensive trip overseas without deciding what you want to do there: not a great plan.

Not a great plan

Pick your school based on your chosen major

I know of several people who went to small liberal arts colleges and then discovered these colleges didn’t offer engineering degrees. They ended up going into math or physics because they couldn’t do engineering. Take a guess how useful a B.A. in physics is from a small liberal arts college. Hint: not that useful. Most of these students ended up transferring, or going on to grad school so they could get a more useful degree. And that’s after paying a 300% markup for tuition because they went to a private liberal arts school.

So decide on a field of study and then find the best school to pursue that field of study. The best school doesn’t have to be Harvard, but find the best school for your desired field of study for the right price, in the right location. For me that best choice was the University of Nebraska. It was a cheap public university with a great engineering school. It was 20 minutes away from family, and my church had subsidized student housing.

What if I end up changing my major?

Many people do change their major, but if you’ve actually decided on a field of study, you’ll probably stick to at least that relative field. Many people drop out of electrical engineering, but they often switch to some other type of engineering so most of their classes will transfer. I seriously considered switching majors to Laser Physics. It’s not engineering but nearly all of my credits would transfer.

What if I don’t know what I want to study?

Then don’t go to college. College is a really expensive way to try to find out what you want to do for a career. Find something that you can do that will make ends meet in the meantime, and take some time to figure out what you actually want to do.

Not all majors are Created Equal

I think it goes without saying, but some degrees are useful and some degrees are useless. Liberal arts degrees are useless. Useful majors give you marketable skills, which I’m defining as a skill that you can take with you to a different career or that employers are looking for. The problem with college is that most degrees don’t teach you skills. They may teach a lot of facts but it’s hard to get a job where all you do is know facts. Most companies want you to be able to perform some sort of task that bring in revenue.

Heck even underwater basket weaving teaches a more marketable skill than most liberal arts. But lest you think I’m just an apologist for the hard sciences, I don’t think Biology gives you any marketable skills either. There’s a reason most people who get a bachelor’s degree in science end up going to grad school. Most bachelor’s degrees don’t give you marketable skills.

As a holder of a masters in electrical engineering, these scene is more real than it has any right to be.
I’ve never watched a more relatable scene.

Smart Majors

Why are ten of the top ten highest paid degrees engineering? Because engineering is a marketable skill. Problem solving, computer programming, design, soldering, laboratory work… these are all skills that you can learn in college that employers are interested in. Other non-engineering degrees like teaching, foreign language, or business, also teach marketable skills. As the world gets smaller and more intertwined, being able to speak a foreign language is immeasurably helpful to companies and interpreters are highly sought after.

Business is often called “the universal major of all” because everything is a business, but that makes it marketable. Specialized business degrees like marketing, economics, accounting, and management are always desirable to hiring managers. (My one caveat here is that if you get a business degree just because it sounds like it might be marketable but don’t have a plan on how to use it, that is not a useful degree.)

Not-So-Smart Majors

Art history, on the other hand, doesn’t teach any marketable skills. I’m not saying you can’t get a job with an art history degree or even that you can’t get a job in that field, but it’s not marketable to anyone else. Philosophy or religious studies is another example. Personally I find them to be fascinating subjects, but no one so far has offered me money to philosophize. It’s not a marketable skill.

The same goes for English, or sociology, or psychology. I’m not saying they’re useless degrees, but there is a reason only 27% of college graduates end up getting a job in the same field as their major (source). And 41% of recent college graduates end up in jobs that don’t even require a degree (source) or they go on to get their PHD. The majority of majors are interchangeable because very few of them actually teach you marketable skills.

Even with an English degree, John Mulaney is doing pretty well for himself.
I never understood why college students reveled in not doing their homework. College is too expensive to just ignore.

Trade Schools

What’s a good way to learn skills? Trade schools, community colleges, and apprenticeships offer cheap avenues to learn marketable skills. Apprenticeships and trade schools are becoming passé, but community college is growing faster than ever. People often look down on a 2-year degree as less valuable than a 4-year degree, but an associates in welding will make you way more money than a bachelor’s in psychology ever will.

If you are interested in working with computers but don’t want the stress of getting a computer science degree, you get an associates in information technology or database management for a whole lot less money. Also those jobs are pretty plentiful and well paid. And if you find you really like programming you can then transfer to a university and finish up a 4-year degree.

Again, I’m not anti-college or pro-trade schools or anything, I’m just saying that you should pick a career path before going to college, and you should major in something that makes your marketable for that career path. They say “get a job doing something you love and you’ll never work a day in your life.” That’s lovely. If you find a company that will pay me to go hiking through the mountains, please let me know. But for the rest of us, employers pay employees to do things because they wouldn’t do them for free. If you want to succeed in life, you need to:

  1. find a career that is in demand
  2. Pick a major that will train you to be effective at that career
  3. Pick a college that is well-equipped to teach you that major
  4. Work hard to make yourself stand out to employers

Conclusion

While college isn’t the right idea for everyone, there is a smart way to do college. If you decide on a good career first and then pick a major that will equip you to excel in that career, you’re off to a good start. Last post we discussed the wrong reasons to choose a specific college. Today we learned that the smart way to choose a college is to find a good school for your chosen major. In our next post I’ll give my solution to the college problem.

What do you think? Am I being too harsh on liberal arts? What did you study in college? Let us know in the comments below.

0

College is Crazy Stupid

Posted on by David

College is crazy stupid. Don’t get me wrong, Courtney and I both went to college. In fact, I delayed getting an engineering job and went back to get my master’s degree so that Courtney could finish her degree. College is great, and college degrees are *almost* necessary to succeed in life. Bachelor’s degree holders earn about $32,000/year more than those with just a high school diploma (source). The problem isn’t necessarily college, it’s the crazy stupid approach we take to college.

Borderline Predatory Recruitment Strategies

Imagine you’re a high school senior, 17 years old. Colleges are circling like buzzards, filling your mailbox and inbox with spam about how “our college is the right place for you, <insert name here>!” It’s up to you to make the decision on where to spend 4 years of your life (nearly 8 in my experience) and probably 6 figures. You’re not even legally an adult yet.

Take my Alma Mater for example. I went to the University of Nebraska, and as an in-state public university tuition was $6,956.70 annually. Room and board were about $8000/year and books were about $500/year. I spent 5 years getting my engineering degree (STEM degrees often takes longer than other degrees because of all the labs.) So that comes out to $77,500 to go to college. That’s a huge amount of money. If I had gone to Colorado School of Mines like I had originally planned, it would have cost between $140,000 and $175,000 depending on if it took 4 or 5 years to graduate!

Come to college here, we have shiny toys

And how do colleges usually recruit 17 year-olds? They often tell you about their campus: how pretty it is, what kind of clubs there are, how active the student union is, etc. They’ll show off their rec center or their sports leagues, and they try to convince you that you’ll “fit in” at their college. They act like parents in a particularly nasty custody battle: “Come with me, I’ve got shiny new toys and a house with a pool!” But literally none of that matters. The only thing that matters when going to college is whether or not this really expensive experience will give you the ability to get a job afterwards.

Unless you are the heiress of a multibillion dollar company, the only reason to go to college is to get a job afterwards. We are going to talk about how not all majors are equal in the next article (On how to do college right), but suffice it to say that colleges will sell you a totally useless degree in a totally useless major simply because you’ll pay for it. The job you can get with your degree, and how hard it will be to get said job, should be weighed very heavily.

The mom on Titanic understands the purpose of college
If you are an heiress, I guess you can get your MRS degree.

So if getting a job afterwards is the most important reason to go to college, the most important criteria you should be judging a college based on is academics, job placement, and how it looks on a resume. The second most important criteria is cost. Picking a college based on how pretty its campus is is like buying a house solely based on the color of the paint: not a great plan.

The Avenger's know a bad plan when they see one

Small Private Schools

When it comes to recruiting foolish 17 year-olds, small private colleges are the worst offenders. They boast a tight knit college experience with a low student to faculty ratio and a pretty campus that really appeals to high school seniors who are social creatures used to small classrooms. But to get this community experience, you have to pay through the nose. The average private college costs more than three times as much as a public state university (source). And unless you’re going to Harvard, the chances are that your small private college won’t look as good on a resume as your public university anyways.

If you are a recruiter for a tech firm and you’re looking for engineers from around the state, chances are that the local university in town has a program you are familiar with and you trust their system. You’ve probably interviewed and hired graduates from that program before and you know basically what to expect.

If you interview a recent graduate from some small college 100 miles away, they may have a good resume and good GPA, but you probably aren’t familiar with their school’s program. It may be a great engineering program, but you don’t know how well it covers the subjects you care about or how hard they grade classes. Whether it’s right or wrong, a recruiter is going to go with what they know and will most likely be biased towards the graduate from the university they’re familiar with.

A Real World Example

I have some friends who went into teaching. Some of them went to the University of Nebraska, and some went to smaller private colleges. The Lincoln Public School system (LPS) hires dozens of teachers a year. The majority of them graduated from the University of Nebraska. LPS is very familiar with the university’s teaching college. They know what to look for and exactly what they’re getting. For better or for worse, my friends who got teaching degrees from schools other than the University of Nebraska didn’t end up getting a job offer from LPS.

With Crazy Prices to Match

There are two problems with college:

  1. Teenagers usually pick a college based on how it feels to them or how much fun they had on the campus tour.
  2. They are supposed to shell out six figures to pay for it.

Teenagers are rarely expected to make any decisions for themselves, much less hundred thousand dollar decisions. We can’t even expect them to think one year into the future, much less multiple decades. Kids are impulsive, short-term thinkers who are very susceptible to peer pressure. Why are we trusting them to make hundred thousand dollar decisions basically on their own?

Also, how are they going to pay for it? Unless their parents are pretty well off and they get scholarships, they’re going to have to get student loans. Long gone are the days where you could work part time and summers and make enough to pay for college. Unless you have a lot of circumstances go right you’re going to have to get a loan.

Student loans are dangerous

Over 20% of current student loans are held by baby boomers. That’s over $336 billion owed by people over the age of 50. Their average student loan amount is $40,000/family, which is really depressing considering the average cost of tuition in 1990 was only $4000/year (source). Imagine paying student loan payments every month for 30 years and still having more debt than you started with. That’s equal parts crazy and disheartening. You can see the need for financial Independence.

When you apply for a regular loan, you put something down as collateral. Something roughly equal to the value of the loan as a pledge so that the bank can be assured that their interests are protected. When you get a mortgage for a house, you put the house down as collateral. That way if you fail to pay your debt, the bank can sell your house to cover it.

The bank also requires you to have an income. When we bought our house, they required bank statements from all of our accounts, two months of paychecks to ensure we had a job that could afford the house, and a statement from our bank saying we’ve had the money a while, that we didn’t just get it recently. There are a lot of hoops to jump through to get a mortgage. If you don’t have a job, even if you have the money to buy the house outright, no bank with give you a mortgage. Even if you are retired with a million dollars, it is really hard to get a $200,000 mortgage.

Imagine you’re about to graduate high school and you go to the bank and ask for a $100,000 loan.

Loan Officer: What do you have for collateral?

17 year old: I’ve got an Xbox and that’s about it.

Loan Officer: OK, let me see your bank statement.

17 year old: I’ve got a thousand dollars in my checking account

Loan Officer: Um, do you have two months of pay stubs?

17 year old: Yep, I’ve been working part-time at McDonalds for the past year making about $600/month

Loan Officer: HAHAHAHA good joke. REJECTED.

That’s literally how it would go. And yet we hand out six figure loans to any Joe Schmo who says they’re going to college. These student loans are given without a thought as to how the borrowers will pay them back because they are guaranteed by the federal government. Student loans can’t be expunged via bankruptcy and if the borrower defaults on the loan we, the taxpayers, will foot the bill.

Ain't nobody got time for that
Honestly though, it’s so much work to get a mortgage

We’re the collateral

According to Investopedia: “As of July 8, 2016, the federal government owned approximately $1 trillion in outstanding consumer debt, per data compiled by the Federal Reserve Bank of St. Louis. That figure was up from less than $150 billion in January 2009, representing a nearly 600% increase over that time span. The main culprit is student loans, which the federal government effectively monopolized in a little-known provision of the Affordable Care Act, signed into law in 2010.”

The reason banks can offer tens of thousands of dollars to children without collateral, income, or prospects, and who may not even want to go to college, is because they can. Since the taxpayers are ultimately on the hook for loan, it’s free money. It doesn’t matter whether Joe Schmo gets a high paying job or not. They still get the money. It doesn’t even matter if Joe drops out of school. The bank still gets the money. Investopedia also estimates that the government loses between $100 and $250 billion/year due to student loan costs.

I find I agree with Ron Swanson more every day.
As a taxpayer I’m kind of annoyed

Conclusion

College is not stupid, but the way we are doing it is. We sell kids the complete wrong thing when it comes to what they actually need out of going to college. And then we charge them exorbitant amounts of money to get that college degree. What can be done? First, we need to learn how to do college the right way (under the current system). This is a short term solution. Secondly, we need to discuss how to fix the current system. The next two articles will be discussing those two solutions, so be on the lookout for them.

What do you think? Is college really this crazy or am I an alarmist? Are there any crazy things my list is missing? Let us know in the comments below.