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June 24 2014

College Loan Debt: Why President Obama Is Wrong and Howard Schultz Is Right

Charlotte Hays

President Obama believes that student loan interest rates are responsible for the plight of indebted college graduates. In this, he has the company of Senator Elizabeth Warren.

Market Watch reports:

Obama’s idea is to cap repayment loads on undergraduate loans at 10% of income, saving an early-career schoolteacher $132 a month. The president also endorsed Warren’s bill to reduce interest rates on older loans by letting borrowers refinance at around 3.8%.

Neither of these is the solution. The problem is getting large enough to need more radical solutions, which [Mark] Cuban pointed out last week and which Starbucks’s SBUX +0.26% CEO, [Howard] Schultz, is doing something about.

Schultz, who has actually run a business—as opposed to President Obama’s having landed an almost entry level job running a country—sees the culprit not as interest rates but as the principal of the loan.

If you get out of college owing $100,000, you are seriously in hock, regardless of what the interest rate is.

I am a big believer in the liberal education, but I can still recognize that getting a job is just as important. And sometimes people go into debt to get a degree that doesn’t justify the cost of that degree:

You don’t have to be Einstein to know $150,000 in loans to get a $42,000 job doesn’t compute. Those people will defer buying houses and cars (at the margin, anyway, the data don’t actually show much effect). And yet society doesn’t want everyone to study coding or accounting. So what to do?

Unlike the president, the Starbucks CEO has ideas that might actually reduced the cost of getting a degree:

First, innovate. This is where Schultz comes in.

The Starbucks alliance with Arizona State University, announced last week, calls for Starbucks to pay up to $30,000 for employees to study at ASU through its online program. It’s not for everyone, but for people who value practical skills over football games (or need to save cash), online education may do fine.

If not, find other ideas and experiment. Because a system where costs rise 7% a year for more than a generation — like at Catholic — is not sustainable. Neither is the 52% growth in student-loan balances outstanding since 2009, to $1.26 trillion.

Second, start funding state universities again. …

State colleges were set up to be cheap so everyone could go. Great university systems like California’s and Virginia’s were meant to foster mobility through cheap education. Even that’s slipping away: California in-state students pay $32,400 all-in. They’re not rich-kid havens yet, but some are uncomfortably close.

I am not sure that state universities are underfunded, but it does seem clear that students might be able to find less expensive schools that serve them quite well.

Market Watch offers another tip: bargain.

When Junior or Janie insists on a pricey school, you might tell Precious that maybe you’ll think it over--and then bargain:

One [father] told his son to go to Clemson rather than Villanova for half the cost; his credentials would fall in the same broad band of reputation. Dad would pay up if Junior got into Harvard, but double for Villanova was a no-go.

This is a lesson we apply to everything but college. You’ll pay $1,000 for a suit, but not at Sears SHLD -0.05% . You’ll pay $50,000 for a BMW, but not for a Pontiac Vibe.

The mother in the other story laughed at a school proposing she mortgage her house. Not only do I have other kids to educate, the mother told the school, but if I hock the house, I’ll do it for Notre Dame, not Providence College. The kid went to a state school. He’s no music therapist, but he’s fine. Providence, whose tuition this fall tops $43,000, learned nothing.

The day is coming for all three strategies. As Cuban told Inc. magazine last week, college tuition is a bubble. When easy credit disappears, students will get price-sensitized and colleges will fail, he said. Subsidizing loan interest for mediocre education feeds the problem instead of fixing it.

There are too many colleges. Too many are overpriced. Too many students and parents fear confronting the obvious and pushing back. And if you’re waiting for politicians to do it, well, ha-ha-ha.

When this happens, colleges and universities will have to do more to attract students at affordable prices. Rick Perry may be just another cowboy to the liberal elite but Perry's proposal for a $10,000 college degree may be just the ticket to allow more people to get a degree without incurring lifetime bondage to debt.

 

 

 

 

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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