Is There Any Value in Education?

I read a disturbing article in the Wall Street Journal today talking about how difficult it has become to obtain a school loan. I could swear I have read this story before, but this article was particularly striking because it also discussed a rise in tuition for both public and private colleges, 6% and 4% respectively. The article simply states that the once-lucrative business of school loans has dried up and students are feeling the pinch, especially in an economy where many parents are out of work. The article made me really think about how the value of education may change in a post recession America.

The article headline, “Students Rely on Federal Loans to Pay Rising Tuition,” reminded me of a conversation I had with a close friend almost a year ago. We were sitting discussing the state of the world over a cup of coffee. At the time, he was a first-year med student at a state university. The school had just raised his tuition and we were discussing how this fit into the broader economic disaster that seemed to have no end in sight. Last year in New York, state schools raised tuition as a money generator for the State. With a dwindling tax base stemming from high unemployment, the State was trying to be creative with generating additional funding. At the time I thought this was brilliant from a public policy perspective. During a recession, as unemployment rises, tax revenue falls. But the last thing you want to do is add an additional tax burden onto the fragile bones of an economy. Solution? Cash in now on students who can defer the tax payment to a later date by taking out a larger school loan! My student friend listened politely, even agreed with me, but he didn't like it.

Yesterday’s article flipped my thinking on this whole issue. I am now more honed in on the scary fact that students can no longer leverage future income to meet their rise in tuition. By putting both tuition hikes and loan problems in the same article, a much larger issue seemed to appear (even though the article did not make the link). The value of the college grad in a post recession economy does not look good.

The credit issues our students are facing means our lending institutions do not believe a degree is as economically realistic as it used to be. What if a degree no longer guarantees students will make enough money after graduation to afford their debt service? The answer is what we are seeing in the market: the loans are drying up. A student in 2009 is becoming a bad business deal.

Making the business deal even worse is the rise in tuition. Schools (and governments) are hurting for money. Endowments took a hit but professors still need to be paid. It is making a degree with seemingly depreciating value more risky because of a higher cost. The conclusion one could draw is that we have reached the tipping point of risk/return. It no longer makes sense to lend additional funds to meet the rise in tuition because the long term return just isn't there.

Have we past the time when a college student could simply leverage their future potential to secure a loan?

It seems this market phenomenon is the recognition of a new risk factor related to future wages. I considered, but dismissed, the possibility that the currently high unemployment rate is an influencing these loan decisions. Unemployment trends are relatively quick, short term problems; the loans we are discussing are medium term with a minimum 14 year time horizon from issuance, since a student doesn't begin paying back until they graduate and I believe a typical payback term is 10 years. If we dismiss the short term unemployment factor, the alarming new risk is probably an anticipated drop in lifetime wages of a degree-holding worker, a really important medium- to long-term risk factor. In this case, loans are not made because the investment no longer creates an income (wages) that support the debt service. In short, the college degree is no longer worth its price tag.

How scary is that possibility?!


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