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Sunday MoneyComment Part2- March 11, 2012

Posted by Jill Kerby on March 11 2012 @ 13:12


HIGHER STUDENT FEES COULD LEAD TO YET MORE FINANCIAL DISASTER …FOR STUDENTS

 

Last week’s revelation that there has been a surge in CSO applications for science and technology places in our universities is great news. The country needs more young people training for such sectors.  Consequently, and I speak from personal experience here as the mother of an 18 year old with his heart set on a science place at TCD, more young Leaving Cert heads are now engrossed in their schoolbooks this weekend as they scramble to achieve the higher points they’ll need from their June exams.

The less good news for these aspiring scholars is that there’s also been an increase in the number of students from Northern Ireland and the British mainland applying for college places here.  

They’re not doing so to fill our skills gap but because from next September their annual college fees go up to £4,000 and £9,000 respectively.  Unless they have rich parents, Irish registration fees of c€2,500 look a lot more affordable over four yeas than the prospect of years of slogging to pay off UK bank loans of £36,000  or more.

This isn’t just a simple tale of the consequences of changing government policy regarding the funding of third level education.  Fees are higher because all western governments are running huge deficits and they can’t get away with blatant universal freebies (like free university).

But unless they plan to reserve access to third level education only to the very wealthy – which is political suicide - they will have to find another way and state backed, student bank loans will be given a go until that money burns out.

The British have the Student Loans Company, which originally offered mortgage style finance to qualifying students and since 1999, future income-based loans – or graduate tax - for repayment purposes. The amounts the SLC award no longer cover the huge new fees and there are questions about how far the UK government can go to keep funding and guaranteeing these loans.

The Americans have similar schemes, but the money originates in private banks and is backed by the US government so that full cost of fees can always be covered and not just amounts set by the student loan company as happens in the UK.

The UK system is losing money, but the American one is an an unmitigated financial disaster. Could it also happen here?

Young buyer beware, especially in light of this anecdote.

A couple of weeks ago, the Federal Reserve Chairman, Ben Bernanke, made an extraordinary revelation to the House Finance Committee during his monthly report about the state of the US economy.

He said that his son, who is a medical student, now owes over $400,000 in (state-backed) student loan debt.

Tuition at an Ivy League medical school (where presumably Mr Bernanke’s son attends) costs at least $50,000 a year. Multiply that by seven or eight years (the young Bernanke also has living expenses) and that figure is credible. 

Or Incredible.

American doctors earn huge money but to be carrying $400,000 in debt before getting your first job or seeing your first patient seems a little excessive even by the US personal debt standards.

Bernanke junior’s story is an extreme example of what happens when government policy to support higher education with a state backed loan scheme goes out of control.

Government supported loan schemes really took off in the US in the 1970s, partly as a response to meet the education promises made to returning Vietnam War GI’s and to encourage higher third level education generally.

The size of the loans grew greater and greater in response to the inevitable raising of fees by the education sector which was acting in exactly the same way as all commercial recipients of cheap, easy-to-get finance react:  they raised their prices. 

(When an infinite amount of money meets a finite supply of goods, the goods ALWAYS get more expensive.)

The US student loan industry is now a racket. 

There is over $1 trillion in loans outstanding now and 27% of those loans are now in 30 days arrears.  Default is commonplace; so much so that bankruptcy laws were changed to exclude student loans. Unlike non-recourse mortgages, that debt now follows the ex-student indefinitely.

It isn’t just Ivy League and State universities that are the expected beneficiaries of taxpayer largesse. Every post secondary institution qualifies and there is now a new industry of for profit educational institutions in the US that was set up specifically to milk the government student loan schemes, aimed a sub-prime scholars.

No one with a beating pulse is turned away from so called third level education; if the student drops out or doesn’t get their qualification or degree, (and can’t repay their loan because they have no job), so what? The government picks up the tab, the fee part of which just keeps getting more expensive every year.

The US Economic Policy Institute recently produced a study that showed that the wages of young men aged 23-29 have fallen by 11%, adjusted for inflation over the past decade and by 7.6% for young women. 

The easy availability of higher education has not improved the employment or earnings prospects of all graduates in the United States and while the Ivy Leaguers with professional qualifications will undoubtedly early substantial incomes over their lifetimes, if their fees are not waived, even they will be burdened by inflated state-backed loans.

No one wants third level education restricted to only those who can pay the true and full cost. This is why colleges constantly seek (or should) donations, bequests and benefactors, and hire fund raisers and fund managers:  to offset the costs for gifted but poor scholars.

The politicians meanwhile have a political agenda, specifically to please middle class voters and to keep youth unemployment and dissent as low as possible.

For 15 years the cost of ‘free’ third level education was paid for through government borrowings and especially during the boom years, from abundant property taxes. (Where did you think that money was going when you paid €40k stamp duty on your new house?)

Now all this money is gone and university fees have to be reintroduced.

I don’t think we’re at risk – yet – of introducing calamitous state loan schemes on the American or even British models. That’s because we’re already bust.

But emigration isn’t going to keep the youth unemployment pressure cooker under control forever and it doesn’t buy very many votes from their parents either.

Give us enough time and financial assistance from the Troika or ECB and student loans will be part of the debt landscape here too with the same outcome: higher college fees and charges, even more ‘graduates’ than we already have with useless arts and social science degrees, a growing default rate as they can’t find adequate employment to repay their debt and, in the end, another great big bill for the Irish taxpayer.

 

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