[R-G] [BillTottenWeblog] The Great College Hoax

[Bill Totten]

by Kathy Kristof

Forbes.com (February 02 2009)


As steadily as ivy creeps up the walls of its well-groomed campuses, the
education industrial complex has cultivated the image of college as a
sure-fire path to a life of social and economic privilege.

Joel Kellum says he's living proof that the claim is a lie. A
forty-year-old Los Angeles resident, Kellum did everything he was
supposed to do to get ahead in life. He worked hard as a high schooler,
got into the University of Virginia and graduated with a bachelor's
degree in history.

Accepted into the California Western School of Law, a private San Diego
institution, Kellum couldn't swing the $36,000 in annual tuition with
financial aid and part-time work. So he did what friends and professors
said was the smart move and took out $60,000 in student loans.

Kellum's law school sweetheart, Jennifer Coultas, did much the same. By
the time they graduated in 1995, the couple was $194,000 in debt. They
eventually married and each landed a six-figure job. Yet even with
Kellum moonlighting, they had to scrounge to come up with $145,000 in
loan payments. With interest accruing at up to twelve percent a year,
that whittled away only $21,000 in principal. Their remaining bill:
$173,000 and counting.

Kellum and Coultas divorced last year. Each cites their struggle with
law school debt as a major source of stress on their marriage. "Two
people with this much debt just shouldn't be together", Kellum says.

The two disillusioned attorneys were victims of an unfolding education
hoax on the middle class that's just as insidious, and nearly as
sweeping, as the housing debacle. The ingredients are strikingly
similar, too: Misguided easy-money policies that are encouraging the
masses to go into debt; a self-serving establishment trading in
half-truths that exaggerate the value of its product; plus a Wall Street
money machine dabbling in outright fraud as it foists unaffordable debt
on the most vulnerable marks.

College graduates will earn $1 million more than those with only a high
school diploma, brags Mercy College radio ads running in the New York
area. The $1 million shibboleth is a favorite of college barkers.

Like many good cons, this one contains a kernel of truth. Census figures
show that college grads earn an average of $57,500 a year, which is 82%
more than the $31,600 high school alumni make. Multiply the $25,900
difference by the forty years the average person works and, sure enough,
it comes to a tad over $1 million.

But anybody who has gotten a passing grade in statistics knows what's
wrong with this line of argument. A correlation between BAs and incomes
is not proof of cause and effect. It may reflect nothing more than the
fact that the economy rewards smart people and smart people are likely
to go to college. To cite the extreme and obvious example: Bill Gates is
rich because he knows how to run a business, not because he matriculated
at Harvard. Finishing his degree wouldn't have increased his income.

All the while students have been lulled into thinking of the extra $1
million that will be theirs, they have been forced to disgorge an ever
larger fraction of it in pursuit of the degree. While the premium that
college grads earn over high schoolers has remained relatively constant
over the past five years, the cost of acquiring a degree has risen at
twice the rate of inflation, dramatically undermining any value a
sheepskin adds.

Offsetting that million-dollar income discrepancy is the $46,700
four-year cost of tuition, fees, books, room and board at a public
school and $99,900 at a private one - even after financial aid,
scholarships and grants. Add all this to the equation and college grads
don't pull even with high school grads in lifetime income until age 33
on average, the College Board says. Even that doesn't include the
$125,000 in pay students forgo over four years.

"I call it the million-dollar misunderstanding", says Mark Schneider,
vice president of the American Institutes for Research, of the
prevailing propaganda.

Not only are college numbers spun. Some are patently spurious, says
Richard Sander, a law professor at UCLA. Law schools lure in minority
students to improve diversity rankings without disclosing that less than
half of African-Americans who enter these programs ever pass the bar.
Schools goose employment statistics by temporarily hiring new grads and
spotlighting kids who land top-paying jobs, while glossing over
far-lower average incomes. The one certainty: The average law grad owes
$100,000 in student debt.

"There are a lot of aspects of selling education that are tinged with
consumer fraud", Sander says. "There is a definite conspiracy to lead
students down a primrose path".

Warped as the numbers are, they don't begin to account for the hidden
cost of higher education: financing it. Borrowing has doubled over the
past decade, to roughly $85 billion in new student loans in the 2007--08
academic year, bringing total student debt owed to well over half a
trillion dollars. The average borrower went $19,200 into debt for a
diploma in 2004, a 58% increase after inflation since 1993, according to
the Project on Student Debt.

The proportion of students who graduate with more than $40,000 in debt
jumped sixfold during that period, to 7.7% of the one million grads in
2004, or 77,500 people. Most will struggle for more than a decade to
work it off, assuming relatively low 6.8% interest rates, the Project on
Student Debt says.

For many, the terms are far worse. A decade ago nearly all student
lending was of the low-cost, federally guaranteed variety, most of it
with six to eight percent interest kicking in only after a student left
school. As costs outpaced such financing over the past decade, the share
of student loans from "private" lenders rose from seven percent to 23%
of the market, or $20 billion in the 2007-2008 academic year.

The rise of private student lending closely paralleled the subprime
mortgage boom, which went from eight percent of home loan originations
in 2003 to twenty percent in 2006, before the housing meltdown sent that
mortgage sector over a cliff. Private student loans resemble subprime
mortgages in other ways, too. As banks and brokers did with subprime
home loans, colleges and the lenders in cahoots with them commonly
market private student loans alongside lower-cost alternatives, blurring
the differences.

The key one is cost. Many private lenders tack ten percent origination
fees onto eighteen percent variable interest rates (there is no legal
limit), which begin accruing the moment a loan is funded. That has made
private loans more than twice as profitable as government-guaranteed
ones and lured heavy involvement from Citigroup, Bank of America and
Wells Fargo.

New York Attorney General Andrew Cuomo has called private lending "the
Wild West of the student loan industry". Some problems he notes smack of
subprime mortgage lending: lax disclosure requirements, variable
interest rates that compound and make paying off the principal a
Sisyphean task, and kickback agreements by which lenders pay loan
originators - in this case, colleges - a cut of their revenues.

State and federal authorities have taken action to curb the outright
bribery. No less illustrious institutions of higher learning than
Columbia University, New York University and the University of
Pennsylvania paid $1 million-plus each to settle charges of wrongdoing
in the student loan market.

Yet investigations still found "troubling, deceptive and often illegal
practices ... involving lenders, educational institutions and financial
aid officials", according to Cuomo's office and the Congressional
Committee on Education & Labor. Don't count on Washington to provide any
more safeguards than it did with housing. Department of Education
oversight of the student loan industry has been deemed insufficient by
the Government Accountability Office.

Lacking honest input, three-quarters of high schoolers still seek to go
on to college, many deluded about the financial prospects it holds, says
American Institutes for Research's Schneider. "Part of the drive is the
idea it pays", he says. "We need somebody making more realistic
statements about the risks".

The risks are hefty. Half of students entering college never earn a
degree. Six in ten African-Americans depart without one. "Hundreds of
thousands of young people leave our higher education system
unsuccessfully, burdened with large student loans that must be repaid,
but without the benefit of the wages a college degree provides", warned
a 2004 Education Trust study.

Among the half of entering students fortunate enough to get through
college, millions go into debt for two-year associate degrees. These
alumni outearn high school grads by only $8,400 a year. (Community
colleges currently enroll 11.5 million.)

Tracy Kratzer, 27, enrolled in the International Academy of Design &
Technology in Orlando, Florida. in 2003. With visions of making big
bucks as a Web designer, she didn't give much thought to the interest
rate on her loan from Sallie Mae, the Fannie Mae of student lending.
Kratzer didn't know it at the time, but she was part of an experiment
that has proved disastrous for borrowers and shareholders of Sallie's
parent, SLM Corp. It's called "nontraditional" lending.

"That's not a sociological term", Albert Lord, chief executive of SLM
Corporation, told an audience of financial analysts last fall. "It's
basically kids and parents with poor credit who are at the wrong schools".

Sallie Mae was set up by the government in 1972 and began privatizing
its ownership in 1997. It began nontraditional lending in the easy-money
heyday of 2002, when it cut deals with dozens of trade schools to become
their preferred subprime student lender. Over the next four years Sallie
doled out about $5 billion to people like Kratzer, waiving the credit
scores and cosigners formerly required for its loans.

The bill arrived last year after nontraditional borrowers began entering
the workforce. Of the half no longer studying, Sallie had written off
fifteen percent of loans by last June, the most recent period for which
it has released figures; another 24% were delinquent. Among traditional
loans for four-year universities, writeoffs ran two percent and
delinquencies 4.9%.

SLM set aside $884 million to cover these bad loans in 2007 and posted
its first loss. It expects nontraditional-loan writeoffs to peak this
year. SLM's stock has lost eighty percent since the beginning of 2007,
wiping out $15 billion in value. Lord, who was unavailable for comment,
is a 28-year company veteran. He made $72 million as chief executive in
2007 by unloading SLM stock before it tanked. Sallie largely abandoned
nontraditional lending last January.

That's little consolation to Kratzer. Shortly after graduating with an
associate of arts degree, she discovered that the high-paying jobs she'd
hoped to qualify for go to people with bachelor's degrees and years of
experience. After a bout of unemployment, when she lived off credit
cards, Kratzer recently found an hourly job as a clerk at a magazine,
where she earns less than the average high school grad. In the meantime
her $14,000 student loan has mushroomed to $27,000 - more than she makes
in a year - and continues to accrue interest at eighteen percent a year.
She says collection agents for Sallie and others hound her to hit up
relatives for the money she owes.

"My mom works in a restaurant. My stepdad is in prison", says Kratzer.
"There are so many people like me out there. They don't get seen. They
don't get heard."

Mindy Babbitt entered Davenport University in her mid-twenties to study
accounting. Unable to cover the costs with her previous earnings as a
cosmetologist, she took out a $35,000 student loan at nine percent
interest, figuring her postgraduate income would cover the cost.

Instead, the entry-level job her bachelor's degree got her barely
covered living expenses. Babbitt deferred loan repayments and was then
laid off for a time. Now 41 and living in Plainwell, Michigan, she is
earning $41,000 a year, or about $10,000 more than the average high
school graduate makes. But since she graduated, Babbitt's student loan
balance has more than doubled, to $87,000, and she despairs she'll never
pay it off.

"Unless I win the lottery or get a job paying a lot more, my student
debts are going to follow me to the grave", she says.

Babbitt is no oddity. In fact, one in four college grads takes home
considerably less than the top quartile of high school grads, according
to a College Board study. Even some people with doctorates earn less
than people without so much as an associate degree, it shows.

For an indication of how out of touch the degree factories are with
economic reality there's no need to pick on UCLA's course in queer
musicology or Edith Cowan University's degree in "surf science". US
universities also minted 37,000 history degrees in 2006, including 852
PhDs. That for a field with fewer than 500 job openings and average pay
of $48,500. Plumbers, by contrast, enjoyed 16,000 new jobs that year and
earned only $6,000 less than historians, census figures show.

Of course, not all history majors want to become historians. For many a
bachelor's degree is nothing but a stepping-stone to a professional
degree. Joel Kellum is one of those. After graduating from the
University of Virginia, he got into California Western. Kellum
approached a law professor about the wisdom of borrowing for the tuition.

"He said, 'Don't worry'," Kellum recalls. "'We had the same thing when
we were in school'".

Kellum filled out a fat packet of forms in his school's financial aid
office. Weeks later, he says, he got a call asking him to sign over a
check to the school without any discussion of the loan terms. Kellum
complied.

Only after he graduated, and his payments came due, did he dig into the
details. What Kellum discovered was that, instead of cheap government
loans, the bulk of his debt was in Signature loans: variable-rate debt
from Sallie Mae. Kellum's variable rate has ticked as high as nine
percent and his ex-wife's to as much as twelve percent.

Like many grads, Kellum and Coultas hit bumps along their career paths.
They deferred payments once when they were unemployed and twice more
after their children were born. Each time, Kellum says, Sallie Mae
tacked on fees for the delay. When he was a few days late making
payments, he says, he got hit with more fees, which also accrued
interest, and with a scolding.

"When you're a second late, you get twenty or thirty calls", he says.
"It [Sallie Mae's Signature loan] is coated as a sweet government loan,
but you can get better interest rates, and better treatment, borrowing
from Vito in downtown Brooklyn".

Like Vito, private student lenders don't dwell on the dollar cost of
compound interest. Cathelyn Gregoire says she applied for financial aid
at the Tampa campus of the design school Kratzer attended and was
assured she'd receive a loan at a fixed seven percent rate. Three months
after classes began Gregoire received a $14,000 loan. Only after
graduating did she discover she was being charged a variable 13.25%,
plus a "supplemental fee" of six percent. Her loan balance had jumped to
$20,000 by the end of 2007.

Gregoire is now a plaintiff in a federal suit in Connecticut, accusing
Sallie Mae of targeting minorities with deceptive lending. Her lawyers
are trying to make it a class action.

Sallie Mae denies wrongdoing and distributes rate disclosures when
students apply for loans, according to spokesperson Thomas Joyce.
Sallie's disclosure document warns in capital letters that the rate a
borrower sees may not be the one he gets.

Joyce says Sallie's borrowers receive detailed paperwork within ten days
of funding and can rescind their loans then. In reality loan checks
often go directly to schools after classes have begun. To rescind a loan
a student must get the college to return the money. The student must
then find new funding or drop out.

Education lenders, unlike other consumer financiers, are not required to
provide Truth in Lending disclosures before reeling in borrowers. A law
passed last year requires advanced disclosure, but not until 2010.

Get caught in this quagmire and you're stuck for good. Consumers who go
on a credit card binge stand a good chance of getting debt discharged in
bankruptcy. Not so if they take out a loan to educate themselves. Those
loans, per the 2005 bankruptcy law, are not dischargeable. One reason:
Without this exception, every student would run through a bankruptcy
between graduation and starting a career.

Who gets stuck with these toxic loans? As with subprime mortgages, the
people who can least afford them. A disproportionate number of
high-interest student loans go to low-income students attending
for-profit institutions, according to a 2008 study by Charlene Wear
Simmons, assistant director of the California Research Bureau, an arm of
the state government.

"Borrowing, combined with other risk factors for not completing higher
education (such as working too many hours, lack of adequate preparation
and part-time attendance), puts many students, especially low-income and
first-generation students, at a particular disadvantage", says a 2005
study by Lawrence Gladieux, an education policy consultant, and Laura
Perna, assistant professor of education at the University of Pennsylvania.

It's too late to save the country from the housing finance bubble. But
the college bubble is not quite as far along.


Sidebars:

Docs in Hock
http://www.forbes.com/forbes/2009/0202/060a.html

Subprime Student Loans
http://www.forbes.com/forbes/2009/0202/060b.html

http://www.forbes.com/forbes/2009/0202/060.html


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