Higher Education Part II

Some years ago I was staying with my mother for a visit and happened across an AARP newsletter that actually interested me. The article was called “How to Learn Just about Anything Online for Free.” I’m all for learning, and even more so for free or very low cost.

It was a pretty good list. Some of it included major universities that have put lectures online—MIT (MIT OpenCourseware), Harvard (Harvard@home), and Berkeley (webcastBerkeley) among them. It listed a couple of sources for downloading textbooks and other books for as low as a dollar: AbeBooks.com and Alibris.com. This was before practically everything became available for e-readers through Amazon or Barnes & Noble, but I think these sources are supposed to be even less expensive.

OpenCulture.com was another recommended site being updated with new content. And for the even more tech savvy senior, ITunes U with over 100,000 educational video and audio files. Add to that AcademicEarth.org and of course YouTube EDU, which offers lectures from some of the top universities. Then there’s VideoLectures.Net and TedTalks (one of my favorites). There’s also WebMD and BBC video language learning courses. The list isn’t quite endless (although it might be nearly endless, now several years hence), but let’s just say there are a great many low-cost ways to get yourself educated from your computer. It’s not unheard of to imagine homeschooling through college on a shoestring budget.

For a little more cost, there’s GreatCourses.com, at about $100 per college level course.

Getting the information you want to learn—for little or no cost—is not the problem with higher education. So maybe it’s about getting a degree.

Options for that are growing online as well. BYU-Idaho, for example, has a growing program called Pathways, to help people get their college degrees through distance learning combined with local class groups. This can be ideal for homemakers who dropped out to support a spouse, or people who made it partway through college, took a job, and eventually had a career stall. The program is real college, accredited, with more support than traditional distant learning classes. (Mrs. Political Sphere and her sister are both in their first month of this program, and feeling great about getting back into progress toward a degree.)

Meanwhile, a typical college education is currently costing in the range of a starter home—often without the promise of salary commensurate with paying back student loans. 

Andy Kessler and Peter Thiel on Uncommon Knowledge

While I was thinking about higher education and gathering this list, I happened to spend an evening listening to the latest Uncommon Knowledge discussion, this one from September 20^th, with PayPal founder/venture capitalist Peter Thiel and author Andy Kessler talking with host Peter Robinson about the progress of technology, including the disappointment that it hasn’t gone further. Twenty-one minutes in, they switch gears and started discussing higher education.

I got down part of the conversation (from notes, so not necessarily direct or full quotes):

Peter Thiel: The top universities serve as a sort of tournament credential….  These colleges never want to expand the number of people they let in.

Peter Robinson: So they are in the business of exclusivity?

Peter Thiel: In that sense education is not a positive sum game about learning and education, but a zero sum game.

Andy Kessler: Universities are a sorting mechanism…. If corporations were allowed to give aptitude tests, universities would wither.

Peter Thiel: Yeah, 15-minutes aptitude tests would not cost you a quarter million dollars a semester…

Andy Kessler: And four years of your life….

Peter Robinson: So, top universities are in the best shape, not because they do a better job of educating, but because they’re in a better position to do the sorting.

Peter Theil: They [graduates] want to have the credentials of a top university, because it is an IQ test in disguise, yes.”

Andy Kessler [about online education affecting K-12 education]: We have the same problem we have with energy and pharmaceuticals. It’s a regulatory issue.

Peter Theil: Large sectors of our economy are government run—quasi-government run. And so, if you define technology as doing more with less—more computing power with less cost—education is the opposite. We’re doing less with more. We’re spending more and more money. The quality of the public school teachers has steadily gone down. So you’re getting less for more. So it’s actually moved in the opposite of a technological—it’s an anti-technological direction.

 

To summarize, what we have is a burst of availability of information and education sources for lower costs—just like you’d expect from a free market technology economy. But simultaneously we have ever more expensive and limited sources for the credentials necessary for upper-middle-class-and-higher success.

And it is at this point that the president steps in to “solve the problem of the cost of higher education.” Recall what Reagan once said: “The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.'”

Part III to come.

Doing the Math

Last Wednesday (November 2), our current President wrote a piece for The Harvard Crimson, called “We Can’t Wait: Helping Manage Student Loan Debt.” He mentions that he had recently announced at the University of Colorado at Denver “steps we’re taking to make college more affordable and to make it even easier for students like you to get out of debt faster.” 

So the plan should show steps affecting affordability and quicker debt repayment, right? For today’s math, we’ll just look at how his plan addresses the rate of debt repayment. Here are his word:

That’s why we’re making changes that will give about 1.6 million students the ability to cap their loan payments at 10 percent of their income starting next year. We’re also going to take steps to help you consolidate your loans so that instead of making multiple payments to multiple lenders every month, you only have to make one payment a month at a better interest rate. And we want to start giving students a simple fact sheet called “Know Before You Owe” so you can have all the information you need to make your own decision about paying for college. That’s something Michelle and I wish we had. 

Let’s summarize his plan’s points:

1. Cap payments to 10 percent of income.
2. Consolidate loans and make a single lower payment.
3. Give students “Truth in Lending” disclosure.

Let’s wait on number 1 for a bit, and start with number 2. A consolidated loan is a new loan totaling the sum of government-subsidized loans, private, loans, and parent loans—in order to pay off those loans and have a new single payment. The consolidated interest rate might be lower than some loans, higher than others. But typically the consolidated loan is entered into not just for simplicity but for lower interest. With a lower overall interest rate, payments can actually go down without increasing payback time. 

This is great news! Except it isn’t news. This has been standard practice for students upon graduation for decades. It is the status quo, not a sudden new resolution to high student loan debt. 

Does number 3 lead to quicker payback of debt? The Truth in Lending Act (1968) requires disclosure in any kind of loan from credit cards to mortgages. Student loans offer additional information. The student is clearly told, not just the amount being financed, the interest rate, the finance charge, and total of payments (principal plus interest over the life of the loan), but will also have spelled out for him/her exactly what the monthly payment will be for each additional increment in student loan debt.

This is helpful information. Something Mr. President not only wishes he and Michelle had benefitted from—they did. For many years, the Truth in Lending Act has done exactly what Mr. President says his new idea will do. Again, what he is calling “Know Before You Owe” is not only the status quo, it has no effect on lowering college costs or increasing the speed of paying back student debt. 

So, if his plan includes an actual way to more rapidly pay back student debt, it must be number 1. Indeed, number 1 relates to repayment rate: the repayment rate will be lower or stay the same. If 10% of a person’s income is enough to cover the standard monthly payment, there will be no change, but if a person’s income is low enough that 10% is lower than the standard payment, then the payment will be only 10%, not all the way up to the standard payment. 

Let’s say a student graduates with $50,000 in student loans (higher than many, but he’s writing to Harvard students, so let’s say this is pretty common for the audience), and a rate of 6% (which may be at the low end), to be paid back over 10 years—then your monthly payment is $555.10.  That means your monthly gross income would need to be $5,551.00 or higher in order to meet this standard payment. That’s an annual income of $66,612. For Harvard graduates that might be in the range of possibility for a starting job, depending on field of study. But let’s just admit that isn’t a common starting rate for new college graduates across the country. 

So, let’s say a starting wage for a graduate is half that: $33,306 per year, or $2775.50 per month. What happens when you start with the same loan amount and same interest rate, but with a lower payment? You make more payments—464 payments instead of 120 payments. You’ll be paying interest on the remaining principal for 38 years (as opposed to 10), which means your actual interest will be considerably more. How much exactly?

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Interest rate	Total principal to be repaid	Length of loan	Total interest paid over life of loan	Total amount (principal plus interest) paid over life of loan
6% per year	$50,000	38 years	$78,548.00	$128,548.09
6% per year	$50,000	10 years	$16,612.30	$66,612.30

You take longer to pay back the amount, and end up paying 4.7 times more [I used this calculator] total interest—exactly the opposite of what Mr. President says the cap will accomplish. 

So when he says,  

These changes will make a real difference for millions of Americans. We’ll help more young people figure out how to afford college. We’ll put more money in your pocket after you graduate. We’ll make it easier to buy a house or save for retirement. And we’ll give our economy a boost at a time when it desperately needs it.

…should we believe him? I’m thinking I’d rather believe someone who has done the math.