Wednesday, April 25, 2012

Obama's College Loan and Student Loan Bubble

President Obama is visiting three universities, all are incidentally situated in states critical for his re-elections, asking Congress to extend a subsidized low interest rate for Federal student loans (called 'Stafford Loans'). The speech was very well received with tons of applause. 'Stafford Loans' are Federally guaranteed loans (no credit check etc) for student at an interest rate of 3.4% for the subsidized Stafford Loans. The subsidized loan rates (not unsubsidized Stafford Loans) of 3.4% expire on July 1st 2012 and rates would double to 6.8%. This is financial disaster for many parents. Presumptive Republican nominee Mitt Romney too has come out in support of extending the lower rates though it would add to the deficit. I too agree. An educated workforce is an economic asset in the long run. Beside health care cost the other major area of cost increase in USA is college tuition fee. College tuition is a runaway nightmare with college costs projected for a private college is set to rise from $119,000 (2010) to $340,000 (2028, when my daughter goes to college). This is the prime driver for families scrounging to save and gargantuan loans that are now approaching debt loads that sap the entire working life of a graduate.

Economist in an article, "Student Loans in America: The next bubble" identified that federally backed loans given to students pursuing any course, regardless of economic utility, is a prime reason for inflating college costs. It is simple economics. Here is the government stepping in to guaranteeing a loan regardless of what returns a student can earn for a degree he/she pursues this skews market pricing. This is inflationary. Naturally the seller who sees a cash influx keeps raising the price without any corresponding change in productivity or efficiency. New York Fed, Economist says, puts the total student debt at $500 Billion with an asterisk that the figure may be under reported. LBJ, Economist cites, started the loan to help students get education that would bring gainful employment but (as with any Government program) was immediately altered to cover all courses.

In 2011 I met an Occupy Wall Street protester at the famous Zuccotti park. He was a student who railed against banks, Wall Street, 1% etc. His main grouse was that he could not get a job 4 years after graduating. He had graduated in "visual communications". He is now facing debt that he has no way to repay. Of course that means tax payer is waiting for payment. Even in the super heated Clinton economy he would not have found a job that easily. Why in God's earth should I pay for somebody pursuing his 'passion' knowing fully well that that 'passion' has very meagre returns?

The much respected "The Atlantic" ran a piece on college debt and argued that free borrowing inflates costs, "colleges have embraced a host of extraneous activities - from obscure sports to overseas centers - and tacked most or all of their tabs onto students' bills. Unlike businesses, which cut losing operations, colleges simply hike their tuition". Availability of loans makes parents complacent about saving for their children's education, "Only half of entering freshmen say their parents had put anything aside; and of those who did, half had banked less than $20,000". Yeah sure why not sock the rich while I go holidaying. Colleges pad costs recklessly says Atlantic, "Bowdoin's menu features vegetable polenta and butternut soup, while Penn State provides legal downloads of music numbering two million songs a week. But let's be clear. It's not the colleges which are paying for these and similar amenities. It's the students, mainly by borrowing, which the colleges actively encourage. " Sure why not, some poor soul will pay for it with taxes. Bring it on, pass the soup please.

Added to the above are salaries paid to Football coaches and Professors. Joe Paterno, legendary Football coach at University of Pennsylvania (U.Penn) was a million, $200,000 MORE than the salary of the University President and way above the average salary of a professor. Dodd-Frank compels financial institutions to report on the ratio of CEO pay to average salary of the rest. Of course its an obvious attempt to incite envy (a CEO salary is any way publicly reported). Would Obama ask why should a football coach be paid so much more than possibly the best Physics professor on campus? What is the prime objective of an University, to churn out footballers or physicists? Jack Welch's contract with GE post-retirement spilled out during his divorce proceeding and caused, well deserved, consternation at the outrageous perks he got. Joe Paterno, though dead, got $5 million in final settlement from U.Penn. This, to a guy who left in a cloud of shame for not dealing firmly with his subordinate who abused children. 

Robert H. Frank, economics professor at Cornell, wrote an op-ed in NYT suggesting that students flock to Ivy League's only because they are tempted by what they could potentially earn with an Ivy League degree which makes the Ivy League universities or any prestigious university to hike fees. His remedy is simple, hike the taxes on the high earners taking away the incentive for an Ivy League university. This, my friends, is truly what he calls, remedy. If this is logic from Cornell, I am now convinced that Ivy Leagues are just a mythical aura of excellence. 

 Frank, author of "Winner take all society: why the few at the top get so much more than the rest" (the title says it all) cites "Baumol's cost disease" as the reason for high professor salaries. Really!!!! Baumol, Princeton Economist, studied the rise of salaries in NY Philharmonic and came up with that theory which said that though a musicians productivity in playing a symphony can never change (a symphony takes however long to play in 2012 as it took in 1700's for Mozart to play that piece) his salary could increase in order to match corresponding increases in other industries where salaries rise due to productivity increase. Frank reasons that Professors are highly compensated to match salaries in other industries and is subject to Baumol's disease.

David Levy, educationist, ripped into professors for high  prices in a stinging oped "Do professors really work hard" in Washington Post. He points out that purely teaching only universities pay their professors similar to what a research university pays its professors. Then he lists the meager hours professors work compared to general workforce etc. Note, college professors also enjoy very generous perks and they are virtually impossible to fire once they get 'tenure'. 'Tenure' was a tool used to give security to professors to teach freely any idea without fearing dismissal but it is now purely a shield from being fired for incompetency.

Elizabeth Warren, Harvard Professor and Consumer advocate in Obama administration, is a poster child for salary excess amongst professors. Warren, now running for Massachusetts Senate, is a heroine for liberals for her speech railing against the rich that went viral. Warren drew a salary of $430,000 for PART-TIME work while drawing a salary of $170,000 from the tax payer for working on Consumer protection in Obama's administration. The guy who came up with the greatest scientific theory worked in a patent office. What is Ms Warren's earth shaking revolutionary idea that warrants a half million dollar salary for part time work. No wonder Harvard is now becoming so expensive that only Mitt Romney's son can afford it.

Cornel West, a much celebrated Afro-American sociologist, drawing a high six figure salary from Harvard neglected classes and went to campaign for a democratic Presidential nominee (and acting in the 'Matrix trilogy'). When Harvard dean Larry Summers called him out West huffed and puffed and off he went to Princeton.

With all these to contend with Obama offers platitudes on student loan. He affably jokes, taking a characteristically unsubtle swipe at his opponent Romney, that he understands students' difficulties since he (Columbia+Harvard) and Michelle (Princeton+Harvard) experienced that and did not read it in a policy note to speak (unlike the Rich Romney being the implication). Obama went on to say, to applause, that he could repay his loan only 8 years before his Presidency. The Ivy League students cheered. The President forgot to mention a few facts.

Obama finished his BA for Columbia (1983, age 22, Political science and international relations) and went on to work, by his choice, as community organizer. After 5 years, he went to Harvard to complete Law (1991, age 30). By age 30 he had become famous too thanks to his historic election as President of Harvard  Law Review. He even signed a book contract. Then he became a law professor. He was always focused on elected office and ran for state congressman (unsuccessfully), state senator (1997), US senator (2004), US President (2008). In this stellar hurried rise to become US President at 47 he did not go after jobs that would have maximized his earnings his targets were always at the ultimate prize. When he complains of not being able to pay his loans earlier it is completely facetious and misleading.

Michelle Obama, graduated from Harvard in 1988 and started earning $273,000 in 2008. They were a power couple who made conscious choices on careers to suit their long term political ambitions rather than short term economic gains. Mark my words, Obama as ex-President will open the cash spigot with memoirs and speeches making Bill Clinton look underpaid.

UNC Chapel Hill senior Domonique Garland introduced Obama and said in her remarks that if the interest rates rise then she would have to "worry about paying of her loan and focus more on that rather than enjoying the college experience. I'd have to do some part time work cutting into my extra curricular activities". Her mother, Pamela Hampton Garland, a PhD, posted a comment on a town online newspaper of how she is struggling to get a job commensurate to her PhD and her family's sacrifice to educate their children. Pamela had spent time working on now disgraced candidate John Edwards's campaign. GIVE ME A BREAK. WHY should I foot her bill? Why should I pay for her loans for doing a PhD that probably has no scope for a decent job? Why should I pay for her daughter who is loath to doing any part-time work lest her 'extra curricular activities' are curbed? 

Moulshri Mohan, rejected by Delhi University was accepted at Dartmouth (with scholarship), caused quite a stir meriting an article in New York Times. While Dartmouth does provide for her tuition fee, Mohan's very lower middle class family has to scrounge to pay for all other expenses. I can bet that Moulshri is NOT thinking of extra curricular activities but of the numerous loans that her family is taking that she would have to repay. I am all for supporting weaker sections especially on education however some effort on their part is actually a good character that would go a long way in instilling a zeal to succeed and surpass those with a silver spoon in their mouth. Every university and school will have rich and poor kids. A decent society MUST help poor students BUT not to the level where a student can fool herself into thinking she is entitled to relaxation. Note, these loans are very generous when it comes to the conditions for repayment and that is relaxation enough.

I am all for keeping the low interest rate but this is unsustainable. College costs must be reined in. I am not one for wage controls but there are other ways of compelling colleges to rein in salaries. Obama has indeed told colleges that Federal subsidies will be cut if costs are not reined in. Students also must understand that a loan is to be repaid and career choices should reflect that responsibility.

Politico reports that Obama, as senator, missed two key votes on similar bills to give low interest rates to students. He was busy campaigning with students swooning at his rallies while being absent on bills related to their chief concern. Today Obama is calling on students to campaign on twitter #dontdoublemyrate. What a guy?

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