Who is the government really helping with student loans and grants?

Lee Friday – March 31, 2017

Financial Post (August 26, 2013): “For all those students racking up debt, their degrees are increasingly worth less. . . . CIBC World Markets economists Benjamin Tal and Emanuella Enenajor note the cost of a bachelor’s degree is 20% higher than it was in the late 2000s but the unemployment rate among university graduates is now only 1.7% lower than high school graduates. The employment gap used to be much wider between university and high school graduates. . . . Canada is experiencing an excess supply of post-secondary graduates.”

CNBC (January 29, 2014): “Nearly three-quarters of hiring managers complain that millennials — even those with college degrees — aren’t prepared for the job market and lack an adequate “work ethic,” according to a survey . . . A wide range of businesspeople, corporate recruiters, academics and others interviewed for the study agree that recent college graduates deserve a grade of “C” or lower for their preparedness for their first job. . . . more than 60 percent of employers said applicants lack “communication and interpersonal skills” — an increase of about 10 percentage points in just two years. Many managers also said that today’s applicants can’t think critically and creatively, solve problems or write well. . . . Time noted that jobs are going unfilled as a result, which hurts companies and employees. Companies say candidates are lacking in motivation, interpersonal skills, appearance, punctuality and flexibility.

CBC News (September 10, 2015): …… the number of people aged 25 to 29 living in the parental home more than doubled between 1981 and 2011 . . .  Young people were hit hard by the 2008 financial crisis, and Ontario numbers show incomes for new graduates have yet to recover. Six months after graduating in 2012, their incomes were seven per cent less than when students graduated in the class of 2005. And two years after graduation, their incomes were 14 per cent lower than they had been for the class of 2005. Only one of the 25 fields tracked, computer science, increased in real terms compared to 2005.

The Wall Street Journal (September 29, 2015): “Recent college graduates are significantly less likely to believe their education was worth the cost compared with older alumni and one of the main reasons is student debt, which is delaying millennials from buying homes and starting families and businesses.”

The Globe And Mail (November 1, 2015): “. . . on surveys completed last winter by 444 York [York University, Toronto] students . . . Almost 40 per cent of York students said financial stress has caused them to consider dropping out . . . 48% neglected studies or reduced course load because of debts”

The Wall Street Journal (April 7, 2016): “More than 40% of Americans who borrowed from the government’s main student-loan program aren’t making payments or are behind on more than $200 billion owed, raising worries that millions of them may never repay. The new figures represent the fallout of a decade long borrowing boom as record numbers of students enrolled in trade schools, universities and graduate schools.”

Mises Institute (April 7, 2016): “ . . . many students spend vast amounts of money on college degrees that will never contribute much to actually paying off loans or . . . toward the graduates’ actually earning a living . . .”

National Post (May 30, 2016): “The Canadian University Survey Consortium surveyed more than 18,000 graduating university students from 36 Canadian universities for its 2015 annual report. The average debt-ridden student owed $26,819. ….. Students who took out more student loans were more likely to report poor mental health in early adulthood”

The Wall Street Journal (January 18, 2017): “. . . Last Friday, the Education Department released a memo saying that it had overstated student loan repayment rates at most colleges and trade schools and provided updated numbers. . . . Revised Education Department numbers shows at more than 1,000 schools, at least half of students defaulted or failed to pay down debt within 7 years . . .”

WHY  IS  THIS  HAPPENING ?

I have written about the negative economic consequences of the monopolized banking system (see here). This system enables the government to borrow newly created money to fund innumerable interventionist schemes to satisfy the desires of special interest groups, at the expense of the masses who absorb the well-disguised losses. Without the monopolized banking system, governments would have to resort to direct taxation – i.e. undisguised losses – to fund these schemes. Thus, most of the schemes would never arise because governments know that high levels of taxation would trigger a massive revolt by the people. Student loans/grants are one such scheme.

Government loans are not a response to rising tuition costs. Causation works the other way.  Government loans CAUSE a continual increase in the cost of tuition.

The government hands out student loans like candy, which increases the demand for post secondary education. Universities and colleges respond to this increased demand by raising prices – tuition. The increased rate of spending at universities and colleges is much higher than the increased rate of enrolment. This is facilitated by increases in tuition far above the rate of inflation, made possible by the government’s easy-to-get-student-loans. The Globe And Mail (January 17, 2017) reports: “Colleges are currently consulting on “compensation frameworks” . . . executives could be eligible for raises of more than $100,000 a year . . .” Administration and faculty at tertiary educational institutions are direct beneficiaries of government student loans, while students shoulder the liability.

EXPLOITING  MILLENNIALS

Many older adults have foolishly burdened themselves with debt. They are present oriented – “I have to buy this now” – thus, they borrow against future earnings, failing to properly assess the risk. They are living beyond their means. Unsurprisingly, their children follow in their footsteps. The apple does not fall far from the tree. If parents are ill equipped to judge the dangers of debt, their offspring are easy pickings.

CBC News (September 3, 2015): “It may sound crazy, says Kyle Prevost, co-author of More Money for Beer and Textbooks, but not all youth realize a loan is something they have to pay back. Not to mention, most government student loans accumulate interest after graduation. “I know a lot of students that were not aware,” he says. For many, parents filled out the applications, creating confusion about where the money came from, what a loan is and what the borrowing terms were. Others adopt a live-in-the-moment mindset. They reason “I don’t know what this is and I know it won’t affect me for years, and there’s a party Friday night so I don’t have to worry about this right now,” he says. The attitude, Prevost says, is a mixture of procrastination, refusal to be realistic and lack of understanding.”

From the Globe And Mail article: “Basic financial literacy does appear to be a contributing factor to the debt struggles of York students. One-third of them answered incorrectly or didn’t know the answer to a question about compounding interest and debt repayment ……. “I talk to a lot of my students here and they just have no idea how the student loan system works, and what the implications for them down the road are,” Prof. Letkiewicz said.

Mises Institute (February 2, 2017): “Student loan money is so easy to come by that the students aren’t even bothering to see if their degree program has the potential of providing relative ease in repaying loans.”

Borrowing money is a serious decision, not to be taken lightly. Are young people sufficiently mature and experienced to make this potentially life altering decision? When they apply for student loans, they are not required to pledge collateral, nor display any capacity to repay the loan i.e. the money is easy to get. These youngsters have just finished high school, where they had to ask permission to use the bathroom – and now the government dangles this carrot in front of them, saying “Make a decision.”

The plain truth is that students, and their parents, are products of the government’s primary and secondary schooling factories, which do not impart the requisite financial and economic knowledge to make an educated decision about the ramifications of accepting loans from the government (or from banks).

When they leave college or university, having graduated – or not! – many students are faced with the responsibility of repaying large loans, with interest, and frequently without the lucrative job that the pre-enrolment propaganda, or their own ignorance, had led them to believe would most certainly be awaiting them.

As a lender, if someone asked me to suggest a way of exploiting young people who don’t understand the dangers of debt, I would be hard pressed to come up with a method which surpasses the effectiveness of the government’s student loan program.

There are many (socialists) who are in favour of replacing student loans with grants, because everyone has a ‘right’ to an education. This is unacceptable. It places the entire burden of artificially high tuition costs on the backs of taxpayers, while virtually eliminating the incentive for students to ascertain whether their education will substantially improve their employment prospects. Students would be relieved of the financial stress which loans create, but they would also be relieved of the responsibility for planning their own lives. Developing a sense of responsibility is a vital part of the process of growing up.

Because grant money is even ‘more free’, demand will increase further, which means tuitions will increase further, which means taxpayers will be penalized at an increasing rate. Thus, for many students, grants will simply magnify the effects of student loans – excess supply of graduates; unemployment; underemployment.

EDUCATION – FOOD  FOR  THOUGHT

One of the problems in Canada, the United States, and many other countries, is that education is often not tailored to the needs of employers. Furthermore, four years of post-secondary education means four years of not working. Absence from the workplace explains the absence of a work ethic, which is a significant concern of many employers today. The earlier adolescents start working, the more likely they are to develop specific skills, good work habits, and a sense of responsibility. The longer they wait, the more likely they are to be unskilled, lazy, and irresponsible.

Consider the experience of a country with far less government ‘education intervention.’ In Switzerland, Time Magazine (October 4, 2012) reports: “About two-thirds of 15 and 16 year-olds who finish nine years of obligatory schooling choose to continue their education through Vocational Education and Training (VET) . . .” This system follows “a dual-track approach combining practical training at a host company with a part-time classroom instruction at a VET school. Trade organizations determine skills that are most in demand in the labor market, ensuring that apprentices will be adequately trained for jobs in their fields.” Companies benefit from the “productive output” of apprentices, who receive salaries during their three-year VET programs.

Even though it’s not as demanding as a university curriculum “apprenticeship is not just education for dummies,” says Stefan Wolter, head of the Centre for Research in Economics of Education at Bern University. “It attracts the most talented students, so when companies hire former apprentices, they know they are getting qualified employees.” 19-year-old Jonathan Bove said “The idea of university never appealed to me. The vocational training is more hands-on and the path to a good job is shorter.”

“ . . . less than 3% of Switzerland’s young people are unemployed, the lowest rate among 30 industrialized countries belonging to the Organization for Economic Co-operation and Development. (As a comparison, that rate is over 12% in the U.S and 22% in European Union nations).” . . . Switzerland “consistently scores at the top of world education rankings . . .”

John Taylor Gatto, author and former New York State and New York City Teacher of the year, wrote this about Swiss education: “It seems the Swiss don’t make the mistake that schooling and education are synonyms. . . . Many of the top management of insurance companies, manufacturing companies, banks, etc., never saw the inside of a high school, let alone a college.”[1]

CONCLUSION

“In a world of more market-oriented colleges,” says economist Ryan McMaken, “we’d be seeing colleges that work strenuously to reduce costs while increasing the quality of faculty instruction.”

McMaken is correct. If all levels of government stopped their intervention by ending their student loan/grant programs, does this mean students would be deprived of tertiary education? Of course not. The end of the programs would cause demand to plummet, thereby forcing colleges and universities, as McMaken said, “to reduce costs while increasing the quality of faculty instruction.” Tuition would once again become affordable. Exorbitant tuitions are a product of government intervention, not the marketplace.

Prior to the State’s provision of student loans and the imposition of a monopolized banking system, tuitions were largely market-driven and affordable. Consider:

Annual tuition at Yale remained at $33 from 1810 to 1852. In 1918, a blue collar worker at Ford earning $5 a day needed to work only 32 days (no income tax) in order to save enough to pay the annual tuition at Yale, which was $160.[2]

Perhaps tuition-free education, and not at taxpayer expense, will be the death knell of government intervention.

The government’s student loan program is having a detrimental effect on many of those it is supposedly designed to help. For many of them, the effects are quite intense – lack of full time employment in their chosen field, delayed careers, underemployment, financial stress, continued parental dependency. Confronted with these issues, it is not surprising to see a decline in self-esteem, confidence, and mental health in young adults. This is not an encouraging sign for the development of society as a whole. Let’s correct the problem. If you want as many students as possible to have access to post-secondary education, you should oppose government intervention in this market.

 

[1] John Taylor Gatto A Different Kind Of Teacher (Berkeley Hills Books, Berkeley, California, 2001) pp 103-104

[2] Taken from a YouTube video by Peter Schiff, titled: How Government Programs Drive Up College Tuitions. I encourage you to watch this ten-minute video. Schiff is an author, investment broker, financial commentator, and CEO of Euro Pacific Capital Inc.

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