Friday, November 02, 2007

Good and Bad News

By Richard Vedder

Today's INSIDE HIGHER ED has good and bad news. It sort of reminds me of the economy --the "real" economy is humming, with good output and employment growth, but the "financial" economy is nervous and complaining of hard times (largely through mistakes of their own). A classic good news, bad news scenario. The same is true of colleges.


Elite colleges are increasingly getting out of the student loan business. In principle, I think borrowing for college is a legitimate idea, and indeed colleges should loan, not give, money to students from moderately affluent families. However, the loan programs have been abused somewhat, and endowments are being underutilized in some cases. Harvard could lower tuition for everyone to zero without breaking a sweat. So, I was not unhappy when Williams College joined other elite schools (e.g., Princeton, Davidson, Amherst) in saying they are only going to give grants, not loans. The trend in this direction is building partly because colleges are now scrambling to deal with the inconvenient truth that they have become more elitist and less available to low and even low-middle income students. Others (e.g., Wesleyan, Bowdoin) are rumored to be ready to follow this lead.


Congress reminds me of over-sexed teen-aged boys --they have trouble doing things in moderation. The Aristolean golden mean is foreign to their thinking. Earlier, the President signed a bill, very much to my chagrin, that, among other things, increased the maximum Pell Grant by around 19 percent for the coming year. Congress now is saying that is not enough, and they want to raise the maximum by another $150 --for a total increase for the year of around 24 percent.

CCAP likes giving money to kids, not institutions, so we generally like the Pell Grant program (although in principle we are not overly wild about any third party payments to higher education), but we also think the financial aid offices of colleges should have absolutely nothing to do with it. As a Spellings Commission member, I went along with Jim Hunt's plea to raise the Pell maximum. However, huge increases in Pell Grants all at once are an open invitation for universities to raise their tuition charges. Tuition inflation is up, not down, this year, as the colleges talk a good game but continue to tell the public to go to hell on the issue most concerning them. No big attempt is being made to rein in costs, which, admittedly, is nearly impossible to do when Congress continues to allow universities to avoid fiscal responsibility and accountability by increasingly subsidizing either them or their customers.

The prediction is that the President will veto the bill. Of course he should (it includes the budget of the Department of Education). What he should do and what he will do, however, often do not coincide when it comes to fiscal responsibility and adherence to sound principles.


Faith said...

Students interested in paying for their college education with student loans should shop around before committing to any deal. There are different plans available, and many have specific conditions. Students should understand all of the possibilities.

TC said...

Seems a lot of people just accept the fact that borrowing to pay for college is the way things work - no questions asked.

Well pardon me but the more I read this blog, the more pissed off I'm getting.

There should be needs-based and merit scholarships.

And very soon we won't be able to determine merit as the schools aren't giving out grades anymore - they get a 1, 2, 3, or a 4. And each number is defined in a manner as to not offend anyone, or create a competitive environment.

It used to be, Johnny, you little shit - you got an "F". Now it's, Johnny, you got a 1? What the hell does that mean? Will you get to go to the next grade level?

Schools are going down the toilet - just like our do nothing, divisive, vitriolic government and we're going to go down the shitter with it.

Get rid of student loans altogether and see how gd fast tuition comes down.

This whole situation is incredibly STUPID and I am sick of it. Citizens of this country seem to be walking in their sleep. When are more people going to draw a gd line and say, "ENOUGH IS ENOUGH". When?

You can delete this message of you like due to my choice of words - they are a "tinge" off color. But for God's sake - we act like a bunch of gd sissies. Grrrr!!!!!

maxheadroom said...

lets face it, colleges are in business to make money - non-profit or not. education is a secondary endeavour as far as i'm concerned. there's no way to stop the student loan business because they have as much right to be in business as any other business. but if lenders keep lending money hand over fist like they do, they are running a risk. first, if the attrition rate at colleges is 50%, and those students who drop out owe money, there's a good possibility that most of the drop outs are going to default. there's also a risk that a number of students who graduate are going to default and this is because of predatory lenders. joe or jane graduates from college, wants to buy a home and gets an adjustable rate or jumbo loan. they get credit cards with usury interest rates. all of a sudden they are leveraged to the hilt and operating on leveraged cash flow. next thing you know, they realize they need to file for bankruptcy. but the way the bankruptcy reform law was written, the mortgage lender forecloses on jane or joe before they can even file with the court - which is why we are seeing so many millions of foreclosures over the last year. so let the student loan compamies keep lending more and more due to demand and rising tuition costs. guess what you get? another sub-prime type debt crisis. if we have monetarily huge defaults on student loans, the credit (student loans) will dry up and after a period of time loosen up a bit but with tighter restrictions. this is the only scenario that i can think of that would reduce the supply of credit for paying college tuition. and if this ever happens only then will we see tuition costs drop in my humble opinion.

maxheadroom said...

check out these links. it's surprising that the way banks are almost collapsing has not affected the student loan market. but then again, the way things are going, student loans may soon be affected. how can they continue to lend at the rate they are lending while this storm swirls all around them? how can they be left unaffected?

TC said...
This comment has been removed by the author.
TC said...

I have to agree with you max. At some point the cost to attend college is just not going to be worth it because so much of a college grad's net income after graduation is going to have to go to paying down student loan debt.

Parents and their high school college candidates must sit down and do the math if they are going to mortgage their college education.

As tuition increases the incentive to borrow one's way through college will decrease. I think the first signs of this phenomenon might be seen in the number of out-of-state students at colleges - beginning with the "Brand Name Recognition" schools first and then working down through the "Joe Six Pack" colleges.

I think we might also see a move away from degree programs like sociology, HPER, history, and other degree programs that aren't real money-makers after graduation.

The way things are going now is just not sustainable and the big time colleges will see their prospective students making a change to "Joe Six Pack" colleges with a strategy of "a college degree from Joe Six Pack U. is better than no college degree at all". There's also a possibility that the prospective college students who are sitting on the fence trying to decide whether to go to college will decide against it because they don't want to be deep in debt when they graduate.

The bottom line is that, as I said, the path we are on now has a breaking point. And I don't think the point is about the supply of credit, I think it's about how much debt a student is willing to take on.