The Student Loan Racket: Ron Paul Right Again

Ron Paul was asked about student loan programs, which have made debt slaves out of countless kids, in his excellent interview on Meet the Press. Here’s an excerpt from Rollback, my book from earlier this year, that amplifies his points:

We know all about the easy-money policies that lured people into crushing amounts of mortgage debt, but we hear less about how those same policies have encouraged impossible amounts of debt related to higher education, for undergraduates and graduate students alike – especially in the wake of the financial crisis, when the job picture for these students is so bleak. (Many of them have indeed found employment, to be sure, but not quite the jobs they were looking for.)

In early 2009, Forbes magazine told the story of Joel Kellum and Jennifer Coultas, who met at the California Western School of Law and were later married. When they graduated in 1995, their combined debt was $194,000. Each got a six-figure job. But even with one of them moonlighting, they managed to come up with only $145,000 in loan payments. That reduced the principal of the loan by $21,000. Just $173,000 to go.

When they divorced last year, the couple cited the crushing burden of law school debt as a key factor in ruining their marriage. “Two people this much in debt just shouldn’t be together,” said Kellum.

Or there’s Mindy Babbitt, who enrolled at Davenport University in her mid-20s to get a degree in accounting. She borrowed $35,000 at 9 percent interest, and assumed the income she could command with her degree would make it all work. Instead, the entry-level job she found upon graduating barely kept her above water. She deferred her loan payments, and for a while was out of work. At age 41, she told Forbes she despaired of ever paying off her loan. She earns $41,000 per year – $10,000 more than the average high school graduate. But by now her student loan balance has risen to $87,000.

In May 2010 the New York Times reported on the case of Cortney Munna, who graduated from New York University with $100,000 in debt. Of course, the Times could have chosen a great many individuals to profile for such a story; the number of people leaving college with over $40,000 in debt had increased ninefold over the previous decade. Munna and her mother bought into the propaganda: forget about the money you’re spending on college, since the rewards you’ll reap will far surpass them. In fact, she barely scrapes by, working for a photographer. That plus her degree in religious and women’s studies is what her $100,000 investment yielded her.

But perhaps we are being too cynical: what about the extra $1 million that college graduates are supposed to earn over their lifetimes compared to their high-school graduate counterparts? Forbes tackled that one, too. The $1 million figure is arrived at by taking the difference in annual income between college graduates and high school graduates, and multiplying it by the 40 years of the average working life. Where this claim falls short is that it assumes that the additional income earned by college graduates is caused by the college education, when it more likely reflects the fact that smarter, more motivated people are more likely to go to college in the first place.

Meanwhile, the combination of compound interest and low salaries is leaving wreckage everywhere. The four-year cost of undergraduate tuition, room, board, books, and fees at a public university is $46,700, and $99,900 at a private one, even after financial aid and scholarships are included. That also doesn’t include four years’ worth of foregone income – in other words, another $125,000. Bankruptcy won’t save these poor souls: college debt is one category of loans that cannot be written off in bankruptcy proceedings. They’ll follow you forever.

Of course, it is the subsidies themselves that push tuition costs ever higher. Here’s the obvious point everyone pretends not to realize: colleges know the students have access to low-interest loans courtesy of government. Aware that prospective students enjoy artificially increased purchasing power, college administrations raise tuition (and cut back their own aid programs) accordingly. When tuition thus continues to rise, as any fool could predict, we hear huzzahs for the government – for however could students pay this high tuition without government assistance? It is the classic case, as Harry Browne said, of the government breaking your leg, handing you a crutch, and saying, “See? Without me you couldn’t walk.”

This, by the way, is how the government defines affordable. As with housing, government programs artificially increase prices. What makes those inflated prices “affordable,” in the government’s version of things, is that you can get a government-subsidized loan to pay them. Letting prices fall in the first place, so people might be able to pay college tuition or buy a house without enslaving themselves to debt for the rest of their lives, is not even on the table. (Incidentally, Fannie Mae, which was created in order to foster affordable housing, makes loans in excess of $938,000. Hooray for “affordable housing” programs!)

Just about any professor, left, right, or center, can tell you how few college students today show the slightest intellectual curiosity about anything. Give me my B-minus and let me out of here. Even with all the grade inflation and the dumbing down of curricula, the National Center for Higher Education Management Systems found in 2006 that the six-year – six-year – graduation rate for students seeking bachelor’s degrees was a mere 56.4 percent.

For those students who actually belong in college, though, a combination of falling tuition and increased private aid – along with more part-time work, in place of full-time drunkenness – will keep college within reach. One form of private assistance that would no longer be crowded out by government involvement should subsidized college loans be phased out is Milton Friedman’s proposed human capital contract, by which students would pledge a portion of future earnings in exchange for tuition assistance in the present. Such a proposal has the added benefit of not making every single American into a debt slave the moment he enters the workforce. Students would not have to live in terror that their future salaries might be insufficient to repay their student loans. Repayment according to the terms of these contracts would be based on the student’s earnings and thus his ability to pay. Investment funds could spread out the risk of default by purchasing these contracts in large quantities. Shares in the funds would be traded analogously to how shares in real estate investment trusts are purchased today.

http://twitter.com/catdayz100 Florence

Makes good sense to me . Thanks Ron Paul
Anonymous

Once again, Tom, a great piece providing the free-market perspective on another one of Ron’s “controversial” positions. Thanks for giving the grassroots the ammo they need to fight the establishment criticism.
http://www.facebook.com/dave.burnham1 Dave Burnham

There is an hour you tube video on the “College Conspiracy” that goes into this. Some people predict that the college loan buble will be next to break.
Michael

It has always fascinated me that when my grandpa came to this country in the 1950s with nothing but a suitcase of clothes and $100, he was able to pay for an excellent, private college education by working summer and after school jobs. He was debt free by the time he graduated.
Paying for just one year of private college nowadays costs roughly as much as a Corvette.
Dreapisani

I’m so glad more and more people are speaking out about the higher education bubble. Thanks Tom
Blaine

Without student loan money pouring in, colleges would have to lower prices to compete for students. Among things they’d have to cut would be worthless courses and degrees as well as buildings and other structures designed to be monuments rather than places of learning. Students (and parents) would be more conscientious with how they spend their education money. All that would be a very good thing.
Paul

Are there people who are taking out loans that probably shouldn’t be, of course. But for all of the examples you cite, there are tons of examples to counter that show people who have gone to be very successful after borrowing money to get there degree. I could not have afforded to prepay for Business School, and was very grateful for the access to financial aid.
People do need to be educated on what they’re singing up for. Borrowing $100k for a degree in Religious and Women’s Studies is probably not a great idea.
Tricked College Student

Like an idiot, I fell for the ‘you’ll repay it all with your wonderful job’ – hook, line, and sucker. Now I’m about to get a Political Science degree next semester that is totally worthless, and I’m told that the only remedy to that is to pile on more debt by going to Law School.

Hook, Line, Sucker….
http://www.facebook.com/eksepulveda Efrem K. Sepulveda

I just found this chart with regards to Clemson University’s fee history. Colleges really do gouge the public. http://www.clemson.edu/oirweb1/fb/OIRWebpage/TuitionAndFees.htm
http://pulse.yahoo.com/_ZI3JIIG3XQ6NCOY3IDPR4LJLT4 ikihi

ron paul 2012
Ryan Fleharty

Right on Dr. Woods- you and Ron Paul gave me the free-market approach I needed to see the education system for what it is, and to start theinterversity.org to at least try and solve some of these problems by offering basic classes at 10-20% normal prices. As a college teacher, I’m glad to see this issue taking more prominence, with student debt being the largest sector of debt in the US today- its strangely effective and frightening to have my students study Jefferson’s triumphant liberalism under one of the most corrupt and centralized education systems possible. But again I’m glad student debt is being addressed more, as the youth are also the most malleable and growing demographic in the next election. If we can swing former Obama supporters, its the recently graduated mid 20s who have been wiped out of relevance by Obama’s policies and been lied to about most of his campaign promises. I think education can be a big card for the Paul campaign and libertarians at large.
NeilBJ

Dr. Woods,

I know this is off topic but I hope you will devote a future post regarding this news from the Vatican.

“The Vatican called Monday for radical reform of the world’s financial systems, including the creation of a global political authority to manage the economy.”
Anonymous

Great article, shared with my friends on Facebook. I also pointed out that it’s no coincidence that the three areas of the economy that have experienced the most significant pricing bubbles are the ones the government pours the most money into: housing, health care, and education.
Lascivus

I live near the amusement park Cedar Point in Ohio. Many foreign students come to work at Cedar Point each summer. Many use these summer earnings to pay their schooling and living expenses back in their home country the following year.
bill

You have good points, Paul. Most people should not borrow for college, especially with the job prospects being so bleak. The government must separate itself from the economy completely in order for things to work. Everyone should learn from the Austrian School on ways to save money and keep debt as low as possible. Only saving money and educating yourself privately can help us build for the future. Make contacts and work for a local industry that will be willing to teach you valuable customer service/trade/technical skills. These often cannot be learned in a classroom setting that is becoming obsolete with the internet. Far too many years are spent in school because of state/federal/international laws. As Lew Rockwell points out, if the market handled schooling, there would be many different kinds of schools competing, many with varying curriculum. What if a talented, mature and motivated student could become a doctor, spending tens-of-thousands less than the time and money it takes today to go to medical school? I agree with James Altucher: if a child wants to be a doctor, for instance, let him/her volunteer or work in a hospital changing bed pans. See if you have the compassion and competency to work in that field.

There is a point to all this useless education and bureaucratic training: lifelong learning for lifelong labor with no upward mobility. The elite do not want educated self-sufficient people who believe in individual rights. They want dependent, divided, immoral people who fight each other for the scraps from the table.
http://pulse.yahoo.com/_X2HCOP7AE6PW652LBKZGPHUXZ4 Alysse

Ugh this is very depressing…I wish I heard about you, Dr. Paul, Peter Schiff and Adam Kokesh like 4 years ago! I’m graduating with a Bachelor’s of Fine Arts in the spring, and I’m cared to death about finding a job to pay off my debt of 100K . I’ll gladly work outside the country at this point. You know, I went to a community college before transferring to the private art school I go to now. I was so ready to get out of there and be challenged to do my best, and felt I had to go this school because of its reputation and connections. Well, here I am, I love the resources, facilities and a lot of the professors, , but a lot of the student body is untalented hipsters, no joke. I can’t possibly fathom why they are paying so much for their education to do nothing, and the structure of the school doesn’t help in pressuring them to wake up and focus. I resent having to take out government loans just to finish school, knowing its because of them the price is so high. I would love to go to graduate school in the Netherlands in a couple years, but I don’t see that happening now.

Anyway, sorry for the rant.. despite all this I support you guys, and I’m doing my best to spread the word!
http://www.facebook.com/michael.r.pomroy Michael Ross Pomroy

Hope so, my daughter is a senior in high school.
http://rosarynovice.stblogs.com/ Augustine

Of course, student loans were labeled “good debts”, alongside home mortgages.
Anonymous

The Vatican back to selling salvation again?

http://www.garynorth.com/public/512.cfm

http://www.psupress.org/Justataste/justatasteRNelson.html
RFN

The vatican should sell some of their holdings and use the proceeds to help some of the needy. The pope is the vicar of Christ? Christ didn’t live so opulently. The vatican has no credibility here.
Anonymous

Even degrees with known good salaries feel the pinch. I graduated an EE, accumulated only a moderate amount of debt (30k) and have been working for four years straight. I still haven’t had the down payment for a new car, as any surplus income goes towards the loan principle. I do have it better then most, I easily pay my rent every month. However, watching construction workers drive brand new diesel pickups while I can barely afford a Honda is disheartening. I can only imagine what the next generation will have to cope with.
TJ

When I was a senior in high school, everyone else was planning on attending colleges which were $34,000-$40,000 a year. Curious as to how they would pay for it, they thought student loans and financial aid would pay for all of it.

For whatever reason, I had a gut instinct telling me to avoid a loan at all costs to pay for college, so I attended an in-state university with a very low tuition rate and graduated without having to go into debt.

It pains me to see other people my age recently out of college and laden with tremendous debt they will spend half of their life paying for.

Higher education has become a bigger sham than getting a winning check from Publisher’s Clearing House. The words of Will Hunting have come to pass. “You dropped $150,000 for an education you could have gotten for $1.50 in late charges at the local library.”
Debmrrw4631

I as a parent that cosigned for a debt for school loans have taken on the burden to pay it back so there goes any retirement. I had no idea what I was signing and I was the grown up- the 19 year old kid didn’t have a clue. Now he makes 10 dollars an hour.I pray that I can have them paid off before I die.
Debmrrw4631

I as a parent that cosigned for a debt for school loans have taken on the burden to pay it back so there goes any retirement. I had no idea what I was signing and I was the grown up- the 19 year old kid didn’t have a clue. Now he makes 10 dollars an hour.I pray that I can have them paid off before I die.
Alan Murray D

When government subsidises one sector/industry it creates a bubble by stimulating artificial demand. The easy credit causes fees to rise (just like inflation) and more and more schools are built as the education complex balloons. Enrolments increase as kids who couldn’t previously afford it, or were perhaps not suitable, can now get a loan. The result is an over supply of overly educated graduates (with crushing debts). Money that would have been available to the private sector to create jobs for graduates is diverted into creating graduates for non-existent jobs.

It’s easy to see all the jobs created for professors and lecturers and the government agency that is established to regulate the money changers who profit from your debt (and the government will claim it a great success) but it’s not so easy to see all the jobs that are destroyed or the jobs that never came into existence because of the government’s mal-investment or misdirection of capital.

Student loan schemes are no different to mortgage schemes and like all ponzi schemes, they eventually fall over like a house of cards.
http://www.facebook.com/JClintRamey Clint Ramsey

Great book Tom. I have read at least some parts of it probably 5 times and the whole thing at least 3 times. Anyone that wants nothing but Gold to throw out there in debates with clueless Dems or Neocons, Rollback should be at the top of your reading list.
L Kaz

For those students who actually belong in college, though, a combination of falling tuition and increased private aid – along with more part-time work, in place of full-time drunkenness – will keep college within reach.

Perfectly said.
I owe you money …

If you loan me money to start a business which fails, and I can’t repay you, that is simply called a bad investment and you loose money.

If you loan me money to go to school and I fail to complete it or am unable to find a decent job, that is called a student-loan and I become your debt-slave. Why?

Shouldn’t the loaner bear the risk that the loan will not show a profit? And if it was, wouldn’t this ensure that the funds were allocated to the right people and in the right quantity?
Peter Belles

What School did you go to ?
I have a BFA and it’s worthless to me.
Peter Belles

What Obama did recently about student loans will drive up the cost of tuition higher because more people will default on their student loans.
Peter Belles

My friend, lawyers are a dime a dozen.
Avendack

Excellent article. I’m worried about all those debt slaves out there. I never experienced school debt as I worked hard and did not borrow any money for my undergraduate or graduate degrees. My wife also worked hard and paid for her education. I believe that it’s possible to do, especially if a person will live frugally and perhaps go to the less expensive community college first. People need to be real about what they can and can’t do. Also, scholarships can help a lot.
Stacyfonoi1

I think that tuition is definitely out of control but I still think that students and their parents could be a little more wiser concerning the debt they get into; for example, most of them could choose to stay at home and go to the community college for all or most of their degree, the students could work part time as they go through school and keep paying down the debt as they go along, and the students should choose a course of education that will actually get them a “real” job rather than wasting their time by majoring in something that gets them no where. I keep reading of how several students choose one degree and then change their mind a half dozen times before finishing school, ending up with huge debt and then only qualifying for a job that pays around $30,000 a year. Now that is what my father use to call a stupid college student.
http://www.facebook.com/people/Monique-Michel/100000527371109 Monique Michel

“Bankruptcy won’t save these poor souls: college debt is one
category of loans that cannot be written off in bankruptcy proceedings.
They’ll follow you forever.” They become
slaves before they are experienced enough to realize what they are getting
into. Anyone who has experienced excessive
debt knows how that hole feels and it can take the life out of you. This system has to change for the sake of our
higher education so doctors can go to school and afford to pay their bills let
alone their education. The insurance companies and the government do
not pay them living wages for their work.
They are going broke too! Ron
Paul has been warning about this for a long time RP 2012.
Dreed16122

Why the difference?….because of rampant greed and corruption….back in the good old days people had a conscience….USA has been bought and sold to the higher bidder..it is longer a country….it is a business…