Here is an email from Eugene Holloway, a Maryland Attorney, on the rising cost of college education.

Eugene writes:

When I attended law school at George Washington U in 1969, the tuition was $1,900 a semester. I worked my way through and had no debts when I began to practice law.

Later, student loans became the norm. The loans were subsidized, encouraging students to become indebted rather than build sweat equity in themselves. Student loans also took parents off the hook for saving to pay for their childrens’ education. The result was still more government dependency.

Screwing up the marketplace with subsidies, drove up the price of education, encouraged institutions to grow based on government support, and placed undue emphasis (economically) on higher and frequently useless education.

We should expect the higher education market to suffer a similar fate to the real estate market, where subsidies, encouraging people to buy what they could not afford (and did not need) led them to a result that, when compared to their investment in time and treasure, was uneconomical.

Eugene Holloway

I spoke briefly with Mr. Holloway on the phone. He is from the Austrian economist school, and spoke of the “education malinvestment”.

Over time that is certainly what has happened. The cost of education has spiraled out of control with the cost of higher education far exceeding the payback unless one gets lucky in the jobs lotto process.

Many college graduates will be paying back student loans for 20 years or more. This is what happens when government tries to make things affordable. The same thing happened with affordable housing.

Fannie Mae Freddie Mac Mission

Has anyone even bothered to look up the Mission Statement of Fannie Mae?

We are a shareholder-owned company with a public mission. We exist to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market.

Fannie Mae Limits

Fannie Mae exists to expand affordable housing.

Fannie now offers loans as high as $938,250.

By what stretch of the imagination is that affordable? That such loans are deemed necessary is proof Fannie Mae has failed its core mission.

Fannie at least has a mission statement that one can understand. They failed, but the mission is clear. Compare an contrast to the Federal Student Aid program.

Federal Student Aid Mission

Inquiring minds are investigating the Federal Student Aid Program.

Organization and Core Mission

Federal Student Aid, an office of the U.S. Department of Education, ensures that all eligible individuals benefit from federally funded or federally guaranteed financial assistance for education beyond high school. Located in Washington, D.C., and ten regional offices, its 1,000-person staff consistently champions the promise of postsecondary education and its value to American society.

Federal Student Aid was formed as a result of the 1998 Amendments to the Higher Education Act of 1965. To face the challenge of modernizing the delivery of student financial aid, this legislation named Federal Student Aid the government’s first Performance-Based Organization (PBO).

Federal Student Aid’s five core objectives are to integrate systems, to improve program integrity, to reduce program costs, to improve human capital management, and to improve products and services.

Excuse me for asking but where exactly is the mission statement? Is this it? To consistently champion the promise of postsecondary education and its value to American society.

The objectives are clear however.

Federal Student Aid Core Objectives

1) integrate systems
2) improve program integrity
3) reduce program costs
4) improve human capital management
5) improve products and services

While the core objectives are clearly stated, it certainly is not clear what any of them have to do with helping students.

Integrating systems is the #1 core objective of the student aid program. Pray tell what the hell does that even mean?

Program “Success”

One way to measure success is by dollars spent. By that measure the student loan program is a rousing success.

  • $21.8 billion in Direct Loans were awarded to 2.9 million recipients in FY 2008, excluding consolidation loans. Funds were borrowed from the US Treasury.
  • FFEL funds are provided by private and non-profit lenders, insured by loan guaranty agencies and reinsured by the federal government. $52.9 billion in loans were delivered to approximately 6 million FFEL recipients in FY2008.
  • Perkins loans are made through participating schools to undergraduate, graduate and professional students. These loans are offered to students demonstrating the greatest financial need. Undergraduates may receive up to $4,000 a year and graduate students may receive up to $6,000 a year based on a student’s need and a school’s available funding.

The document states the student loan portfolio is now up to a whopping $556 billion.

Is it any wonder with success like that, that cost of education is spiraling out of control?

Nowhere along the line are there any incentives by anyone (either the colleges or those administering the program) to reduce costs.

As long as government is willing to “help out” with student loans, universities and colleges will keep raising prices, and the total cost of an education will keep soaring until one day it blows sky high, just as happened with mortgages.

Note that the loans are guaranteed by the government. Also note that student loans are not discharged in bankruptcy. Those two facts are all you need to understand why the financial industry as a whole consistently champions the promise of postsecondary education and its value to American society. No one really gives a damn about the students. Worse yet, were funding cut off, there would be student outrage over it when stopping funding is exactly what is needed to bring costs down.

Mike “Mish” Shedlock
Click Here To Scroll Thru My Recent Post List