If you have one or more kids that are approaching the time when they fly the nest, you’re either involved in this in some way or likely will be.
I’ve hammered on this nail many times, but I’m going to do it again today, because right about now is when decisions have to be made about next year and bad decisions here can cripple or even economically destroy a young adult.
This is not overstating the case folks.
In the 1970s and early 80s you could spin pizzas or wash cars and put yourself through school, and many people did. Today that is nearly impossible, and a big part of the reason is that schools have gotten predatory and treat young adults not as a mission but as a revenue source to be extracted from to the maximum possible extent.
I look at balance sheets literally all day long. Guess what: So do colleges, and the balance sheets they’re looking at are yours, having essentially forced your disclosure through the FAFSA.
Simply put colleges know on-aggregate what their degree is “worth” in discounted cash flow over a period of time, say, 10 years (the typical student loan repayment period.) Over the last two decades they have increasingly ratcheted up their price to approach as nearly as possible that delta in value and in many cases exceed it, with full knowledge that they’re doing so.
What this means to you is that the marginal value of such an education, that is the delta in earnings power less the price of obtaining it, has trended toward zero and for many fields is deeply negative.
There is another side to education that is non-monetary, and schools know that too. That’s the value of “prestige”; the social value that allegedly comes with a degree from a given school. Here’s the problem: Most of that so-called “social value” is not really about the school, it’s about who you are and you either have it or don’t before you go. Where this really gets bad, incidentally, is in the private college area where that “cachet” is played to a ridiculous degree.
The 2011 graduation rate for full-time, first-time undergraduate students who began their pursuit of a bachelor’s degree at a 4-year degree-granting institution in fall 2005 was 59 percent. That is, 59 percent of full-time, first-time students who began seeking a bachelor’s degree at a 4-year institution in fall 2005 completed the degree at that institution within 6 years. Graduation rates are calculated to meet requirements of the 1990 Student Right to Know Act, which directed postsecondary institutions to report the percentage of students that complete their program within 150 percent of the normal time for completion (that is, within 6 years for students pursuing a bachelor’s degree). Students who transfer and complete a degree at another institution are not included as completers in these rates.
Is it sinking in yet?
That is, four out of 10 do not manage to complete their studies in six years.
Now folks, step back a second, because the price you’re quoted is predicated on four years of work. Inflate it by another 50% if there are two more years required!
That little scam, incidentally, is not new. Colleges are notorious for setting scheduling up such that it’s nearly impossible to get a gatekeeping class (one that’s required to progress in your major) at the point in time where it would usually fall. This forces the student to take an extra semester worth of work (at an additional cost of another semester’s tuition, room and board!) and the problem only becomes more-acute if there is any interruption in progress (such as a class you fail or have to withdraw from for any reason.)
By the way, if you think the tony private and very exclusive institutions are particularly better in this regard you’re wrong. Private, non-profit colleges (those nice expensive highly-credentialed ones) still have a one third failure rate after six years, or just marginally better than the 59% completion rate overall.
At a four-year public institution? 32% or about one third. Non-profit? 52%, better, but still nearly half do not finish “on-plan” and therefore on cost. For-profit? 36%, or about one third.
This, folks, is very, very important because all of your pricing data is predicated on you finishing within four years. You’re off by half if it takes you six and if you don’t complete at all it’s a sunk cost!
Now I’m sure you’re going to tell me that your little snowflake is special. Very special. And he or she will never flunk out, will not fail, will succeed, get through in four years and then go on to get a great job that will make this all work out.
Just remember that the more-exclusive the school the more likely it is that every single person there believes they are also one of those very special precious snowflakes, and not ordinary. Yet the fact remains that of those “special snowflakes” at these exclusive private institutions half of them melt into slush and are financially damaged against expectations, and one third fail to complete their degree at 150% of quoted cost and are decimated.
Remember that there is no discharge in bankruptcy for student loan debt. Period.
The damage is not just to the kids either; schools press hard to get parents to blow all their money as well, including reaching into intended retirement funds. That’s an outrage, especially when the odds are taken into account of not finishing at all, but it happens every single day.
Further, as a parent if you co-sign they will come after you and sue you to beyond the orbit of Mars to force payment, even if it means losing your house — and everything else you own. Remember, student loan debt is not dischargable in bankruptcy — period.
The post-secondary educational game is a form of financial******that we have encouraged through the years first by allowing student loan debt to treated “specially” instead of like any other unsecured debt and then by making it available to pretty much anyone who asks. The result is that colleges have run the numbers and added their glitzy marketing to the package, putting forward a premise that for four out of ten incoming students fails to advance their economic prospects and damages them instead.
In most lines of work a business that did this sort of critical damage to people on a routine basis with four out of ten being economically destroyed would be considered a criminal enterprise and the perpetrators — all of them — would be prosecuted.
But in this case it’s considered something to look up to instead, as the perpetrators are found both in the colleges and the government itself.
Folks, I’m a parent. I, like everyone else who is a parent, believes that my child is special. But as a parent my first and foremost obligation is to provide guidance based on my longer tenure of experience to my younger, starry-eyed offspring, and not to get the stars in my eyes as well. An 18 year old is no longer a child, and if my child decides to put herself into debt to attempt to gain an education that she is odds off to complete within the plan and cost that is sold to her, and has a four in ten chance of not completing it at all, that’s her call. The day she turns 18 I cannot stop her from doing so.
But if I enable that act in any way, shape or form, or worse, actively encourage it, knowing these odds, then I deserve to be BBQd and eaten if her gambit fails, because nobody in their right mind would willingly take a gambit that has a 4-in-10 chance of economically destroying their future given the existence of other options — and there are other options.
There are ways to attempt to gain a post-secondary education without debt. A potential sunk cost that is not debt-financed is simply an expenditure that didn’t work out. That is supportable. It’s difficult and for some people it means not going to college at all — but that is in fact the right choice for a significant percentage of young adults.
Debt-funded post-secondary education, on the numbers, especially when the quoted figures are intentionally understated by as much as 50% for the typical case, is simply not a supportable decision.
via It’s That Time Of Year Again in [Market-Ticker] / Karl Denninger