Daniels Is Proving Just How Bad Colleges (and People) Are at Controlling Costs

Mitch Daniels took over the presidency of Purdue University in 2013. They have yet to have a tuition increase on his watch. That, quite frankly, is remarkable in the world of higher ed and, perhaps, even unimaginable in a world in which annual tuition increases are a given. For more details, I refer you to this Inside Higher Ed story.

I’m particularly fond of the Daniels story because he’s proving me right. And everyone likes to be proved right.

Since becoming intimately familiar with the world of higher ed, when preparing for and then occupying the presidency of a college, I’ve contended that annual increases in the cost of a college education were not inevitable, as many claim, but were, in part, the product of gross mismanagement, namely, the pathetic inability of college trustees, administrators, and faculty to control their costs. Stated differently, higher ed is smothering in waste, inefficiencies, and extravagant spending.

They get away with it because students and their parents are willing to pay the ever-rising prices, in tuition, fees, and room and board, and are willing to go into debt to finance these purchases. Moreover, thanks in part to the cartel called the accreditation system, the competition isn’t there to constrain price increases, as it is in many other industries. But that doesn’t make it right or without consequences.

One of the consequences is student-loan debt, which is now in the neighborhood of $4 trillion. Not that most college trustees, administrators, and faculty care. They don’t. If they did, Daniels would have more company in his campaign against out-of-control spending. And Purdue wouldn’t be alone in holding the line on tuition increases for seven straight years.

Colleges and universities mismanage resources on so many levels. But, of course, they’re not alone. Their bad habits are shared by other nonprofits and governmental agencies — organizations that are not accountable to investors. But it’s not that all for-profit organizations excel in this regard. They don’t. Many of them do a poor job of controlling expenses, too. But, overall, they do a far superior job than their nonprofit relatives.

It will be harder for other colleges and universities to peddle their excuses now that Daniels and Purdue have shined the spotlight on them. Yet I don’t expect much to change for most institutions. They’ll continue to increase prices every year.

There’s only one thing that will bring about change, and that’s competition and consumer awareness. If and when students stop enrolling because there are better values to be had elsewhere, then and only then will boards of trustees hire administrators with the skills and guts to act in the best interests of the students.

But there’s a bigger lesson to be learned here, Vera, for what we see in the world of higher ed and organizations generally, we also see play out in the world of household finances. Continue reading

Student-Loan Debt Is Following Americans into Retirement

I can’t imagine carrying student-loan debt when I was 40 years old. Or 50. Or, for heavens’ sake, 60 or older. But that’s what happening in America according to the New York Fed.

Of course, some of this debt will never be repaid. The U.S. taxpayer, who holds most of the debt via its federal government, will have to absorb the losses. The winners in such a system are the colleges, who received most of the loan proceeds.

When I was a college president, I was shocked by the willingness of some students to incur ridiculous amounts of debt for a college degree with little economic value. There just didn’t seem to be any concern over the relationship between the debt and that which was being purchased with the proceeds, or about the impact of the debt on their lives in the years ahead. I believed then and believe now that we need:

  • to do a much better job of educating our kids about personal finance; and
  • to revamp a seriously flawed student-loan program.

Unfortunately, none of this seems to be a priority, either with our local school boards or our national government. So nothing has changed. Except the loan balance, that is. The total amount of student debt has grown to about $1.5 trillion. And it’s continuing to rise.

Students Use Your Money to Invest in Cryptocurrencies

I have issues with our federal student loan program. But this wasn’t one of them. Until now that is.

From Investopedia:

According to a study by The Student Loan Report, over one-fifth of current university students with student loan debt indicated that they used their student loan money to invest in digital currency such as bitcoin.

The student loan news and information website found that 21.2% of the 1,000 students they surveyed indicated that they used their borrowed cash to gamble on the highly volatile digital currency market. While school administrators may look down upon the practice of using borrowed funds for non-school expenses, Student Loan Report indicates that there are currently no rules against it. College students are able to use loans for “living expenses,” a flexible category that covers a wide range of potential necessities.

I wonder if any of these risk takers will be unable to complete their studies because of their investment losses. Probably, but we may never know.

All of these student loans are funded by money borrowed by your federal government. In other words, you, the taxpayers, are on the hook to repay those borrowed funds if the student-borrowers fail to repay their student-loans. Not surprisingly, student-loans have a high default rate, meaning the lender (the U.S. Government) has to absorb the losses. It appears those losses may be increasing due, in part, from the risky investments made by the students in cryptocurrencies.

It will be interesting what effect, if any, stories like this one have on the student loan program. The main beneficiary of the program is the colleges, who would be compelled, without the program, to run more efficient operations and keep tuition low. In other words, the student-loan program is an indirect subsidy of the colleges.

There are better ways to assist needy students with a college education. Yet, at this time, I haven’t seen any political support for pursuing any of them. So it looks like taxpayer money will continue to be used for dubious purposes.

The Transformation of a Government into a (Bankrupt) Bank and Insurance Company

The U.S. Government now holds over 30 percent of all consumer debt. When you add in all the federal mortgage guarantees, it’s clear that our national government has slowly but surely become one huge bank underwriting the leveraging of its citizens’ balance sheets.

But, of course, that’s not all. The national government also is one humongous insurance company. It’s called Social Security, Medicare and Medicaid.

I’m not suggesting this role the national government plays in financing and insuring its population is bad. Or good. That’s for you to decide. But it certainly is dramatically different — from what it was 100 years ago, that is.

You might ask, How can the government afford all of this? After all, many borrowers default on their student loans, meaning the government (more precisely, its taxpayers) have to absorb those losses. Plus, the social safety net programs run at a large deficit, which will grow exponentially over the next few decades as baby boomers retire and put unimaginable strain on the Social Security and Medicare systems. So how indeed does the government afford to keep these programs alive?

It’s simple: it borrows. How ironic that the country’s largest bank and insurance company also is one of the world’s largest debtors.

And who does it borrow from? Lots of lenders, including real banks, insurance companies, pension funds, endowments, individuals and a host of countries, the largest being China.

But surely there must be a limit to what constitutes prudent borrowing, you might ask. History tells us there is. More specifically, history tells us that once a country’s debt exceeds 90 percent of its GDP, the debt becomes a drag on growth. Well, ours has or will soon exceed those levels, meaning that it’s likely we’ll grow slower than our potential and that our standard of living will suffer.

That shouldn’t come as a surprise to anyone. But, for reasons I don’t fully comprehend, we’ve decided to take from our children and their children so we can have more today. That tells you something about our character, I suppose.

The other thing that can happen — and which may be happening now — is that the debtor nation’s currency can become less valuable. If that happens, inflation can ensue, further eroding purchasing power and the debtor nation’s standard of living. Given how the U.S.’s currency has been reacting lately (somewhat akin to an emerging market country’s currency, which, of course, isn’t good), it’s possible we’re beginning to see that erosion accelerate. But we still have a ways to go before it becomes a problem. The concern, however, is that these things can unravel quickly. And when they do, it will be too late to reverse the effects.

All and all, it’s a troubling development, this transformation of our national government into a bank/insurance company. Perhaps it wouldn’t have been so bad if we had decided to bear a larger portion of the costs as they were incurred. But we didn’t. Instead, we decided to put the bill on our national credit card. While cutting taxes for the wealthy. Surely, over the long term this is a disaster in the making.

It might be a good time to convert some of those savings to renminbi.

The Price To Pay For Spending Tomorrow’s Income Today

When you borrow, you’ll pulling spending forward, that is, you’re spending tomorrow’s income today. Sometimes that’s smart; sometimes it isn’t. In fact, debt can be a killer.

It can kill your retirement. Your security and well-being. Your marriage. Your job. Your dreams. Even your life (suicide rates rise during recessions and periods of high unemployment).

Yet America is in love with debt. But perhaps it’s a toxic love affair. Perhaps, Vera, you’d do well not to fall in love with debt as so many of your fellow Americans have done.

Not all debt is bad though. Continue reading