Transforming Student Loans from Taxes Back into Debt

James Pethokoukis notes the skyrocketing ratio of student loan debt to household income, the currently spiking default rate on student loans, and wonders if a new federal government bailout is in the works:

See where this is heading? When you take into account America’s burgeoning bailout culture and the rising political power of younger voters, it’s no surprise that Citigroup thinks taxpayers might end up riding to the rescue:

Taxpayers already (or will) indirectly subsidize both the housing and healthcare sectors by covering GSE losses and paying for a healthcare system that pays out more than it receives in revenues. If the continued misalignment of educational resources ultimately leads to government “forgiveness” of student loan debt, it will simply be one more example of fiscal subsidies for a narrow demographic.

Citigroup estimates that writing off defaulted student loans would cost $74 billion, though such a move might nudge other borrowers to strategically default in hopes of a bailout of their own.

We have a very easy solution for this scenario, which enterprising politicians might use to both ride to the rescue of distressed student loan borrowers while avoiding the moral hazard issue of encouraging other borrowers to strategically default on their student loans: restore the ability of distressed borrowers to have their student loan debt discharged in bankruptcy!

In one fell swoop, it would be possible to both relieve the genuine distress of the excessive debt held by these individuals in such a way that would stop other less-distressed but really opportunistic people from considering strategic defaults on their student loans, thanks to the restrictions and higher costs of future borrowing activity that would be placed upon them in bankruptcy proceedings.

Plus, this reform would have the unique benefit of forcing the undoing of one of the biggest political power grabs of recent years: the federal government's takeover of the student loan industry.

Here, the unspoken goal of President Obama's policy has been to fully exploit the restriction of borrowers from being able to discharge their student loan debts in bankruptcy court as a backdoor means by which he could increase the amount of money that the federal government collects from low and middle income earners. All, we might add, without having to go through the hassle of fighting the political battle that would come from attempting to directly increase their income tax rates.

Just in case you wondered why President Obama has always been so keen to push "cheap" student loans....

That's also why President Obama has been so focused on increasing the tax rates of just those with high incomes, while pushing to keep the Bush-era tax cuts in place for low and middle income earners, even though such a strategy will do very little to reduce the federal government's annual budget deficits or the national debt. Since most income in the United States is actually generated by people who earn much less than $200,000 (or $250,000 per household), the President is simply using the old deceptive magician's trick of distraction in an attempt to keep low and middle class earners from recognizing how much of their income they're really paying in total to the federal government.

It doesn't matter that it's called "debt". If you cannot discharge it in bankruptcy and you owe it to the federal government, which sets the size of your payments according to the amount of your annual income, then the money that you're paying to the government should more properly be called "taxes".

At the very least, the federal government should require student loan borrowers to write that number somewhere in the "taxes you paid" section of their tax returns....

Image Source: ZeroHedge.

2012's Worst Paying College Degrees

Payscale.com analyzed the data in its online salary database and has revealed the college degrees that go along with the jobs that have the lowest median pay for their respective career professionals in its 2012-13 College Salary Report. Note - these figures represent the typical annual combination of pay, bonuses, commissions and profit sharing earned by people who have been successful in working in these fields for at least 10 years and were willing to participate in Payscale.com's survey, which means the reported median incomes will likely be inflated above each field's actual median incomes....

College Degree	Median Annual Salary
Child and Family Studies	$37,700
Social Work	$45,300
Elementary Education	$46,000
Human Development	$47,800
Special Education	$48,900
Culinary Arts	$49,700
Athletic Training	$49,800

So what possesses people to take out big student loans to go into professions like these that offer such little compensation? Payscale.com offers the following insight:

"According to our research, people in these majors typically believe their work makes the world a better place," says PayScale’s lead analyst Katie Bardaro.

To translate, the people in these majors are perhaps so disconnected from reality that they do not recognize that the reason their trades provide so little return on their educational investment is because they really do not require unique ability, which is why society does not reward them with greater compensation.

These people are then exploited by the higher education establishment, which really does know better, but can't help noticing that these same people are willing to pay nearly the same amount of money for their college degrees as do people in careers that society values a lot more.

And let's not forget the role of the U.S. federal government in guaranteeing and issuing student loans, which has its own ulterior motives for pushing higher education that offers little real benefit to society.

Elsewhere on the Web

Say what you will about the careers that go with the degrees above, but at least many of the people who pursue these degrees might actually get jobs in their fields of study, if only low paying ones. Kiplinger's Caitlin Dewey takes things several steps further and identifies the college degrees in Payscale.com's database that combine low pay with high rates of unemployment for their graduates!

Also, this isn't just an American phenomenon. Don't miss this perspective by a recent PhD graduate in Britain who complains that the "real world" doesn't understand or appreciate their skills.

Image Source: Global Elites.

Your GPA on Facebook

Facebook (NASDAQ: FB) CEO Mark Zuckerberg is one of Harvard University's most famous dropouts, leaving the school to launch his company on the way to becoming a billionaire. But could he be responsible for setting a number of college students infatuated with his creation on the path to unintentionally follow suit, although with much, much less success?

Although we suspect that the real answer to that question will be settled by tort lawyers in the future, what we're really looking at today is how excessive time spent by college students on Facebook affects their grades.

Your Potential GPA and Facebook Usage
Input Data	Values
Your Potential GPA (the GPA you reasonably think you can earn in this school session.)
How many minutes do you spend on average on Facebook every day?

Your GPA on Facebook
Calculated Results	Values
Your Likely GPA given your Facebook usage level

Here, researcher Reynol Junco has published a study that indicates that too much time spent on Facebook lowers the Grade Point Average (GPA) of college students. Finding that the average college students spends an average of 106 minutes (1 hour, 46 minutes) on Facebook each day, Junco documented that each additional 93 minutes per day beyond that level lowers a college student's GPA by 0.12.

That may not seem like much, but when the maximum GPA that can be earned at most universities is just 4.00, tenths of a point matter. That's especially true for students with GPAs in the margins between major letter grades, where missing the mark might mean potential employers pass over their résumés.

The reason why that would be the case is that time spent on Facebook is stolen from time available for study. Or sleep. Or physical activities. Or time that if used for other productive purposes has been noted to provide a positive effect on student grades.

But time on Facebook, not so much apparently!

That's why we've created our featured tool today, which college students can use to estimate how much their grades might be negatively affected for spending too much time on the dominant social networking site.

Just enter the average amount of time you spend on Facebook daily, along with the GPA you think you're capable of obtaining this quarter (or semester), and we'll let you know if you're liking Facebook a little too much this session.

If you're not happy with the GPA we show you, just cut back your Facebook time to more reasonable levels. Trust us, neither you nor anyone on your wall is that interesting.

And despite the movie and millions of dollars, neither is Mark Zuckerberg!...

The Next Scary Hockey Stick Chart

If Michael Mann's infamous hockey stick graph should be taken seriously as evidence that human activity is causing global climate change that must be stopped, or else it will trigger positive feedback effects that will result in a catastrophe that will ruin the lives of millions of people, what then are we to make of the following chart showing how the U.S. federal government is running up its own debt for the sake of loaning out money to college students?

Here, we find that the federal government has sharply increased the amount of money it borrows for the sake of loaning it right back out to college students since 2008. Beginning in 2009, the net increase in those borrowings account for 2.9% of the entire increase in the U.S. national debt observed since 2008. That amount is above and beyond the amount directly added to the nation's total public debt outstanding by the federal government's annual budget deficits.

In this case, the disaster that would directly affect the lives of millions of people means being forced at the direction of government bureaucrats into a dramatically lower standard of living for the sake of being able to make the payments on their student loans to the U.S. federal government, without any real hope of being able to discharge that debt through bankruptcy.

That, in turn, has the real potential to indirectly hurt millions of other people, because student loan payments are rising at the rapid pace supported by the government-subsidized cost of tuition, even though college graduates are entering into jobs that pay far below what is required to both live well and to support their super-sized student loan debt.

It is quite possible then that we have reached a point where higher education hurts the economic growth of the nation, rather than helps it:

Student loans could be the next asset class to school the United States about poor debt management. Graduates are now forking over more of their disposable income in repayments than 10 years ago, defaults are rising and with Uncle Sam now directly holding $450 billion of student debt, taxpayers are on the hook again. That could put U.S. higher education in the embarrassing position of hindering, rather than helping to fuel, economic growth.

Here's how: first, the size of the student loan market has mushroomed. Bachelor-degree debt at graduation has grown 250 percent over the past decade, according to finaid.org. At $867 billion, it exceeds both credit-card and auto debt in the United States, according to a study by the New York Federal Reserve. If this trend continues, by 2021 it'll be equivalent to 1.3 percent of GDP, triple its current level, assuming GDP cleaves to its 4.5 percent 15-year average nominal growth.

Next, average payments have risen by 83 percent over the past decade while median income for those aged 25 to 34 has increased by just a fifth, according to the Bureau of Labor Statistics. That leaves less money for graduates to spend or save. Extrapolate ahead 10 years, and former students will be paying $125 billion extra a year. By then, that would equate to two-thirds of a percentage point of GDP.

We wonder how the higher education bubble and federal budget crisis deniers will react to this hockey stick chart....

Data Sources

U.S. Treasury. Monthly Statement of the Public Debt of the United States, September 30, 2011.

U.S. Treasury. Monthly Statement of the Public Debt of the United States, September 30, 2008.

U.S. Treasury. Final Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2010 through September 30, 2011, and Other Periods.

U.S. Treasury. Final Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2010 through September 30, 2010, and Other Periods.

U.S. Treasury. Final Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2009 through September 30, 2009, and Other Periods.

U.S. Treasury. Final Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2008 through September 30, 2008, and Other Periods.

U.S. Treasury. Final Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2007 through September 30, 2007, and Other Periods.

U.S. Treasury. Final Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2006 through September 30, 2006, and Other Periods.

U.S. Treasury. Final Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2005 through September 30, 2005, and Other Periods.

U.S. Treasury. Final Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2004 through September 30, 2004, and Other Periods.

U.S. Treasury. Final Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2003 through September 30, 2003, and Other Periods.

U.S. Treasury. Final Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2002 through September 30, 2002, and Other Periods.

U.S. Treasury. Final Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2001 through September 30, 2001, and Other Periods.

U.S. Treasury. Final Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2000 through September 30, 2000, and Other Periods.

U.S. Treasury. Final Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 1999 through September 30, 1999, and Other Periods.

U.S. Treasury. Final Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 1998 through September 30, 1998, and Other Periods.

The Rising Unaffordability of a College Education

How much has the average cost of college at a four-year degree-granting institution risen since the 1976-1977 school year?

Our first chart below, drawing on data published in the Digest of Education Statistics: 2010 reveals the answer!

We see that the average cost of tuition and required fees at a four-year institution has risen from $1,218 in the 1976-1977 school year to $12,467 through the 2009-2010 school year.

But how affordable is that? To find out, we calculated the ratio of the average cost of tuition and fees with respect to the median household income for each of these years, which will give us a pretty good idea of just how affordable college has become for the years since 1976:

Here, we've shaded the years where the cost of a college education rose the fastest with respect to median household income. These are the times in which the cost of college really inflated beyond the ability of a typical American household to pay for it.

Next, let's look at the cost of college vs median household income, which will really let us see the inflation of the higher education bubble at work:

In this chart, we've estimated the additional inflation in college tuition and fees that has taken place in the 2010-2011 school year.

But what's really making college so unaffordable for the typical American household? The findings of a recently reported study points to the answer:

Perhaps worse for students than a crowding out effect is the Bennett Effect, named for William Bennett, who 25 years ago as Secretary of Education wrote for the New York Times, "Increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions."

[...]

There have been mixed findings on the Bennett Effect in recent decades, with some studies finding a dollar-for-dollar relationship and others, none at all. Determining why college costs are rising is a difficult task, after all. Stephanie Riegg Cellini of George Washington University and Claudia Golden of Harvard take a new approach, focusing on for-profit schools. Some of these are eligible to participate in so-called Title IV aid programs (named for a portion of the aforementioned Act) and some not.

After adjusting for differences among schools, the authors find that Title IV-eligible schools charge tuition that is 75% higher than the others. That's roughly equal to the amount of the aid received by students at these schools.

Without such subsidies, college students would pay the full cost of the tuition and required fees for their education out of their own pockets, or through other financial aid, such as through student loans. With subsidies, the average college student is effectively paying the same amount of their own pockets as they would have without the subsidies, but their universities are also collecting the additional amount of the subsidies.

We see this effect especially during years of recession, where the federal government acted to sharply increase the subsidies for college educations. That's why we see the higher education bubble greatly inflate during these years.

It wasn't always that way. Back in 1982, in the depths of the second biggest recession since World War 2, the federal government didn't jack up its subsidies anywhere near like it did in later recessions. As a result, the cost of college remained closely coupled to the incomes of the typical American household.

But as you can see, the federal government has different ideas today. Perhaps because it has become the dominant student loan provider, as student loans have become nearly the full equivalent of taxes.

Data Sources

Digest of Education Statistics: 2010. Table 345. Average undergraduate tuition and fees and room and board rates charged for full-time students in degree-granting institutions, by type and control of institution: 1964-54 through 2009-10. 5 April 2011.

U.S. Census. Current Population Survey. Annual Social and Economic (ASEC) Supplement. HINC-01. Selected Characteristics of Households by Total Money Income in 2010. 13 September 2011.