America spends more on higher education, as a percentage of Gross Domestic Product (GDP), than almost any other nation. As the world's biggest economy, it spends vastly more in dollar terms than anyone else. But when you measure how many people actually end up getting through college, we're more inefficient than almost every other developed nation. – Max Nisen
As promised from my last article, I’m going to dive into the second point in the home buying analogy compared to education lending: the rigorous demands that a lender will put on the borrower.
An algorithm called the Debt to Income ratio shows buyers what they can afford. To calculate this number, the lender goes through all your income and expenses, job stability, taxes, investments, large cash withdrawals and deposits—literally everything about your financial situation—to make sure you can afford the home you are buying. To ensure that you can afford the monthly payments based on your income and spending habits. Again, they do this to protect themselves against the loss of the money they are lending you.
Now, obviously the main difference in this analogy is the fact that when a young person gets lent a student loan, he usually doesn’t have any credit. There’s no lending or buying history, no financials, often no job. So it is impossible to base what we lend on what their “current financials” are now. I completely understand that—which is why we need to talk about the future earnings potential of the education that is being lent on. Literally, the protection for the lender to get their money back is to make sure that the education will get the student to the income needed to pay back the loans. Makes sense, right? So why does no one do this?
There is absolutely no regulation. There’s no metric for lending—on how much you can borrow versus how much you will make when you come out with your degree, or even what you’ll be making when you are 5-10 years into your industry. WHY?
This one I really don’t understand. This is the one that, strictly from an investing or lending standpoint, makes absolutely no sense to me. I’ve helped art students with $140,000 worth of debt who now work for the IRS making $45,000 a year—lower their student loan payments. I’ve helped countless teachers with anywhere from $60,000 to $150,000 worth of student loan debt restructure their payments, because teachers are vastly underpaid across this country. Whether the student goes into the field they studied for or not, the cost of the tuition versus what they make after their schooling is lopsided in tons of industries. This is a major factor in the problem of our mountain of student debt and one of the first things that needs to be addressed on the road to recovery.
Take a minute to watch this great TED Talk by professor Sajay Samuel. He makes the point that, here in the United States, we have quality control on everything. Our products today are covered in “buyer beware” type of warnings. So, when you buy a Hyundai, for instance, there are tons of safety and product warnings on every major part of the car, from drive train and transmission, to paint enamel and airbags. There are reviews about the company’s safety ratings, comfort of the car, third party independent studies on dependability, cost of maintenance, normal wear and tear, collision studies, recall warnings, customer reviews, all the way down to the exact year and model you are interested in buying. There are even, thank God, reviews on the dealerships you buy from. Because even if the cars are made from the same manufacturing facility, there might be a snake trying to sell you a bad deal, hoping that you haven’t done your homework.
Now, I know I just switched from home buying to car buying, but bear with me. Because what I am trying to say is—and what Professor Kumar brought up is—why doesn’t the same consumer protection apply to higher education?
Why don’t we know exactly how far that education will take you in today’s market before we buy it? Where are the consumer protection warnings? Where are the third party independent studies that look at every degree from every college and compare them to what you get versus cost of tuition?
If we put something like that in place, the cost of tuition might stop rising at such a catastrophic rate, because all the cards would be on the table, and people could price shop. It would force the colleges to either justify their prices or keep them low to be competitive.
Remember, college is a business—the business of selling education, and it is time they joined the capitalistic model of consumer pricing, not price gouging. If we could compare what we truly get, the quality of the product, I believe it would force the institutions to either lower their prices or improve the quality of the product, or ideally both.
Professor Samuel also brought the idea of custom tuition pricing up, which is an elegant yet simple solution to the cost of tuition in my opinion. It goes like this: If an engineering student will make (X) amount of money on average after graduating; and they will use (Y) amount of resources at the college during attendance; then their tuition should be (Z). (Z) then, or the cost of the engineering’s student’s tuition, would be specific to that school, that industry, and the current or projected income of the student upon graduation. So an arts student should not be paying the same in tuition, because they don’t use the same amount of resources at the college, and their education is not going to take them as far economically.
In many ways, this idea coincides with the concept of “mass customization,” defined by Investopedia as “the process of delivering wide-market goods and services that are modified to satisfy a specific customer need… [that] combines the flexibility and personalization of custom-made products with the low unit costs associated with mass production.”
In our current system, college is a lot like high school. Everybody is treated the same. But this doesn’t make sense in college. Students are headed into specialized fields—specialized industries—and so the one-size-fits-all model is wasteful and stupid. Again, it reeks of people asleep at the wheel doing things the way they have always been done before. Also, because it is the cross roads of a Socialist System and a Capitalist System. In that K-12th grade is paid for by all of us as a country, through taxes, but students and/or their parents pay for higher education personally. So why is the tuition cost the same for every student, no matter the subject or field of study?
Oh, and don’t even get me started on what happens if you don’t finish your degree and drop out. Now you have absolutely have nothing to show for your time and effort but the debt. That is a complete failure for all of us…the lender included. Why isn’t the lender doing something—anything—to ensure drop outs don’t happen? To make sure their investment is protected? To make sure they get their loan paid back by someone who can afford to pay it back—some who has a great education?
Do you know how many people I’ve come across that got out of their four, or now five, year undergraduate studies, gone into the job market and failed? Not because they weren’t good enough, but because the jobs weren’t there, or the job paid way less than they were told when they went into that field of study. Or just got to where they wanted to be, and it wasn’t what they thought it was going to be at all.
So now they go back to school in order to change the trajectory of their life but are now fully aware that whatever they choose must have a great income, because now they will have a ton of debt when they are done to worry about.
We need a way for young people, high schoolers even, to know what they are getting into well before they get to college. No one should ever go to a high-priced college to “figure it out.” If they are interested in a few subjects, they need an internship before college. They need a way to talk directly to the people that are doing it, not just to learn the real-world day to day of that job but to understand the financial ramifications of their chosen industry as well. We must find a way to bridge this gap, and it takes real world solutions.
And look, I get the value of a “general education” or undergraduate degree. I also know the statistics say that someone who is “college educated” will make $500,000 more over their lifetime than someone who is not. This statement from Brigham Young University captures the essence of one of the main defenses of the paradigm: “Such an education prepares students who can make a difference in the world, who can draw on their academic preparation to participate more effectively in the arenas of daily life.”
Even still, our “general education” is still based significantly on memorization. Having a mind like a steel trap is almost a requisite for entry. A doctor has to go through 8 years of school, but the first four are basically all about downloading the would-be physician with massive amounts of knowledge that they may or may not use while doctoring. It’s like a kind of hazing. We force them to memorize data just to prove they’re committed to the path. It’s a barrier for entry.
But how much of this hard study is a screening tool? How much of it is strictly necessary to do the job? I cannot judge, because I didn’t go through it, and I didn’t put the system of study in place. I’m simply asking questions that need to be asked. The size of our current problem demands that we ask these questions!