EKIP– Expert Club for Economics and Politics A Different Opinion
Josh Grossman
Last week, former U.S. Senator and Secretary of Education Lamar Alexander wrote in the Wall Street Journal that college degrees are both cheap and a great investment. He repeated the usual argument about how a degree increases the holder’s income by a million dollars “on average.” The use of averages is the most important part, because not all college degrees are necessarily equivalent to one another. In fact, once you look at the details, you find that a degree is not the significant asset that advocates of higher education make it out to be.
In my home state of Minnesota, for example, the cost of earning a bachelor's degree at the University of Minnesota for residents of the state itself, North and South Dakota, Manitoba, or Wisconsin is $100,720 (including on-campus housing and various other fees). However, at private schools in Minnesota, such as St. Olaf, the situation is even worse. A four-year education at this institution costs $210,920.
This price should be compared to the median starting salary of 2014 graduates, which was $48,707. But just like GDP figures, these numbers are misleading because they include the average earnings of all individuals with a bachelor’s degree in all academic fields. If we look at the average student loan debt of an individual graduating in 2013, about 70% of those bachelor’s graduates graduated with an average debt of $28,400. That’s the amount of debt that any student who starts paying off their loans six months after graduating or immediately after dropping out without a degree is carrying. In reality, however, assuming a student loan interest rate of 6.8% and a repayment period of 10 years, the average undergraduate would have to pay $326.83 each month for 120 months, or a total of $39,219.28. Depending on the graduate's job, this amount could be a significant financial burden on their monthly budget.
Not all diplomas have the same value
Unfortunately, there is no price incentive for students to choose the degree that will most likely allow them to repay their loans quickly and easily. In other words, federal student loans subsidize the lack of discrimination in students’ major choices. A person enrolled in a bachelor’s degree in communications has equal access to the same loans that an engineering student would be eligible for. Both students will pay the same interest rate—something that would not happen in a free market.
In an unregulated market, graduates who are more likely to default will have to pay higher interest on their student loans than graduates who are less likely to default. In short, it is not just government subsidies for student loans that increase the cost of higher education; the demand for degrees that promise low wages and high default risks also contributes to this phenomenon, as loans for students in these majors are provided at the same price at which students in high-income majors with lower risk of default can finance their studies.
And which programs are most likely to be profitable for students? The most profitable bachelor's degrees are: petroleum engineering, actuarial [1] mathematics, nuclear and chemical engineering, and electrical and communications engineering. At the same time, the bachelor's programs that earn the lowest salaries after graduation are: animal science, social work, child development and psychology, theology and human development, family science and related majors. The starting salary for petroleum engineers is $93,500, while the average starting salary for animal science specialists is $32,700. Therefore, the monthly salary of a petroleum engineer is $7,761.67, while an animal science specialist earns only $2,725. Given these average monthly salaries, student loan service would amount to 4.2% of the income of a petroleum engineer and 12% of that of an animal science specialist. This situation is exacerbated by the fact that today it is almost impossible for someone to be able to write off their student loan obligations, even if they declare bankruptcy.
Ignoring careers that don't require a college degree
With student loans skyrocketing, the government has very few programs to fund trade education. At the same time, for many potential college students, trades and crafts can be a very attractive alternative. For example, the average plumber makes $53,820 a year, with the employer paying for the young professionals' salary and training.
Granted, that's the salary of a plumber, but there's still a $20,000 gap between it and the salary of someone with a bachelor's degree who has attended four years of college, and plumbers don't have the "bonus" of paying off student loans. Barring bachelor's degrees in technology, engineering, science, math, or accounting (where the average starting salary is $53,300), nurses (who earn an average of $53,624), or low-paid general practitioners (whose average salary is $161,000), society might be better off if parents and educators stopped repeating the myth that a bachelor's degree always pays off. Encouraging students to consider trades and crafts as possible career options, and encouraging parents to use the money they would otherwise spend on their children’s bachelor’s degrees to buy their children a house, may be a much better way to utilize scarce economic resources. The alternative to trying to fit a square peg into a round hole is to condemn another generation to student debt slavery, which will push future students to significantly delay buying a home or getting married.
Loans create all the demand
The problem is rooted in federal government intervention in the student loan market. Since 1965, when President Johnson signed the Higher Education Act, the cost of higher education tuition, room and board, and supplies has risen from $1,105 per student per year to $18,943 in the 2014-15 school year. That’s a 1,714% increase over 50 years. In addition, the Higher Education Act of 1965 created a scheme for private institutions to make loans, but these were guaranteed by the government and carried an interest rate of 6.8%. In the event of an individual borrower’s bankruptcy, the federal government—i.e., taxpayers—takes over the loan, paying 95% of the loan amount. Because student loans are provided at below-market rates and the federal government underwrites risky loans, a colossal amount of bad investments is created. Evidence of this is the fact that before World War II, 10% of individuals with a high school education went on to higher education; by the 1990s, that percentage had risen to 70%. Earning a bachelor's degree in almost any academic field seemed to be the way to enter or remain in the middle class.
But just like the housing bubble, keeping interest rates below market values while increasing the money supply in the form of student loans—even though taxpayers pay off the majority of those loans—creates an avalanche of insolvent professionals and is a recipe for disaster.
Translation: Daniel Vassilev
You can read the original text in English here.
[1] An actuary is a professional who is responsible for the creation and development of financial and insurance products and health and pension schemes – note trans.
The bad thing about student loans is that you can't go bankrupt on them and they are 1 trillion and 391 billion - http://www.usdebtclock.org/#
,and for 61 trillion total debt, I don't even feel like commenting on these ridiculous things
In the previous post, I gave a link where I covered the most important things, starting with Nobel Prize winner in economics, Professor Robert Shiller.
It is about a systemic crisis, beautifully explained by Mr. Hitov, Doctor of Economics and lecturer at the University of National and World Economy.
I formulate things simply - the current financial system with interest rates, etc. profitability requires constant growth, and this is impossible, that is, a new system is needed.
,and in 2011, an interesting book by economist Richard Heinberg, The End of Growth: Adapting to Our New Economic Reality, was published. The author makes a startling diagnosis: humanity has reached a fundamental turning point in its economic history. The trajectory of the expansion of industrial civilization is facing indisputable natural limits. Further growth will be blocked by three factors: resource depletion, environmental constraints, and the crushing volume of debt. These interacting constraints, Heinberg writes, will force us to reassess cherished economic theories and rethink money and trade rather than continue to pursue the impossible – an infinite increase in GDP.
The situation is dire, to put it mildly, and if the transformation of the world to function without oil does not begin within a year, the processes will become irreversible.