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Commentary on The Capital Markets- Category [Education]

The nod of approval is strong with this one folks....

At a Dowling College campus on Long Island’s south shore, a fleet of unused shuttle buses sits in an otherwise empty parking lot. A dormitory is shuttered, as are a cafeteria, bookstore and some classrooms in the main academic building.

“There’s a lot of fear here,” said Steven Fournier, a senior who lived in the now-closed dorm for his first three years. “It’s not the same college I arrived at.”

And what college was that?

What's being discussed here is the deteriorating financial condition of many schools, particularly small, private colleges.  But this is a case of schools (and I include in this group small private secondary schools as well) that have developed swollen heads over the years and become drunk on their own self-assigned importance in the world.

Sorry folks, life doesn't work that way.

All educational resources have some degree of value.  But that value must be measured against objective economic outcomes, and nothing else, from the perspective of the student, and the student alone.

All other means of "measurement" are invalid.  They are nothing more than hubris, expressed as a giant sucking sound aimed at the wallets of students along with their parents and thus doomed to eventual failure.

I've had this discussion with private secondary schools before; objectively viewed there is no way to possibly justify the expense profiles many of them present.  What they are trading on and sell is emotion rather than outcome.  What's worse is that for many of them there is a path forward that works on economics, but taking that path requires finding a way to get rid of the obligations that they had acquired over the years through their arrogance, often found on their balance sheet as debt.

The boards of these institutions typically refuse to have that discussion at all, instead spending their time hiring people who are willing to try to find a "niche" they can serve that comes with the ability to charge whatever they have to pencil in as tuition, fees, room and board in order to make the book balance. 

That approach ultimately fails, however, because they are slicing the pie too thin and thus even if they succeed in their mission they starve to death.

In a time of ever-increasing leverage the worst part of this self-delusion adopted by these institutions is that it appears it can work.  It's even worse when there are financial types on the board, as there usually are, as those people either are or should be fully-aware of the insidious impact that increasing leverage has on balance sheets and the temporary nature of the so-called "successes" that it brings.

But no!  That's not how the game is played!  Instead what you have are institutions that insist that they can find a sustainable path forward predicated on outrageous cost, with some of these schools (whether post-secondary or even secondary schools) arguing for the "sustainability" of $40,000+ annual tuition, fee and expense figures!

To all of those people and institutions: You're nucking futs.

“We haven’t hit bottom yet,” said Glenn Harlan Reynolds, a law professor at the University of Tennessee in Knoxville and author of the book, “The New School: How the Information Age Will Save American Education From Itself.” Students are shopping for a less expensive education as the cost of college has increased and the job market worsened, he said.

“It’s a question of return on investment,” Reynolds said.

That's right -- it's always a question of return on investment.

This is where the educational paradigm has gone in the toilet.  Cost increases of 400-600% compared against minimum wage jobs over the last 30 years have made huge swaths of fields no longer economically defensible when it comes to post-secondary education.  The number of majors for which a positive return on investment is available, when adjusted for the odds of completing on the original matriculation schedule, are dwindling toward zero!

It's even worse if the path to that college includes a private secondary education.  When you add in the discounted cost of that to four years in college, that now being 8 years @ $40,000 each, you simply find that the numbers do not pencil out for virtually everyone irrespective of their intended course of study.

Now I'm sure there will be howls of protest on this article, arguing all sorts of intangibles.  I do not presume to claim that intangibles do not matter, or that they shouldn't matter.  They most-certainly both do matter and should. 

However, the number of people who have the luxury of being able to make such a decision without regard to the economics of the matter are statistically insignificant compared against the population as a whole.  If you wish to try to cater to the 0.1% you are of course free to do so but as larger and larger percentages of both colleges and private secondary schools wind up competing for a tiny percentage of the total population of students you are in essence attempting to eat an ever-smaller piece of pie with more and more people competing to get not the first but rather the last bite.

The solution set to this problem is to make the piece of the pie you can bite off and chew larger, not smaller.  That means finding ways to broaden your appeal and control costs rather than believe your offering is "so special" that it justifies an expense that simply never pencils out.

At the same time those board members who argued for the opposite, or who were complacent and allowed the deterioration of financial condition, especially when debt or long-term obligations were involved (and one or both nearly-always are!) need to be held to account.  Dismissing those board members and potentially even going after them for malfeasance and misfeasance (or worse) literally never happens, but it damn well should.  Instead the insular nature of these boards insures that nobody is ever held to account as these institutions spiral into the ground, desperately looking for a means to claw themselves back up from slipping over the cliff of insolvency.

I weep for some of these institutions because what they offer is, in many cases, unique -- and for many their odds of success have sadly turned deeply negative over the last years.  But I also find anger at the bottom of the well when I examine both the actions and inaction of the Boards of Directors of these institutions.  Anyone fit to sit on these boards damn well ought to be fully aware that their first duty is to the financial stability of the institution and that abuse of leverage as a means of trying to hide a cost ramp that grossly exceeds median income advancement in the population as a whole never works over the long haul.

Denying the facts of arithmetic is an act that, in an educational environment, simply has no excuse.

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Sit down, shut up, and take responsibility for your life as the adult you are.

There.  I said it right up front.

To whom?

Sharon Gochenour.

Who is that?  The crazy chick who wrote this diatribe:

The first thing—the reason I'm writing this article, and the reason I find it almost impossible to write this article—is that I went to the Massachusetts Institute of Technology for my bachelor's, starting in September 2006 and graduating with a degree in "Art and Design" (that means architecture) in June 2010. I usually tell people who ask that I went to school in Boston. This, besides being a factual inaccuracy, adroitly captures my ambivalence about the whole experience.

Oy.  First, Sharon is upset because MIT is, well, competitive.  Guess what darling?  So is the real world.  If you don't like that then you have options.  You can flip hamburgers or spin pizzas.  You can mop floors.  You can do all sorts of things.

But what you can't do is expect world-class opportunities to be dumped in your ****ing lap because the world is not your oyster!  It is, like it or not, filled with other people who are kinda interested in eating the same lunch you want to gobble down.

Now you can take the scraps or the caviar.  But to get the caviar you might have to whack other people over the head -- or stomp on their heads.  Did your parents not tell you this?  Go bitch at them if not.

Incidentally, it's perfectly fine for you to say "No!" to all of that.

But then you don't go to MIT!

Yes, I am bitter.

I am bitter that forty-eight hours of class and study per week was the official minimum expected of us, and that sixty hours of coursework was totally unremarkable.

I am bitter that when I had personal crises -- I got dumped by my freshman-year boyfriend, my family's home and business were flooded, I felt abandoned and directionless in my major -- I had so little energy left for coping that my life slipped out of control.

What the hell do you think is going to happen in the real world?

Let's say you go get a job tomorrow drawing, well, how about buildings?  You know, what you went to study?  Yes, architecture.  Let's also say you're really good at it.

You get hired to draw a building.  A very expensive building that costs millions of dollars.  It has a schedule to be built and the guys and dolls who put that together start selling the space in it.  Space that doesn't exist yet, because, well, you have to design it so they can build it.

You know, that job you have?  Yes.  You are under quite a bit of pressure to perform, yes?

Now, something bad happens.  Your Dad dies.  That's something that happens. All people die. Your father will eventually die.  Mine recently did.  It sucked.  I'm not going to tell you it didn't, because it did.  It will suck when your father dies too, if you have any sort of relationship with him at all.

There are lots of other bad things that happen to people too.  You might get married (real good, right) but then your spouse might decide to file for divorce.  They might make your divorce into a nearly 2 year hell complete with all sorts of false claims you have to defend yourself against, never mind the crazy amount of money you will spend in the process.

That's just an example, by the way.  There are dozens of others, all of them hypothetical but all of them very real risks.  We all face them every day; that's part of life.  It's not all roses darling; there are lots of thorns along the way!

If you think that studying 60 hours a week was hard, wait until something like that happens and you have to discharge your duties at a job at the same time you're dealing with a very personal and serious issue that is consuming your mind (and possibly your wallet as well!)  

Oh, and if you don't deal with it and get fired?  Now you've got more and very-pressing issues to deal with that go far beyond psychological pressure -- like buying food, shelter and the other necessities of life!

That's real life.  That's how it works.  And yeah, it sucks real bad but this is commonly called "adulthood" and whether you like it or not it's part and parcel of being an adult.

Indeed, this is arguably the defining difference between childhood and adulthood.  When you're a child these challenges are someone else's to deal with, at least the really big ones.  Sure, you still have to handle the emotional issues but you have others who are responsible for making sure the water bill is paid so you can take a shower -- and a crap, never mind having heat in the building (or a place to sleep!)  With adulthood comes the responsibility to manage these things on your own even when life really, really sucks.

What I want to see is an educational environment where there is not so much pressure, both subtle and not-so-subtle, to cut yourself loose from your support networks to go to a school like MIT. I want for students to respect their own needs for sleep, good food, and social interaction, instead of seeing those as some sort of "concession" to their weaker human natures.

Moreover -- though this would require change in the entire American system -- a strong educational environment needs to be free of the overhanging shadow of debt. Debt forces people into untenable and unproductive situations, like taking seventy hours of coursework rather than registering for another semester, or dropping activities they love rather than risking their grades over a scholarship.

Well, you got one thing right -- get the damn debt monster out of education.  You know how you do that?  You get the government out of it.  You stop treating student loans as "special" and instead treat them as unsecured credit cards as they were before the 1980s and beyond.  

Now lenders won't loan you crazy amounts of money because if you blow up they lose it instead of being able to hound you for it.

I suspect you had a basic economics class at MIT.  If you did you probably heard of this thing called "supply and demand."  It works everywhere it's allowed to.  We destroyed it in the 1970s and 80s by creating the ability to borrow money to go to school through various vehicles, all of them backed in some form by government force.  This of course created a lot of people who showed up waving money at colleges and they responded by ratcheting up the price.

Like every financialized thing we ever do the colleges and lenders got together and figured out how to take all but one dime of the value of their education out of your ass right up front.  This is why your "education" was so damned expensive and why, on balance, it's usually not worth it if you have to go for more than four years -- and often even if you can manage to get out on the original plan!



Well, guess what?  It was rainbow-chasing bull****!

Now I understand being bitter that you were deceived.  But you should be bitter at the college, at your High School which probably pimped this path to you in exactly that fashion emotionally if not financially and you probably ought to be really*****ed at your parents who probably did the same because their first and foremost job as parents is to give you the tools, emotionally and otherwise, to be able to deal with life (including detecting and calling "BS" on those who run this sort of exploitive crap) as an adult.

Students (even very smart ones!) are people, not tools needing to be ground into their proper shapes. They need to be encouraged and allowed to grow. 

You're an adult, Sharon.

Yes, you were hoodwinked.  I'll give you that without seeing your evidence, because I'm damn near sure it's true.  I've been writing about this very point for years; indeed, it's part and parcel of the book you can find advertised to the right of this article.

But there are two options available to you when this sort of realization visits you as an adult.  

One is constructive and one is destructive.

The destructive (to yourself) choice is to bitch, whine, and blame other people, while putting forward vague claims that others have a "duty" to "encourage and allow you to grow."  That's self-destructive because you are refusing to recognize the part of the scheme that you willingly participated in and, in addition, you're not altering your behavior and evaluation of others -- which played a major part in how this happened to you.

The constructive choice (for yourself and others) is to make damn sure the people responsible are held to account to the extent you were lied to or misled, take responsibility for the part of it that was your unrealistic expectations and the chasing of claims that you should have known with even a basic understanding of mathematics were impossible to achieve and do your level best to change things so those who follow you cannot be similarly hoodwinked as you were.

Your choice Sharon.

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What's "conservative" about indentured servitude?

WASHINGTON (Reuters) - U.S. Republican Senator Marco Rubio, a possible 2016 White House contender, unveiled legislation on Wednesday to broaden the use of financial vehicles known as "income share agreements" that students can use to fund their higher education costs.

Under the agreements, which are marketed as an alternative to traditional student loans, private investors or organizations provide students with financing for their education costs in exchange for a percentage of their future earnings.

In other words rather than address the reason that college credit hours have gone up 600% faster in cost than the minimum wage has risen, taking college from something you could buy with a minimum-wage job in the summer to something you can't, what Rubio wants to do is add more and more ways for you to destroy your financial future.

This is "conservative"?

Like hell.

The entire reason we have such a problem with college costs in the first place is that the government made "free money" the order of the day.  By grossly-expanding the ability to borrow beyond Stafford loan limits and Pell Grants (which by themselves had ratcheted up costs!) the spiral was on.

The free market -- or if you prefer conservative -- solution is to remove the special privileges that these loans "enjoy."  Specifically, return them to the same status as any other unsecured debt -- like a credit card.

Now lenders have a reason to prospectively monitor students and only extend credit that makes sense on a semester-by-semester basis.  If the terms are too onerous then the students can default and declare bankruptcy.  There is a natural check and balance here -- students will have little reason to do that provided the amount of money borrowed and terms of payment are rational, as the impact of a bankruptcy on one's life is quite material.

By the same token if the amount borrowed is outrageous and the compensation available after doing so small, the incentive to declare bankruptcy and (legally) avoid the debt is quite large in relationship to the harm done by undertaking this course of action.

The original push to make bankruptcy unavailable came from the outrageous amount of debt that was taken on by some medical students, who (quite-rationally) decided that the harm done by a bankruptcy was small in comparison to the economic advantage of doing so.  The answer to this "problem", rather than allowing the market to work (which would have dramatically cut the cost of said education as support for that outrageous level of cost would have disappeared) was to make doing that illegal.

Note that corporations evaluate this decision path every single day, and many do indeed strategically default -- or threaten to do so in order to secure better terms.  This is good, not bad, as it keeps the balance between that which one can borrow and that which one demands for a given good or service.  

If either party tries to exploit the other then the bankruptcy court provides the answer; you avoid the debt, but your assets are taken and liquidated, such as they are.  This prevents lenders from letting you borrow money for which there is no rational means of repayment, because the risk of that happening lies with them.

That's how it should be and indeed that risk is exactly why borrowing money costs something (known as "interest"); in part you are paying a fee against the possibility that you will not be able to (or choose to) pay and the lender will suffer a loss.

Markets only work when they're allowed to.  When we pass special laws allowing certain people to evade the market's discipline on bad behavior then we got more bad behavior.

In this case what we've done over the last 30 years is destroy any resemblance of decency and honesty when it comes to college financing and cost.

Rubio's plan is in fact not half-baked -- it's actively malicious.

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2014-04-07 08:32 by Karl Denninger
in Education , 203 references

Gee, you just figured this out?

For decades, it's probably the most troublesome question facing education: Why are results for U.S. public school students so mediocre, despite the billions of taxpayer dollars spent? 

Andrew Coulson thinks he's got the answer: Because there is no discernible correlation between spending and outcomes. 

No, really?

But then the really dumb comes:

"That is remarkably unusual," Coulson wrote in his study. "In virtually every other field, productivity has risen over this period thanks to the adoption of countless technological advances - advances that, in many cases, would seem ideally suited to facilitating learning. And yet, surrounded by this torrent of progress, education has remained anchored to the riverbed, watching the rest of the world rush past it." 

Why is this "remarkably unusual"?

There has never been any evidence that spending more money, especially when it comes to technology, correlates with educational outcomes.  Ever.

Indeed, what correlates with educational outcome is consequences for failure.  This should not be a surprise; failure is a shockingly-effectively motivational tool, even though it has uneven application.  That is, some people who fail will give up.  But others are motivated to try harder or repetitively, until they succeed.

What damages outcomes is rewarding failure, whether it is "social promotion" or handing more and more money to schools that fail to educate students.

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There's an interesting article in The Atlantic that contains a graph you should pay attention to:

This is the number of hours you must work at minimum wage to pay for a credit hour at Michigan State University.

In 1979 it was about 10.  Now it's about 60.

Note that a "full load" is generally considered over 12 credit hours per semester; let's take the minimum (you usually need 120 hours to graduate, so this would be a "five year" plan); this means you would need to work 120 hours (or about 10 hours a week) to pay for school while in school.  That can be done along with the academic load.  It also can be done during the summer. Note too that tuition is nowhere near the entire cost; the usual "all in" price is about double tuition expense, so you would need to work 20 hours a week to cover it.  Again, that's doable -- two 8 hour shifts on the weekend and an hour four nights a week, and you're good.

Today, at six times that cost, it cannot.

The conclusion, however, is backward:

Is it any surprise that so many students today are suckered into taking out non-dischargeable loans, in growing chunks, to pay for their bachelor's degrees?

Wrong answer.

The reason the price went up 600% is the availability of those loans.

That is, it was the financialization of education that made this possible, because it is through financialization that entities sit down and figure out exactly how much they can extract from others in a transaction, causing the price to rise right to that limit.  At the same time they lobby vigorously for "ever-easier-appearing" (but more-onerous in fact) terms that increasingly transfer the fruits of the result of whatever has been financialized from the buyer to the seller through that increased price!

The result of this paradigm and the unholy alliance between banks, Wall Street, Washington DC and the colleges themselves is that the marginal utility of college degrees for many, perhaps even the majority of students, is now negative.

Remember that the school, the lender, Wall Street and Washington DC do not care about individual outcomes.  They could give a damn about whether college is a good deal for you.

That is what happens when anything becomes financialized; the only metric that matters is the aggregate outcome for the financial chef; that is, his goal is to strip all but one penny of the benefit on average from the participants and keep it. 

The closer he gets to that goal the more money he makes.  He does not care about your outcome, only that in aggregate the pool of "buyers" keep just enough that the next group will come in the door.

In other words so long as they can point to a few rocket scientists that make $100,000 a year right out of school that you can only make $30,000 and leave school with $150,000 in non-dischargeable debt,  thereby virtually guaranteeing financial hardship if not outright bankruptcy, does not matter to them at all!

The colleges are not only aware of this they are willing participants in that they have their own finance offices that will help you arrange for your own fiscal destruction and, if they (or you) can talk your parents into it, theirs as well.

This must be stopped -- but until the financialization of education is reversed it won't be.  Until that day comes the best you can do is to take a long, hard look at the numbers and figure out how to get the education you want without taking any debt at all.  If that cannot be done given your specific set of circumstances then in most cases what you're proposing to do is objectively a bad deal.

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