Meltdown in College Education

I have a couple of concerns regarding college education:

  • What will the costs be by the time my children attend college?  The rate of increase seems a little out of control.
  • What is the value of the education?  In other words, in the real world of hunting for great opportunities, what will employers, investors, and business partners really look for regarding a person’s education?

Over the years, I have worked with all kinds of college graduates.  It seems like most people are graduating with more realistic expectations:  they will be competing for jobs; they aren’t entitled to jobs.  I’ve heard a few stats as of recent like 85% of college grads move back in with their parents after graduation,and 25% of college grads in Los Angeles are unemployed.  The world is a different place today than it was a generation ago (regarding employment opportunities for college graduates).

I came across this article below written by Mark Cuban.  In it he is comparing our housing crisis to a potential education crises – at least related to the economics and financing of both.  Enjoy the article.

The Coming Meltdown in College Education and Why The Economy Won’t Get  Better Any Time Soon

This is what I see when i think about higher education in this country today:

Remember the housing meltdown? Tough to forget isn’t it. The formula for the housing boom and bust was simple. A lot of easy money being lent to buyers who couldn’t afford the money they were borrowing. That money was then spent on homes with the expectation that the price of the home would go up and it could easily be flipped or refinanced at a profit.  Who cares if you couldn’t afford the loan. As long as prices kept on going up, everyone was happy. And prices kept on going up. And as long as pricing kept on going up real estate agents kept on selling homes and finding money for buyers.

Until the easy money stopped.  When easy money stopped, buyers couldn’t sell. They couldn’t refinance.  First sales slowed, then prices started falling and then the housing bubble burst. Housing prices crashed. We know the rest of the story. We are still mired in the consequences.

Can someone please explain to me how what is happening in higher education is any different?

It’s far too easy to borrow money for college.  Did you know that there is more outstanding debt for student loans than there is for Auto Loans or Credit Card loans? That’s right. The 37mm holders of student loans have more debt than the 175mm or so credit card owners in this country and more than the all of the debt on cars in this country. While the average student loan debt is about 23k. The median is close to $12,500. And growing. Past 1 TRILLION DOLLARS.

We freak out about the Trillions of dollars in debt our country faces. What about the TRILLION DOLLARs plus in debt college kids are facing?

The point of the numbers is that getting a student loan is easy. Too easy.

You know who knows that the money is easy better than anyone ? The schools that are taking that student loan money in tuition. Which is exactly why they have no problems raising costs for tuition each and every year.

Why wouldn’t they act in the same manner as real estate agents acted during the housing bubble? Raise prices and easy money will be there to pay your price. Good business, right? Until it’s not.

The President has introduced programs that try to reward schools that don’t raise tuition and costs. They won’t work.  Right now there is a never ending supply of buyers. Students who can’t get jobs or who think that by going to college they enhance their chances to get a job. It’s the collegiate equivalent of flipping houses. You borrow as much money as you can for the best school you can get into and afford and then you “flip” that education for the great job you are going to get when you graduate.

Except those great jobs aren’t always there. I don’t think any college kid took on tens of thousands of dollars in debt with the expectation they would get a job working for minimum wage against tips.

At some point potential students will realize that they can’t flip their student loans for a job in 4 years. In fact they will realize that college may be the option for fun and entertainment, but not for education. Prices for traditional higher education will skyrocket so high over the next several years that potential students will start to make their way to non accredited institutions.

While colleges and universities are building new buildings for the english , social sciences and business schools, new high end, un-accredited  , BRANDED schools are popping up that will offer better educations for far, far less and create better job opportunities.

As an employer I want the best prepared and qualified employees. I could care less if the source of their education was accredited by a bunch of old men and women who think they know what is best for the world. I want people who can do the job. I want the best and brightest.  Not a piece of paper.

The competition from new forms of education is starting to appear. Particularly in the tech world. Online and physical classrooms are popping up everywhere. They respond to needs in the market. THey work with local businesses to tailor the education to corporate needs. In essence assuring those who excel that they will get a job. All for far far less money than traditional schools.

The number of people being prepared for the work world in these educational environments is exploding.

You would think traditional university educators would take notice. Beyond allowing some of their classes to be offered online, they haven’t. They won’t. Its the ultimate Innovators Dilemma. They don’t believe they should change and they won’t. Until its too late. Just as CEOs push for that one more penny per share in EPS, University Presidents care about nothing but getting their endowments and revenues up. If it means saddling an entire generation with obscene amounts of school debt, they could care less. This is how they get their long term contracts and raises.

It’s just a matter o time until we see the same meltdown in traditional college education. Like the real estate industry, prices will rise until the market revolts. Then it will be too late. STudents will stop taking out the loans traditional Universities expect them to. And when they do tuition will come down. And when prices come down Universities will have to cut costs beyond what they are able to. They will have so many legacy costs, from tenured professors to construction projects to research they will be saddled with legacy costs and debt in much the same way the newspaper industry was. Which will all lead to a de-levering and a de-stabilization of the University system as we know it.

And it can’t happen fast enough.

IMHO, the biggest problem the economy has is the enormous student debt new college grads and those leaving college find themselves with. In the past leaving college meant getting a job and getting a used car and/or an apartment with some friends. Yes there was student debt, but it wasn’t any where near your car payment. You could still afford the car and the apartment. Now its the exact opposite. Today, the minute you graduate college you face the challenge of debt against a college education whose value is immediately “underwater”

As a result spending habits have changed dramatically. Now when you leave school you move back home. You take public transportation or borrow your parents car. The only thing new you buy is the cheap work outfit you need. Savings ? Forgettaboutit. It’s not happening. Your entire focus is on hitting your monthly nut for school debt , credit card and maybe a car or apartment. The crush of college debt has taken an entire generation of graduates, current and future out of the economy. Which is exactly why the economy hasn’t grown and won’t grow beyond microscopic growth rates we have seen so far.

So until we get the meltdown in college education, don’t expect much improvement in the economy. Who gets elected won’t make a dang bit of difference.

Update: Let me add some clarification here based on some of the comments. I include the Online For Profit Mills that live off of the government delivering student loans as part of traditional education.Phoenix, Strayer, etc, they are not the new generation of Branded Education I am referring to. They are a big part of creating the bubble. i should have gone into more depth here. I will save it for another post.

As far as the purpose of college, I am a huge believer that you go to college to learn how to learn. However, if that gaol is subverted because traditional universities, public and private, charge so much to make that happen, I believe that system will collapse and there will be better alternatives created.

Online video classrooms with lively discussions dont need a traditional campus to teach kids how to learn. Discussion groups built aroundKhanAcademylike classes dont require a traditional campus to teach kids how to learn. I’ve seen better discussions and interactions on twitter than in some of the traditional classrooms I have visited. The opportunities for online interactive video classrooms is going to grow quickly and will be far more cost effective than traditional universities.

Leave the for profit online schools that create more employment for debt collectors than their students out of the equation and we still have an enormous bubble in Higher Education that is having a horrible impact not just on the economic life of their students, but on the economy as a whole as well

The Higher Education Industry is very analogous to the Newspaper industry. By the time they realize they need to change their business model it will be too late. Higher Education’s legacy infrastructure, employee costs /structures and debt costs will keep them from being able to re calibrate to a new generation of competitors.

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Why Are Young Adults Today Having So Many Economic Issues?

I’ve heard this a few times now from several economics experts:  This is the first time in history where today’s youth will have a lower net worth than the previous generation.

Some people say that today’s young adults are lazier than the previous generation.  I find this statement rather comical.  Every generation says that about the next generation.  Growing up as a Gen X, I heard the same thing from teachers and my elders.  There is an obvious rebuttal for young people today:  How hard did you have to work when you were in school?  Today’s youth have an insane amount of homework and extracurricular activities.  Also, school has become much more competitive in every grade.  I think young people today are coming out of school much more prepared with a better work ethic than the previous generation.

It seems like today’s young adults have a few more financial obstacles to overcome that the previous generation did not have:  out-of-control cost of college tuition, unemployment, and a poor housing market.

I came across an article below written by Annalyn Censky.  She captured some very interesting stats that explains this economic situation.

 

One of the most basic tenets of the American Dream is being called into question by recent economic data. Can each new generation do better than the one before it?

So far, today’s young people aren’t off to an encouraging start.

According to analysis by the Pew Research Center released Monday, younger Americans have been left behind as the oldest generation has seen wealth surge since the mid-1980s.

While it’s typical for older generations to hold more wealth than younger ones who’ve had less time to save, the gap between the two age groups has widened rapidly.

In 1984, households headed by people age 65 and older were worth just 10 times the median net worth of households headed by people 35 and younger.

But now that gap has widened to 47-to-one, marking the largest wealth gap ever recorded between the two age groups.

“We don’t know how the story ends, but we know how the story is beginning,” said Paul Taylor, executive vice president of thePewResearchCenter. “At the beginning, today’s young people are not doing better than yesterday’s young adults.”

Households headed by adults ages 35 and younger had a median net worth of $3,662 in 2009. That marks a 68% decline in wealth, compared to that same age group 25 years earlier.

Over the same time frame, households headed by adults ages 65 years and older, have seen just the opposite. Their wealth rose 42%, to a median of $170,494.

So why the growing chasm?

Whether by choice or due to the weak economy, today’s young people are getting their independent lives started later in nearly all respects, taking out more debt, living with parents longer and putting off key milestones like employment, marriage and home ownership longer.

Some of those trends come hand in hand with more young people attending college, which can be a double-edged sword.

While those college credentials could lead to income gains for many young people down the road, surging tuition costs are also leaving them burdened by more student loans than prior generations.

Overall, 37% of the young households held zero or negative net worth in 2009, up from 19% in 1984.

Perhaps the biggest factor leading to the wealth gap between the ages though, is the housing market, the Pew Center said.

While rising home equity helped drive wealth gains for the older generation over the long-term, younger people had less time to ride out the housing market’s volatility — especially its most recent boom and bust.

“Most of today’s older homeowners got into the housing market long ago, at ‘pre-bubble’ prices,” the report said. “Along with everyone else, they’ve been hurt by the housing market collapse of recent years, but over the long haul, most have seen their home equities rise.”

“For young adults who are in the beginning stages of wealth accumulation, there has been no such luck, at least so far.”

Net worth includes the sum of a household’s assets (like equity in a home, car and savings and retirement accounts) minus its debts (like mortgage, car and student loans and credit card debt). 

We need solutions for our young people.  Robert Kiyosaki believes that the answer lies in financial education.  It is not the only solution out there, but I feel he is certainly on the right track.  If young people are aware of what “the real world” looks like, maybe they’ll make good decisions and put themselves in a stronger economic positions?

 

 

 

 

 

 

Preparing for our futures (financially)

Our generation needs to be responsible financially.  We need to think about our futures and prepare for them.

“Live for today.  Plan for tomorrow.”

Let me know your comments on this article that I found on Yahoo’s business page.

Jaime

Baby boomers near 65 with retirements in jeopardy

The first baby boomers get set to turn 65 with their retirement security in jeopardy

Through a combination of procrastination and bad timing, many baby boomers are facing a personal finance disaster just as they’re hoping to retire. Starting in January, more than 10,000 baby boomers a day will turn 65, a pattern that will continue for the next 19 years.

The boomers, who in their youth revolutionized everything from music to race relations, are set to redefine retirement. But a generation that made its mark in the tumultuous 1960s now faces a crisis as it hits its own mid-60s.

“The situation is extremely serious because baby boomers have not saved very effectively for retirement and are still retiring too early,” says Olivia Mitchell, director of the Boettner Center for Pensions and Retirement Research at the University of Pennsylvania.

There are several reasons to be concerned:

**        The traditional pension plan is disappearing. In 1980, some 39 percent of private-sector workers had a pension that guaranteed a steady payout during retirement. Today that number stands closer to 15 percent, according to the Employee Benefit Research Institute in Washington, D.C.

**        Reliance on stocks in retirement plans is greater than ever; 42 percent of those workers now have 401(k)s. But the past decade has been a lost one for stocks, with the Standard & Poor’s 500 index posting total returns of just 4 percent since the beginning of 2000.

**        Many retirees banked on their homes as their retirement fund. But the crash in housing prices has slashed almost a third of a typical home’s value. Now 22 percent of homeowners, or nearly 11 million people, owe more on their mortgage than their home is worth. Many are boomers.

Michael Vanatta, 61, of Vero Beach, Fla., is paying the price for being a boomer who enjoyed life without saving for the future. He put a daughter through college, but he also spent plenty of money on indulgences like dining out and the latest electronic gadgets.

Vanatta was laid off last January from his $100,000-a-year job as a sales executive for a turf company. And with savings of just $5,000, he’s on a budget for the first time. In April, he will start taking Social Security at age 62.

“If I’d been smarter and planned and had the bucks, I’d wait until 70,” says Vanatta, who is divorced and rents an apartment. “It’s my fault. For years I was making plenty of money and spending plenty of money.”

Vanatta is in the majority. Some 51 percent of early boomer households, headed by those ages 55 to 64, face a retirement with lower living standards, according to a 2009 study by the Center for Retirement Research at Boston College.

Too many boomers have ignored or underestimated the worsening outlook for their finances, says Jean Setzfand, director of financial security for AARP, the group that represents Americans over age 50. By far the greatest shortcoming has been a failure to save. The personal savings rate — the amount of disposable income unspent — averaged close to 10 percent in the 1970s and `80s. By late 2007, the rate had sunk to negative 1 percent.

The recession has helped improve the savings rate — it’s now back above 5 percent. Yet typical boomers are still woefully short on retirement savings. Even those in their 50s and 60s with a 401(k) for at least six years had an average balance of less than $150,000 at the end of 2009, according to the EBRI.

Signs of coming trouble are visible on several other fronts, too:

**        Mortgage Debt. Nearly two in three people age 55 to 64 had a mortgage in 2007, with a median debt of $85,000.

**        Social Security. Nearly 3 out of 4 people file to claim Social Security benefits as soon as they’re eligible at age 62. That locks them in at a much lower amount than they would get if they waited.

The monthly checks are about 25 percent less if you retire at 62 instead of full retirement age, which is 66 for those born from 1943 to 1954. If you wait until 70, your check can be 75 to 80 percent more than at 62. So, a boomer who claimed a $1,200 monthly benefit in 2008 at age 62 could have received about $2,000 by holding off until 70.

**        Medical Costs. Health care expenses are soaring, and the availability of retiree benefits is declining.

“People cannot fathom how much money will be needed to simply cover out-of-pocket medical care costs,” says Mitchell of the University of Pennsylvania.

A 55-year-old man with typical drug expenses needs to have about $187,000 just to cover future medical costs. That’s if he wants to be 90 percent certain to have enough money to supplement Medicare coverage in retirement, the EBRI said. Because of greater longevity, a 65-year-old woman would need even more to cover her health insurance premiums and out-of-pocket health expenses: an estimated $213,000.

**        Employment. Boomers both need and want to work longer than previous generations. But unemployment is near 10 percent, and many have lost their jobs.

The average unemployment period for those 55 and older was 45 weeks in November. That’s 12 weeks longer than for younger job-seekers. It’s also more than double the 20-week period this group faced at the beginning of the recession in December 2007.

If financial neglect turns out to be many boomers’ undoing, challenging circumstances are stymieing others.

Linda Reaves of Silver Spring, Md., never had much opportunity to save as a single mother raising two sons and a daughter. After holding a variety of positions over the years — hotel office manager, research analyst for a mortgage company, hospital mental health counselor — she was still living paycheck to paycheck. Then she was laid off in 2007 at the age of 57.  She entered a training program to learn new skills, but all she has found since is a string of temporary jobs. In her daily quest for clerical or administrative work, she competes against much younger applicants.  Reaves, who turns 60 this month, plans to work until she’s at least 70 and then wants to travel, even if she doesn’t know where the money will come from.  “I just keep going. I don’t really worry about it,” she says.

Add this all up, and there’s a “slow-burning” retirement crisis for boomers, says Anthony Webb, a research economist at the Center for Retirement Research.

“If you have a crisis where the adverse consequences are immediately clear, then people understand that they have to do something,” Webb says. “When the consequences will be felt 20 or 30 years in the future, the temptation is that we kick the can down the road.”  As a result, he believes many won’t change their behavior.

For less affluent boomers, it won’t take that long to feel the pain of poor planning. Concerns about financial trouble will hang over many of those 65th birthday celebrations in 2011.  Many seem to view their plight through rose-colored granny glasses. An AARP survey last month of boomers turning 65 next year found that they worry no more about money than they did at age 60 — before the recession or the collapse of home prices. But in an acknowledgement of reality, 40 percent said they plan to work “until I drop.”

Old School