Tuition Bubble - What a Scam

Michael Stuart Kelly · October 20, 2011

Tuition Bubble - What a Scam

Want to understand one of the main issues driving the Wall Street protests?

The problem isn't student loans. The problem is tuition.

I heard a guy somewhere give a breakdown of the left in academia that has made the most sense to me so far. (I wish I could remember who it was, but he will have to stay unnamed for now.) And it explains the student loan issue really nicely.

Back during the SDS (Students for a Democratic Society) years in the 60's (the very people covered by Ayn Rand in The New Left: The Anti-Industrial Revolution), there came a point where it fractured off into three branches. One branch turned violent and became The Weather Underground. Another joined the ranks of the establishment, mainly the going into the universities and, oddly enough, a few folks into Wall Street. And a third went into New Age self-discovery and self-improvement movements.

The group that went into the universities (which was a natural place for them to go, seeing as they were college students majoring in intellectual subjects like history, etc.) did not lose their radical nature, but instead found a way to spread it to the young and receive a paycheck for it under the guise of academic freedom.

The idea was that the SDS movement failed because the older people in America were not capable of understanding why the leftie agenda was superior to everything else. So they needed to form a generation of younger people more receptive to their message. They needed to indoctrinate the young by stealth.

When these lefties started being hired, normal university professors were largely ivory-tower people with rather peaceful natures. At meetings about new hiring and budget assignments, the lefties would be there making a huge fuss--as is their nature--about getting more of their colleagues and programs on board. The ivory-tower folks let it happen just to stop the noise so they could get back to their classes and pursuits.

By this means, the lefties grew in academia and even the violent branch of the SDS was invited in once the underground people resurfaced and the legal issues were dealt with (Bill Ayres, Bernardine Dohrn, etc.). Also, some really nasty lefties and anti-establishment people started getting hired as well (Ward Churchill, etc.).

From the universities, it was easy for lefties to move on to infiltrate state education boards and set the curriculum of grade schools on up to high schools. And think tanks branched out from these people.

The leftie rewriting of history got a steroid boost and the children of normal working people started receiving anti-American indoctrination right under their very noses. As they were working and busy living their lives from day to day, and this process was peaceful and slow, they simply did not see it.

Historical American figures like Daniel Boone were removed from the history books while people like labor leaders were given central stage. And all previous American historical heroes were taught as if they were nothing but exploiters and oppressors of the downtrodden at root.

We now see the result of this indoctrination all around us, but there is one part that the mainstream media has not yet caught up with. Take a look at this chart comparing the Consumer Price Index against cost of housing (which is blamed for the financial meltdown) versus the cost of tuition.

You can read an analysis here (from where I got the chart): Charts: College Tuition vs. Housing Bubble.

It looks like those lefties in academia are making damn sure they get paid well. And I imagine that the ivory-tower folks are not complaining too much since they get their slice of that pie.

Now here's the thing. The lefties pulled this off by going through their think tanks into government lobbying and getting laws passed for the government to back student loans. This is how they got the banks to give it up while they could raise their prices at whim, essentially by saying on paper, "We want more."

And little else.

The indoctrination plan is finally bearing fruit. The brainwashed kids have grown older and now are out on the street protesting about student loans and blaming the banks. But the cost of tuition keeps rising much faster than anything else, so academia is cashing in big time.

It's a sweet deal they managed to pull off.

Notice that nobody is blaming the universities for spiking their prices through the roof. They are blaming the banks.

This makes Enron look like a piker.

Wait until clarity about this con game actually goes mainstream.

You won't see kids demonstrating in an "Occupy College Budget Office" movement, though. They've been indoctrinated.

Apropos, I wonder if the banks are making junk derivatives out of student loans, I wonder...

Michael

merjet · October 20, 2011

Apropos, I wonder if the banks are making junk derivatives out of student loans, I wonder...

Junk or not, there are already asset-backed securities comprised of student loans. There is even a government agency, Sallie Mae -- formed years ago and akin to Fannie Mae and Freddie Mac -- to buy the loans and securitize them. The guarantor is the Department of Education (l ink). Whether or not they become junk will much depend on whether or not the loans will be forgiven. That is something many of the Wall Street Occupy protesters want. Presently a borrower can't escape repaying a student loan via bankruptcy law, but that could change. The Obama administration has already proposed lower repayments or forgiveness for student loans (link).

Selene · October 20, 2011

Merlin and Michael:

Precisely. I saw this in the late '60's as I battled their infiltration of the university where I taught.

This is what I was pointing out on the other thread. These Federally backed "loans" have become the new "derivatives" and they are even better than the mortgages because they are virtually immune from the Bankruptcy Act.

You have to give the marxists credit. They are similar to the blob in the movie with Steve McQueen. Constant pressure across the social structure until a small crack is discovered and then the seeping ooze begins to enter.

Four decades later, we have a four (4) year degree costing anywhere from $80,000.00 to $200,000.00 plus. And the debt is guaranteed!

Second, the unsecured student loan debt has just surpassed one trillion dollars [$1,000,000,000,000,000.00].
This is debt that has been guaranteed by government. It is also one of the most secure unsecured debts in the economy because it is virtually impossible to discharge in bankruptcy.
Therefore, it is similar to the scam of the mortgage derivatives which were guaranteed by Fanny and Freddy because the mortgages were sold as good debt because once the homeowner was into the mortgage and fell behind, they would not be able to refinance and therefore would be impaled on the original debt.
Third, the unholy crony socialist/fascist wedding of the government's guarantee of student loans have acted as incentives for the colleges and universities to maintain their absurd costs for their useless degrees. Nice little scheme they came up with!

Adam

not looking good for America folks

Reidy · October 20, 2011

WSJ just ran a feature on this, starring Glenn Reynolds (cited in the article that #1 link to).

Michael Stuart Kelly · October 20, 2011

Pete,

Class action suite against law schools for inflated claims of potential employment?

Heh.

I love it.

Here is the embedded video you linked to.

Michael

sbeaulieu · October 20, 2011

The guarantor is the Department of Education

This makes we want to vote Ron Paul even more. Can you imagine the backlash of the DoE getting scrapped?

~ Shane

sjw · October 21, 2011

Very interesting Michael, but is it really true that the bulk of the tuition increases are actually going into the leftist professor's pockets?

Shayne

sjw · October 21, 2011

Some reasons for tuition hikes:

http://www.usnews.com/education/articles/2009/01/15/the-surprising-causes-of-those-college-tuition-hikes

Shayne

Selene · October 21, 2011

Very interesting Michael, but is it really true that the bulk of the tuition increases are actually going into the leftist professor's pockets?
Shayne

Shayne:

Define bulk.

Remember to include their lifelong TIAA-CREF pension, one of the best in the country. Life long AAA medical coverage. Life long disability in your calculations. Security. Free campus parking and other ridiculous perks. Also, that grueling teaching schedule.

Edit: http://www.deltacostproject.org/about/board.asp Good grief, look at the Board at this "non-profit!"

sjw · October 21, 2011

That's not a very scientific/empirical analysis Selene. I'm not claiming you're wrong, but without supporting facts and statistics comparing teacher pay several decades ago to today, and accounting for possible increases in other professional fields, it's mere speculation.

Shayne

Selene · October 21, 2011

That's not a very scientific/empirical analysis Selene. I'm not claiming you're wrong, but without supporting facts and statistics comparing teacher pay several decades ago to today, and accounting for possible increases in other professional fields, it's mere speculation.
Shayne

Shayne:

There was no analysis, scientific or otherwise. I asked for a qualification as to what would, in your opinion, constitute "bulk?" 20%? 2%? 51%

Just attempting to get a range that would qualify as proof.

Adam

sjw · October 21, 2011

Selene, it's about making a case for the conclusion that was reached, not a statistical definition of "bulk." I don't see that any case has been made whatsoever.

It is certainly a curious thing that tuition has gone up so much compared to everything else. Something is definitely rotten somewhere, but I don't know for sure where. Well, I do know for sure where in terms of ultimate root cause, I just don't know how to trace this cause to specific increases in college tuition.

Shayne

Selene · October 21, 2011

Selene, it's about making a case for the conclusion that was reached, not a statistical definition of "bulk." I don't see that any case has been made whatsoever.
It is certainly a curious thing that tuition has gone up so much compared to everything else. Something is definitely rotten somewhere, but I don't know for sure where. Well, I do know for sure where in terms of ultimate root cause, I just don't know how to trace this cause to specific increases in college tuition.
Shayne

OK. We can both work with that concept.

Can we agree that there has been since 1990:

1) a tech bubble;

2) a housing bubble; and now, possibly,

3) a tuition bubble.

Now during the housing bubble, the prices of houses went up radically while other prices stayed relatively even. Agreed?

Why? Certainly a tremendous increase in demand and government policies that inflated housing, created a consumption environment and packaged mortgages with sub prime and derivative devices. Additionally, the repeal of provisions of the Glass Steagall Act,* turned the banks into casinos.

*The repeal of provisions of the Glass–Steagall Act of 1933 by the Gramm–Leach–Bliley Act effectively removed the separation that previously existed between investment banking which issued securities and commercial banks which accepted deposits. The deregulation also removed conflict of interest prohibitions between investment bankers serving as officers of commercial banks. This repeal directly contributed to the severity of the Financial crisis of 2007–2011 by allowing Wall Street investment banking firms to gamble with their depositors' money that was held in commercial banks owned or created by the investment firms.^[4]^[5]^[6]^[7]^[8]^[9]

Can we agree on the above?

If not, where would you amend, add or subtract from the above?

Adam

to be cont'd

bmacwilliam · October 21, 2011

I think there's another concept here that seems to be overlooked. The simple, dispassionate look at education as an investment.

It seems to me that if education was "too expensive", what this really means is that the payoff for investing in education isn't worth the money required to purchase it. This would be the same regardless of your wealth (a crappy investment for a poor person should be the same crappy investment for a wealthy person).

Now if money wasn't available or the cost was too high, this could adversely affect the poor more directly. However, right now, money is almost free. Seems like a bit of a non-issue to me.

Bob

sjw · October 21, 2011

Selene, I don't know enough to fully agree with what you said, but your summary seems quite plausible.

Shayne

Selene · October 22, 2011

Selene, I don't know enough to fully agree with what you said, but your summary seems quite plausible.
Shayne

Shayne:

Since we are on the same proposed page, the following information is a good base to start from:

The Real Reason for College Tuition Increases

The past year has seen a wave of protests by California’s public university students against tuition increases. These students have often been encouraged by their professors. But maybe the people encouraging them are the people they should be protesting against. Tuition increases are necessary because of increasing expenses, and the single most significant source of expenses in California’s university system are the personnel costs. So how much does a professor make? Could the solution to California’s higher-education budget crisis be not to raise tuition, but instead to lower rates of compensation?

It isn’t hard to get an idea what taxpayers and students end up paying our college personnel. One can refer to the Sacramento Bee’s “Search for State Worker Salaries” link, where you can enter the first and last name of a full time state university system employee and it will display their salary for the most recent year.

For this analysis, I went to a department website and got the name of an associate professor with one of the social sciences at U.C. Davis, and learned that this individual earned a salary of $89,467 last year. According to the department website, this associate professor earns $89K per year in return for teaching (this spring quarter) one class, that meets for two hours on one afternoon per week. The professor is also obligated to be available to his students for office hours for one hour per week, immediately after class.

Clearly there is more to this professor’s job than showing up to school for three hours per week. In order to earn $89K per year this person has to prepare lesson plans, grade papers and exams, and presumably engage in research. And spring quarter may be a light quarter, and usually this professor may have two classes, or even three classes, requiring a presence on campus for 15 or even 20 hours per week.

But before considering whether or not a typical social sciences professor in California’s university system actually works full time, let’s calculate how much their benefits are worth. Because total compensation has to include all costs, including current benefits and current funding obligations for future retirement benefits.

There is a Total Compensation Calculator provided by the UC Davis Dept. of Human Resources that can get us started. Assuming this individual is single and has no dependents, and elects to receive PPO Health and Dental Insurance coverage, and also taking into account the annual funding being set aside by the university for their retirement pension, their actual compensation per year is not $89,467, but actually $111,260. And it doesn’t end there.

As discussed in earlier posts, specifically in Sustainable Pension Fund Returns, but also explored in California’s Personnel Costs, Maintaining Pension Solvency, and elsewhere, it is not likely that the pension funding obligation disclosed in the “Total Compensation Calculator,” in the case of our social sciences professor, $15,755 per year, is going to be adequate.

This is because the pension funds currently assume they can earn a real rate of return of 4.75% per year – that’s the return on the total fund investments after inflation – when in reality a sustainable return over the next few decades is unlikely to exceed 3.0% per year.

Our social sciences professor, like most all non-safety personnel in the UC System, will get a retirement pension according to the following formula: # years worked x 2.5% x final year salary (ref. University of California Retirement Plan). It is reasonable to assume they will work 30 years, live for 30 years in retirement, and collect 30 x 2.5% = 75% of their final salary as a retirement pension for 30 years, or $67,100 per year (with cost of living adjustments) for the rest of their life.

This is, by the way, about triple what someone can expect after working 40 years and then collecting social security, but more to the point, will a contribution of $15K per year for 30 years yield a sufficient amount of money to fund a pension of $67K per year for 30 years? One must fight the temptation to let the mind wander, because the next few facts are key to understanding one of the biggest financial tsunamis the world has ever seen, and it is just offshore.

At a CalPERS official projected rate of pension fund returns (after inflation) of 4.75%, a 75% pension for 30 years, funded by 30 years of contributions, would require an annual contribution of 25% of salary, or $22,367 per year.

At a more realistic projected rate of pension fund returns (after inflation) of 3.00%, a 75% pension for 30 years, funded by 30 years of contributions, would require an annual contribution of 41% of salary, or $36,681 per year. Care to wager as to which figure is safer to use?

Remember you’re wagering on the future of your children and your nation.

By this reasoning, our social studies professor doesn’t make “total compensation” of $111,260 per year, but $132,186 per year. But we’re not through. Returning to our handy “Total Compensation Calculator,” provided by UC Davis, the following footnote is instructive: “The value of UC’s generous sick leave and vacation time is not included in this calculation.” So how generous is this benefit, and how does that compare to the sick leave and vacation times typically afforded in the private sector?

If you refer to the UC Davis “Accrual of Vacation” page, you will see an employee, on average during their career, will enjoy four weeks vacation per year – 20 working days. Similarly, on the page referencing holidays, you will see they enjoy 13 holidays per year. These are conservative numbers, of course. In reality our social studies professor gets the Christmas break, a few weeks, the Spring break, a few more weeks, and the whole summer off, a few more months – and we haven’t calculated the value of their sick time policy, as the UC Davis HR Dept. helpfully suggests we consider. But even if you simply compare the 33 paid days off, as though school was in session 52 weeks a year, you are still seeing our professor enjoy at least 50% more days off than the average private sector worker. Pick a number – let’s tack on the value of 16 days off by taking a daily rate of $89K / 2,000 x 8 = $356 and add another $5,696 to our total compensation, to get ourselves to a grand total of $137,882.

This sort of pay is not on the high side, it’s actually fairly typical for employees of California’s higher education system. Take a look at all of the pay scales, again courtesy of UC Davis’s HR Dept.: Professional & Support Staff Salary Grades, and Managers & Senior Professionals Salary Grades. You will see the lowest paid full-time position in the system is $25,668 per year. But at the lower end of the salary scale benefits actually represent a greater percentage of total compensation.

If we apply our calculations used above to this lowest salary, we will see this position actually pays, including all benefits, at least $39,765 per year. This is thelowestrate of total compensation you will find. The maximum rate of pay for a UC Position, before benefits, is $282,372.

http://civfi.com/2010/04/23/the-real-reason-for-college-tuition-increases/

This is at least a start to begin to analyze this nightmare.

Adam

Selene · October 22, 2011

http://chronicle.com/article/Interactive-Map-Many-States/63567/ <<<<interesting interactive national map that shows alleged state "cuts" in Fiscal Year '09-10. Ranges from -21.10 % in Iowa to +18.5 % for Minnesota.

About These Data: These figures were reported by the Center for the Study of Education Policy at Illinois State U. and State Higher Education Executive Officers.

For the first time in the history of this annual “Grapevine” survey, the figures reflect total state fiscal support for operating expenses for colleges and universities, for student aid, and for state higher-education agencies. This money includes appropriations from state taxes as well as from lotteries, interest income, and other non-tax funds.

In previous years, the survey reported only appropriations from state taxes. The new methodology introduced this year was applied to all years shown.

These figures do not include appropriations for capital outlays and debt service, nor do they include appropriations from local governments. The data were collected from September to December 2009 and are subject to change, particularly this year as many states face budget gaps and may cut financing for higher education.

Different budgeting practices among the states make it impossible to ensure that all figures are perfectly comparable.

Selene · October 22, 2011

http://collegeaffordability.blogspot.com/2010/07/faculty-salaries-as-percentage-of.html

The average ratio of tuition payments to faculty salaries for public universities was 71%. As expected, since private universities receive very little state support, and rather rely on much higher tuition charges for their funding, the average ratio for private universities was a much lower 29%.

On the flip side, within each category, some do very poorly. Here is a list of the 5 public and private universities with the lowest ratio of tuition payments to faculty salaries:

Public Universities:

Miami University- Oxford (24.26%)

Coastal Carolina University (33.14%)

University of Vermont (33.53%)

Fort Lewis College (33.73%)

Troy University (35.12%)

Selene · October 22, 2011

On page 402 is an interesting formulae that "...allows one to predict, in two cases out of three, the average faculty salary at the colleges in this study, within $1,650."

http://www.augie.edu/dept/phys/Publications/Vander%20Lugt%20faculty%20salries.pdf

Brant Gaede · October 22, 2011

On page 402 is an interesting formulae that "...allows one to predict, in two cases out of three, the average faculty salary at the colleges in this study, within $1,650."
http://www.augie.edu...y%20salries.pdf

Two out of three is worthless, but I suspect three out of three would be worthless too.

--Brant

9thdoctor · October 22, 2011

One point to add to the discussion is that the private, “for-profit” schools (aka diploma mills?) are big offenders. I know someone who fell for the sales pitch hook, line, and sinker. She seemed to be under the impression that with a four year degree she’d be making $100k plus as an interior decorator, easily enough to pay off the $250K of loans she was going to build up. She couldn’t (wouldn’t?) hold down a job, and the student loans gave her enough money to live on for those years. Now, I don’t know how much an interior decorator makes, but $100K was more than I was making at the time slaving away as a CPA with a Master’s degree. I haven’t kept in touch with her (this was maybe 10 years ago), so I don’t know how it’s turned out. Any guesses?

When the shit hits the fan, do you think the liberal arts colleges are going to be assigned the blame, or will it go to those filthy capitalists who have taken advantage of the system?

Reidy · October 22, 2011

What you are talking about is the kind of business that springs up in response to subsidies. If you were to take the subsidies away and put the risk on the businesses themselves or their cooperating lenders, they wouldn't rush in to collect government money. The aforelinked WSJ video talks about this. Rand talked about it in "Notes on the History of American Free Enterprise" and Greenspan briefly in "Antitrust," both anthologized in CUI.

9thdoctor · October 22, 2011

What you are talking about is the kind of business that springs up in response to subsidies.

No doubt, which ties into one of my favorite Thomas Sowell quotes: Blaming economic crises on 'greed' is like blaming plane crashes on gravity. My point was about how private 'greed' is going to take the blame come bailout time.

merjet · October 22, 2011

One point to add to the discussion is that the private, “for-profit” schools (aka diploma mills?) are big offenders.

True. See here.

When the shit hits the fan, do you think the liberal arts colleges are going to be assigned the blame, or will it go to those filthy capitalists who have taken advantage of the system?

I'd bet on that. Very few will blame the government for subsidizing/guaranteeing the loans. Very few will blame the borrowers.

By the way, default rates were much higher before about 1993 than recently (link). I don't know why.

Michael Stuart Kelly · October 22, 2011

Dennis,

You strike on a fundamental point--one that I have been grappling with in Internet marketing.

Here is the marketing angle bullet point for both colleges and diploma mills: a diploma is an essential aid to high income.

That's a false premise, though. A total rationalization that serves as a smokescreen to cover the true value.

Diplomas are useful only where they are formal barriers to entry of getting a job. (To entrepreneurs, they serve no business purpose whatsoever.)

Outside of getting through a formal job barrier, the only other value a diploma has in society is as a status symbol, like a fancy car or a trophy wife (or husband or significant other).

Status symbols are always expensive.

So far, so good marketing-wise. Diplomas are getting really expensive. As status symbols, that's what they are supposed to be.

(Imagine the OWS crowd realizing that they are protesting the loans they took out to acquire a status symbol! Heh.)

Now for the practical value of an education.

What does a person with a PHD in Native American Fine Arts expect such a diploma to produce in his life? And what does that depth of learning mean to the market? Will his latest scholarly tome on Comparative Ritual War Dances of Extinct Native American Tribes become a best-seller?

Heh again.

To be fair, there are cases where diploma + education work together productively, like with brain surgeons. I certainly don't want a self-taught brain surgeon cutting into my head. So for careers that require that level of study and supervised training, I believe a university diploma is high honor. But that is not a performance characteristic of most careers.

A good counter-example for a highly technical field is computer security. Reformed hackers get top-dollar, not PHD's.

So the diploma-seeker really needs to do a reality check on the true value of the diploma he seeks before he takes out a loan and commits to the classwork to get it.

Anyway, I still feel a twinge of guilt when I contemplate lil' ole' me charging a price of $2,000 for a "member's only" DVD course in Internet marketing (or information marketing). That actually is the going rate for the top tier gurus.

But I am eventually going to do it. If this is done honestly and the guru actually inspires the student to take action in addition to providing him with an easy-to-learn system that has proven to work for becoming a successful entrepreneur, it makes you wonder:

University diploma = $300,000 (more or less)

Effective entrepreneur training = $2,000

And the trainee makes just as much money, if not more, than the diploma holder.

Hmmmm...

Sounds like one hell of a bargain from that angle.

(As an aside, the entrepreneur training is a lot cheaper than 2k--even free--if you are self-motivated.)

So I guess it depends on what a person seeks in an education: fundamental knowledge for a career that he goes out and builds, or status and emphasis on esoteric knowledge for a career that someone else has to provide for him.

Granted, not everyone is cut out to be an entrepreneur, but I suspect a lot more people are than they admit to themselves.

I want to say you will be hard-pressed to find one down at the OWS rallies, but that's not true. I hold you will find a lot of spoiled brats who would make excellent entrepreneurs if and when they grow up and learn some self regulation.

Michael

Tuition Bubble - What a Scam

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