Stiglitz On Higher Education

Joseph Stiglitz writes in this morning's New York Times that, just as America is beginning to recover from the crisis which rocked the world financial system, another storm is about to hit:

The crisis that is about to break out involves student debt and how we finance higher education. Like the housing crisis that preceded it, this crisis is intimately connected to America’s soaring inequality, and how, as Americans on the bottom rungs of the ladder strive to climb up, they are inevitably pulled down — some to a point even lower than where they began.

Just as home owners found themselves with mortgages they couldn't repay, American students now find themselves with debt they can't repay:

According to the Federal Reserve Bank of New York, almost 13 percent of student-loan borrowers of all ages owe more than $50,000, and nearly 4 percent owe more than $100,000. These debts are beyond students’ ability to repay, (especially in our nearly jobless recovery); this is demonstrated by the fact that delinquency and default rates are soaring. Some 17 percent of student-loan borrowers were 90 days or more behind in payments at the end of 2012. When only those in repayment were counted — in other words, not including borrowers who were in loan deferment or forbearance — more than 30 percent were 90 days or more behind. For federal loans taken out in the 2009 fiscal year, three-year default rates exceeded 13 percent.

And the aftermath of the Great Recession has made things worse:

Like much else, the problem of student debt worsened during the Great Recession: tuition costs at public universities increased by 27 percent in the past five years — partly because of cutbacks — while median income shrank. In California, inflation-adjusted tuition more than doubled in public two-year community colleges (which for poorer Americans are often the key to upward mobility), and by more than 70 percent in four-year public schools, from 2007-8 to 2012-13.

With costs soaring, incomes stagnating and little help from government, it was not surprising that total student debt, around $1 trillion, surpassed total credit-card debt last year. 

It's a depressingly familiar story. Caught in the jaws of a financial system which piles up profit for the few, the economy stagnates -- because, faced with a mountain of debt, students neither form families nor buy homes:

Those with huge debts are likely to be cautious before undertaking the additional burdens of a family. But even when they do, they will find it more difficult to get a mortgage. And if they do, it will be smaller, and the real estate recovery will consequently be weaker. (One study of recent Rutgers University graduates showed that 40 percent had delayed making a major home purchase, and for a quarter, the high level of debt had an effect on household formation or getting further education. Another recent study showed that homeownership among 30-year-olds with a history of student debt fell by more than 10 percentage points during the Great Recession and in its aftermath.)

It’s a vicious cycle: lack of demand for housing contributes to a lack of jobs, which contributes to weak household formation, which contributes to a lack of demand for housing.

The Masters of the Financial Universe have given birth to a vicious, not a virtuous, cycle. They really aren't the sharpest tools in the shed.

This entry is cross posted at The Moderate Voice.

Student Debt and Myopic Public Policy

Gary Mason began his column in Thursday's Globe and Mail by reminiscing about the good old days:

Once upon a time, getting money to attend university in Canada was easy. There were non-repayable grants available from the government, and there were lots of good paying summer jobs.

But times have changed. The governments which nurtured the baby boomers now insists that the next generations are going to have to pay their own way, even as the cost of getting a university education skyrockets:

I’d hate to be a student these days. Both the grants and the great summer employment opportunities of yesteryear are a lot harder to get. More parents than ever are being forced to dig into their wallets to help their kids finance an undergraduate degree. 

There are plenty of people who bemoan the cost of going to university. But no one mentions the profits that are made from student debt -- and there is a lot of student debt:

The Canadian Federation of Students says the average debt for university graduates is almost $27,000. Canada’s student loan program is close to hitting its $15-billion threshold years in advance. Why? In part, it’s because the cost of getting an advanced education has gone up precipitously. Today, nearly two million Canadians have student loans totalling $20-billion.

Once upon a time, governments saw education as an investment. Now -- like so many other things -- it is a business opportunity for those who have money to invest. The next generation used to be the foundation of a country's future -- and the source of its pension income.

By undermining the affordability of a university education, we have not only put our children's futures in jeopardy. We have also undermined everyone else's future. If there is one characteristic which defines the last forty years, it is our incredibly myopic public policy.

This entry is cross posted at The Moderate Voice.

The Banker at the Schoolhouse Door -- Part 2

Readers of this blog will note that I received my first comment last week. And operating on the principle of full disclosure, I must announce that "Anonymous" is really my son, who was posting his comment from Seoul, South Korea. He raises three very good points: 1) the dollar value of the fees mentioned in the piece are not equivalent; 2) the more university degrees granted the less value each has; and 3) not everyone needs to or should go to university.

Let me address each of these points. Consider the first, that tuition of $585 in 1965 is not equivalent to $5555 in 2006. Absolutely true. But, if one considers the growth of inflation during those years, the rising cost of a university education becomes clear. According to the Bank of Canada Inflation Calculator (www.bankofcanada.ca/en/rates/inflation calc.html) the average annual inflation rate from 1965 until 2006 was 4.65%. That means that, if tuition increased with inflation, a freshman entering Trent University in 2006 would have paid $3733.68. If that is our new base, it means that tuition has increased by an additional 48% beyond inflation. Remember this increase has occurred as the number of students has increased. According to Trent, its student population has gone from 4977 in 1999 to 8207 in 2005. (Incidentally, I am indebted -- pun intended -- to our other son, the U of T graduate, for directing me to the Bank of Canada's Inflation Calculator. This is turning into a conversation between the generations.)

Just as Trent's student population has increased, the general student population at all Ontario Universities is expected to grow. The Ontario Council of Universities claims that "The 18 to 21 year old population will grow by 53,000 from 2006 to 2014 according to the Ministry of Finance." The Council also claims that the demand for post graduate professional education will be even greater: "Ontario's 22-29 year old cohort -- the pool the community professional and graduate programs draw on -- is projected to increase in size by 200,000 by 2021."

And, when one compares inflation and the cost of professional education over the last thirty years, the cost of a graduate education between now and then is placed in stark contrast. The $780 which Dalton McGuinty paid to go to law school in 1976 would be equal to $2,828.86 today. At $8,500, the cost of a ticket to law school at the U of O has tripled, even when one takes into account the inflation of the ensuing years.

Why? Well, again referring to figures compiled by the Council of Ontario Universities, "On a provincial government funding per capita basis, Ontario has been 10th of 10 provinces for over 10 years. While the gap narrowed as a result of the Reaching Higher plan [the $6.2 million the McGuinty government injected into higher education two years ago] it is estimated that it would require a further $950 million to reach the 2004-05 funding level of the other nine provinces." The simple fact is that the provincial government has not been investing in higher education in a manner which matches its rhetoric. As the university population has gone up, grant based government funding has gone down; and students have been caught in the squeeze. Thus, tuitions have risen to meet the shortfall.

And, assuming that students have about twelve weeks to work between the spring and fall semesters, they will never make enough to handle tuition costs. If they manage to squeeze in sixteen weeks of work at, say, nine dollars an hour, they'll earn $5760 before taxes. That's not enough to cover tuition and books, let alone the cost of room and board, if they are living away from home. Is it any wonder that they own a mortgage when they graduate?

As for my son's second point, the consequences of flooding the market with degrees, there are two sides to that coin. Yes, a Bachelor's degree in some fields has become the equivalent of a high school diploma two generations ago. On the other hand, just as a high school diploma was the ticket of admission into the new industrial economy, the bachelor's degree has become that same ticket into the knowledge based economy. And, just as some high school diplomas were awarded in the face of little effort, sadly some Baccalaureates have been granted for surprisingly little work. C's and D's still pass.

Moreover, if the Bachelor's degree is now the new high school diploma, then one could argue that, just as full public funding was eventually extended to all high school students, the same should be true for university students. And, once upon a time, it was. Back in the 1960's, students in California's state university system paid no tuition. That policy changed when Ronald Reagan became governor.The likelihood of that policy's resurrection is, however -- well, I think you can intuit the answer.

Which brings us to my son's third and last point, whether or not everyone should go to university. The obvious answer is no. However, there are all kinds of knowledge. By the time a millwright or an electrician completes the class time and the training time to get his or her ticket, the time and money spent are equivalent to an undergraduate degree. But once again, the burden has shifted to the student. Gone are the days when organizations supported training programs where they would take in a predetermined number of apprentices every year to meet their present and future needs. These days, students have to shop around their skills to various organizations -- a policy that is pretty much hit or miss.

There was a time when education was seen as an investment -- an investment which benefited not only the student but society in general. If an economy was to grow, it needed trained people to support increased productivity. And productivity growth, in John F Kennedy's words, "raises all boats." In the last thirty-five years there has been a change in perspective. Education is now a cost; and, for a generation, governments of all stripes have been downloading costs to the people down the next rung on the ladder. Students are at the bottom of the ladder. These days the rising tide of productivity, in one wag's words, "raises all yachts." The small craft have been beached.

I now return to the task of insuring there will be enough money in the bank to pay for our third -- and last -- son's education.

The Banker at the Schoolhouse Door

Last week, Ontario Premier Dalton McGunity found himself the target of student protests. The issue was university tuition. Perhaps he was surprised. After all, he is the father of three sons who are attending university and he faces the same tuition bills as the rest of us, times three. Moreover, his government injected 6.2 million dollars into higher education two years ago. And the Liberals also froze university tuitions for two years, only lifting the freeze this September, when tuitions increased 4.6%

But, as Carol Goar pointed out in the Toronto Star this week, student enrollment in Ontario universities is running twenty-three percent ahead of government projections. Students were listening when they were told that seventy percent of Canadian jobs now require some form of post secondary education.

The real problem is that the cost of going to university has increased astronomically in the last forty years. When I entered university forty years ago, my tuition and fees amounted to $585 a year. At Trent University, from which one of our sons graduated last year, incoming freshmen paid $5,557.55 this past September. It's a little cheaper at the University of Toronto, from which our oldest son graduated almost four years ago. There, incoming freshmen paid $5,176.30 this past September. If you live in a small rural community, as we do, the cost is considerably more, given what it costs to live away from home.

But, if your children plan on attending a post graduate professional school, the costs are absolutely stratospheric. Goar points out that when McGunity attended law school at the University of Ottawa back in the late seventies, he paid $780 a year in tuition. The same program now costs $8,500 a year. And that's a bargain. This year at Osgoode Hall, the law school at York University, tuition will set you back $13,966. Next year it will cost you $15,116. At the U of T this year, tuition in the Faculty of Law is $17,280. And if you want to get an MBA at Toronto's Rotman School of Management, tuition is $27,000 a year. At Queens, it costs $2000 to apply for an MBA, then an additional $28,000 a year.

One assumes that these tuition fees are predicated on the certainty that the graduates of these programs will be earning top salaries as CEO's or their equivalents. After all, as Senator Jim Webb of Virginia recently pointed out, the average CEO now makes in a day what it takes his or her average employee over a year to make.

What has happened? Well, as Bob Rae noted in his report to the Ontario government, the expansion of higher education in Ontario occurred before Medicare. Since then, the health system has been draining off money which used to go to colleges and universities. Rae suggested that more student aid be made available in the form of loans. The government would underwrite the loans; but, essentially, the private sector would be given an opportunity to expand its loan base.

This is a departure from the policy of direct investment which Ontario governments used to make in higher education -- when Mr. McGunity went to school in Ottawa and I went to school in Montreal. And it has not been just universities which have seen a decrease in direct investment from the government. One of the major "reforms" which the Mike Harris government brought to Ontario's education system was the elimination of grade thirteen in high schools. Up until then, students could attend grade thirteen and get a general degree after attending university for three years. It is more than just a little ironic that these reforms were made during the stewardship of an education minister who dropped out of high school in grade eleven to first work for and then run his father's waste management company.

All of this is of a piece. And it is a policy which has been aided and abetted by governments of all stripes. The mantra for some time now has been, in Ronald Reagan's words, " Government is not part of the problem, it is the problem." Thus, government has left it to the private sector to fund what it used to fund. And the trade off has been lower taxes. But twenty-five years of such "enlightened" policies have led to the wealth gap, which I have written about in previous posts. What that means for university students of modest means is that they will graduate with a large mortgage over their heads.

When I went to graduate school, my father cosigned for a loan which represented 13% of my annual income before taxes. When our son graduated from graduate school, his accumulated debt amounted to 107% of his annual income before taxes -- this despite roughly $65,000 in scholarships and over $50,000 from us.

I do not begrudge the costs. Luckily, we were able to pay them; and scholarship money was available. Still, he had to borrow alot of money, for which he is now on the hook. And someone is very happily adding to his or her company's bottom line because my son wanted an education. What about those other hard working folks who want their children to succeed -- or the children themselves -- who don't have the financial resources to get them in the schoolhouse door and then stay there?

Higher Education has always been a privilege. The problem is that it is increasingly only available to the privileged.