Sunday, November 15, 2015

1,000,000 Student March and Your Bootstraps

So it's been almost a year (but not quite!) I've been a little busy (understatement of the decade) but an issue that's near and dear to my heart has recently surfaced. I'm not talking about France or other countries under attack (so awful), or about the refugees coming in from Syria (again awful). This is all about this "million student march" and some of the stuff I've seen flying around on that lately.
#millionstudentmarch


One of the common sentiments I've seen floating around a lot lately is this whole idea of you signed up for it you should have to pay for it. It's usually coupled with a "I did it when I was your age" and "work a part time job" or "get scholarships" or "don't take so much out in loans." These positions are generally held by people my age (38) or older.

Well, I'm here to tell you that you're wrong. This simplified method of looking at a critical issue is wrong. You can't properly analyze and form an opinion or conclusion based solely on "well I did it" mentality. Here's part of why you're wrong.

Tuition Costs

In the past 30 years tuition costs have exploded. I'll use UCLA to highlight this example (mainly cause they keep their info publicly available). Part of my choice there is because so many people will say "go to a state school." Well guess what UCLA is. You can repeat this exercise for whatever State school you want to. I went to Portland State University (in state tuition) and am currently going to University of Arizona (in state as well). These were two schools that were considered "More affordable."

In 1986 (when many of those "older" people were in college) resident tuition for an undergrad was $434 per semester, for a grad student it was $449. (Click here if you're curious). In 1986, minimum wage in California was $3.35 an hour. This means that you would need to work about 160 hours (post taxes) to earn enough money to cover one semester of in-state undergrad tuition. If you were smarter about it, you could work at Denny's and make that minimum wage, plus your tips and get it done even faster. So you basically would have to work full time in the summer, live frugally, and you could save enough to get it done. If you could get a better job, it would be even easier. Heck if you can knock out a scholarship or two, you're golden. Probably graduate with little to no debt. Easily less than the cost of a new car. 

In 1996 (when people my age generally started school) resident tuition was $1333.50. In 1996, minimum wage in California was $4.75 per hour. This would put you at 280 hours pre-tax so probably about 320 hours post tax. Putting every single dollar towards tuition (never mind cost of living etc.) You can kind of repeat the above model of being frugal, working full time all summer and part-time during the year, living with your parents, but you also better get some scholarships (dicey at best) and probably need to take out some loans (and here's where it starts). You'll graduate with about 10k or 20k in debt, but you can pay that off in 3 - 5 years. Just wait to get a new car. 

In 2006, resident tuition (per semester) was $2177.25. Minimum wage in California $6.75 an hour. Well this means now we're up to 323 hours (pre-tax) so maybe 360 hours after taxes. Now you're not only living cheaply with your parents, but you're working 2 summer jobs (basically full time). You need even more scholarships, and the loans are getting bigger. Now you're looking at 10 years for your loan payments, but it's not all that bad right? It's for your future. A little sacrifice now, will go a long way tomorrow. 

For the 2015-16 school year, undergraduate tuition is $8185.25 per semester. Minimum wage is $10 an hour (effective 1/1/2016). That means (assuming 2016 tuition remains the same) you'll need to work 819 hours over the summer to save up for one semester of tuition (again pre-taxes). After taxes that probably comes out to about 900 hours. There are only 720 hours total in a 30 day month. TOTAL. That means if you worked 24 hours a day, 7 days a week, for 30 days straight, didn't have to pay taxes, you would still not have enough money for a single semester. You can't just "live frugally." Your only options are scholarships and loans with crippling debt, or being born rich. 

To put this in perspective if tuition alone doesn't change for your four years there (LOL) here's what those students face IN TUITION ALONE. (I took the single semester and multiplied by 8 - you know 4 years of undergrad)

1986: $3,472
1996: $10,668
2006: $17,418
2016: $65,482

So in the first 10 years, it nearly tripled. In the second 10 years it slowed down a little, but almost doubled. In the most recent 10 years, it almost quadrupled. Are you freaking kidding me?

Keep in mind, this does not include books, room, board, clothing, school supplies, transportation (I don't even mean a car) or any other normal "costs of living." For an extremely low measure of these costs, let's look at what the total cost will be. Finding actual numbers here would be impossible, so let's use the freaking poverty line for those years and assume that's a good measure. I think it's safe to say that students living at the poverty line is appropriate right?

So here's those numbers. These are the federal poverty levels for a single person, that our hypothetical student is. 

1986: $5,701
1996: $8,163
2006: $10,488
2016: $11,770

So if we multiply that by 4 years, then add in our tuition numbers above we get. 

1986: $26,276
1996: $42,672
2006: $59,370
2016: $112, 562

That's living at the poverty level. How many hours @ minimum wage would that be? (No taxes taken, rounded up to whole hour, assume 2,080 hours worked (40 per week))

1986: 7,844 or 3.77 years
1996: 8,984 or 4.32 years
2006: 8,796 or 4.23 years
2016: 11,257 or 5.41 years


So How to Pay for it?

So I already know your answer. "get more scholarships" or "take out loans" or "don't go to college if you can't afford it." Here's the thing about scholarships, you generally have to be a top student to get them (especially from the schools). Only the very top students are getting these scholarships. 

The other scholarships that are out there are generally for very small amounts. $500 to $1,000. Now I think you should try to apply for as many of these as you can. Sometimes, there is no one that applies so you might win the scholarship simply by default. Of course, you'd have to win 112 of these $1,000 scholarships to pay for it. 

Here's one of the easier ones to apply for (which means EVERYONE is applying for it. http://www.genkellyscholarship.com/. You're competing with a couple million other kids trying to do the same thing. If you assume that you win 10% of your applied for scholarships. You'd be apply to 1,112 scholarships to pay for school. I'm guessing 10% is a bit high. I've applied for about 100 of these type of scholarships. I've received none. The only scholarship I have been awarded is directly related to my ability to take a standardized test (LSAT). 

Oh and on top of all that - school enrollment is on the rise. Since the majority of people I'm writing this to are in fact college graduates, I'll assume you understand supply v. demand. It applies to scholarships as well. These are finite resources. Relying on them solely is not going to be viable for the majority of students. 

This leaves with aunt Sallie Mae. 

The Loan Bubble

I firmly believe this is our next big bubble, that will have to burst. First a little background, this will also help explain why school tuition has skyrocketed at an unsustainable rate over the last 30 years. 

This article has a pretty good history of how this happened, but the gist is this. In the 70's it was decided that too many graduates (the number than was way lower) were going to school, graduating, then immediately filing for bankruptcy to get rid of their student loans. The government put in place an abuse prevention act, that made loans non-dischargeable for the first 5 years (since most people repaid their paltry loans over this time, it was a great solution). Well as government is want to do, they kept tweaking it. In 2006, they tweaked it so the loans are only dischargeable for "undue hardship." This is an extremely difficult standard to meet, and generally means that you are not able to work now, or ever again. It might look like someone who got a B.S. in electrical engineering, then had a stroke and was not able to communicate any longer. The only other way to get rid of these loans (aside from repayment) is to die. 

Now let's think about this for a second. These are the parties involved in this overall decision. 

1. Bank
2. School
3. Government
4. Student

So in the old days, before they became 100% non-dischargeable, if you wanted to go to college you had to go to the bank and apply for the loan. The bank would look at your application, generally including what your career plans were, and decide if it was a good risk/reward. If you went to the bank and applied for a loan to cover your electrical engineering degree, they would look at what the average wages for an electrical engineer, what your tuition cost, what the likelihood of a job was, and then make a determination of yes or no. 

The school knew this process so they kept their side of the equation reasonable. Tuition had to be something that banks would not just say "no" when someone came for a loan. 

The government recognized that this was not necessarily good for society since it might make it difficult for people who want to do things that are valuable, but pay less (like say a teacher) to get a loan. So they told the banks "we'll back your loans," but they left some risk in place. Then there was a perception that bankruptcy laws were being abused, so they went a step further and assured the banks that the banks would still get their money back. 

This had the result of banks allowing essentially free access to money. At first this wasn't a terrible thing. The people in '86 & '96 were able to go to school and then get jobs. But that's because there were not that many people with a college degree. Well guess what, that has changed. 


So that means that the job market has changed. It's getting to a point where you have to have a college degree for almost any job, short of manual labor or minimum wage (if you think I'm disparaging these things, you clearly don't know me. I've done my fair share of both). 

Enter the final person in this equation - the student. They have spent their whole lives working their butt off in school (http://www.racetonowhere.com/about-film - check it out, it's on Netflix) and being told by their parents "if you don't want to flip burgers, go to college." 

So they do this. They get in to a good college. Now they have to pay for it. Someone comes along and offers up the loans. They figure, well this will help me get a good job. So they get the loans.

Here's the thing though, the only one in this whole scenario who will be held accountable, is the student. The schools recognized that they could essentially print money, regardless of how likely the student was to get a good job. They could raise tuition rates as much as they wanted because the banks would keep lending the money. The banks knew the government would support them. The government would hold the student forever accountable. But the student now has to make a choice between ditch digging or $112,000 to go to school. 

Let's assume, just for argument, that every one of these students graduates owing 50% of their total cost for attendance. I'm rounding the numbers to make it easier, but not by much. 

1986: $13,000
1996: $21,000
2006: $30,000
2016: $56,000

Now, assuming 7% interest (this is close to statutory amount) and a 10 year repayment, this would make your student loan payment the following. 

1986: $151
1996: $244
2006: $348
2016: $650

So what's the average income in those years? This was tough to find so I went with the best I could.

1986: ~$29,000 http://www2.census.gov/prod2/popscan/p60-159.pdf
1996: ~$35,000 https://www.census.gov/hhes/www/income/data/incpovhlth/1996/tables.html
2006: ~$49,000 https://www.census.gov/prod/2007pubs/p60-233.pdf
2014: ~$45,000 https://www.census.gov/hhes/www/cpstables/032015/perinc/pinc09_000.htm

I'm not crazy about those numbers, but that's about the best I could come up with. Of course when dealing with these you also run in to the issue that the average is also including some people who make piles of money. I bet most college graduates would jump at $45k per year to start. 

Using those numbers, how high is your loan payment (as a percentage of your income). 

1986: 6.25%
1996: 8.36%
2006: 8.52%
2016: 17.33%

Those are before taxes. So before Uncle Sam takes his 31.5% Aunt Sallie Mae wants her 17%. This means that before paying for ANYTHING else, you're paycheck is missing 48.5%. So if you make that $45,000 a year above, here's what your monthly budget might look like. 

Using numbers from http://www.numbeo.com/cost-of-living/city_result.jsp?country=United+States&city=Los+Angeles%2C+CA for a single person living in LA (assuming they went to UCLA and landed that sick $45,000 a year job)

Total income: $3,750
Taxes: $1,181.25
Student loans: 650
Net income: $1,918.75
Rent (1 bdrm outside city center): $1,300
Utilities: $110
Food: $300
Remaining: $208.75

So that $208.75 needs to go towards transportation (gotta get to work), clothing (gotta be dressed at work), entertainment, cell phone (essential), internet (other than your phone), furniture, cleaning supplies, etc. I'm also assuming that their employer covers 100% of their health insurance (ROFL). Don't forget, Obamacare requires them to have it. And someone making $45k per year probably won't qualify for a subsidy. 

So why does that all matter? 

See, we live in a consumer based society. Our entire economy is based on buying stuff. People buy cars, houses, couches, video games, etc. We have subscriptions to Netflix, Hulu, and HBO go. We've got Comcast. You have to get a new cell phone every other year. Your laptop will be garbage in a couple of years (unless you buy a Mac). We consume all these things. 

This is good because that means people need to make things. We have construction people building new houses, we have furniture makers who build new couches, we have car manufacturers who make cars. These are all people, with jobs and families, who rely on people to buy houses, couches, and cars. 

And here's the thing, who buys new cars? It's generally younger people. Buying a used car does less to stimulate the overall economy than buying a new car. It's simple, with a new car you've got all the people who build the car, the people who deliver the car, the people who sell the car, and all the people who make it happen. These people all have a job because someone bought a new car. With a used car, it's just the sales person, and the admin staff at the car lot. Even if you say new cars should only be for those who are older and more established, well then great, let the previous generation buy the older car. How's that gonna work? 

Your fancy new car: $25,000
Your slightly used car: $15,000

Tell me again, how you can save $15,000 (or afford a payment) on that "disposable" income of $208.75 per month. 

Who buys new homes? Obviously this one gets spread out pretty far, but it's generally a goal for most Americans. Most of these same people who disparage this generation will jump on the "you need to own a home" bandwagon (yes, yes, I'm generalizing here, sue me). So let's be responsible about it and save the 20% that banks generally want to see. 

So in the LA market (where our above grad is now working making that sweet sweet $45k per year) the average house costs $517,500 - ok so that's NEVER going to happen and not even worth looking at. So let's have our grad move to San Bernardino, which for you non southern California people is a little over an hour away on a Sunday morning, forget during traffic. There an average home costs about $230,000. So let's save up 20% and get out of this situation. 

Wait, that's $46,000. You'd need to save $400 a month for 10 years to save that much. That's double what your disposable income above is. So I guess you say, wait till you pay off your loans. So if I graduate when I'm 22 years old. I should wait till I'm 42 to buy a home? 

How does our 22 year old graduate even begin to consider starting a family? This is a big part of why so many of these "lazy entitled millennials" are moving back in with their parents. At least then they can attack the debt and try to start life sooner. 

And to think we haven't even talked about buying a new bed or couch. 

So now all the college educated people that are supposed to be buying all these things, they can't afford to buy them. So what happens to the construction workers, car builders, and couch makers? Well they get laid off. Now our unemployment rate goes up, and our economy goes in to the tank. 

This is really why you should care. Not because anyone should get a "free ride." But because this WILL affect you one day. 

Well pick a better major then!

Sure that would be great, everyone should just do really good at math and be an engineer. That's an idea right? 

So who's going to be a teacher? Who's going to be a fire fighter? EMT? What about the manager at your favorite Starbucks or restaurant? 

And that doesn't even get in to what it costs for grad school (most teachers have to go). What about that legal aid attorney? They have 4 times as much debt, and are trying to survive on $40k per year. You know, that person is providing legal services only to poor people who can't afford it. But surely they should just suck it up and pay their loans. Or maybe they should have just gone to big law to serve rich people so that they could get out debt, then go serve poor people who desperately need it. Never you mind that only about 20% of people ever get a job where current law school tuition makes sense. 

What Should We Do?

Heck, I'm not entirely sure. I don't have the answer to that one. But it can't be "just make them pay it all back dammit." There are some programs in place like PAYE and the loan forgiveness programs. for those who don't know, PAYE is great. It basically caps what your loan payment is at a certain percentage of your income. Of course, it's only putting the interest on top of the total owed. Let me illustrate it with some really simple numbers. 

Total loan 100,000
Monthly interest: 1,000 (yes this is absurd, purely to illustrate)
Expected Payment: 2,000
PAYE Payment: 1,000
Total balance after PAYE payment is made: 101,000

This would be absurd except that loan forgiveness is a thing. Originally it worked like this. If you worked 10 years at a "Public service" job (generally any government work, or working for a non-profit), and made 120 payments (10 years of payments) whatever your balance was is completely forgiven. If you worked a "Private" sector job (anything not public service) then you had to make your payments for 25 years and it would be forgiven at the end of it. The huge kicker on the "private" one is that for tax purposes, the full weight of whatever you still owed would be considered "income" for tax purposes (commonly referred to as the "tax bomb")

This offered hope that maybe you could follow a needed passion (again, I'm thinking of a person who wants to serve others, we are not talking about 14th century French Poetry majors). Then tax cuts came, and the government was looking for more money (since they basically are terrible with money) and decided that these massive loan forgiveness programs were going to bankrupt the government (never mind that we still haven't had anyone hit the 10 years) and reduced the amount that can be forgiven from whatever it is to $57,500. So basically, the average undergrad would probably be fine, but what about that legal aid lawyer above? Even if they are frugal, they are still looking at well over $100k in debt. So they will basically do the PAYE for the rest of their life. They will just have that payment until they finally die. They will never be without it. EVER.

By the way. The school? Oh they got their money. They were not held accountable that the student was prepared for a job, or able to find one. They gladly took their $65,000 and have moved on to recruiting the next group. The bank? They get their money every month, and when the student eventually dies, they'll get a sweet check from Uncle Sam. 

So really, you already are financing their education. Well not you, but future generations. Of course, most people don't really care about that, since they'll be dead by then. 

My solution

My idea would be to model school after what Oregon has recently begun. Any public university should cost nothing to begin with. You should get books & tuition for "free." Then you can go full-time and either work part-time or borrow a more modest amount (see poverty line numbers above for suggested caps). It's not really free though. It's a percentage of your income. I think 6.25% (hey weird it's that 1986 number) is a fair percentage. You pay that for 10 years (hey isn't that how long you're supposed to have to pay your loans) and you're done. You'll still have to take responsibility for anything you borrow outside of books/tuition, but a student who is poor that is trying to increase their upward mobility, they will have a real opportunity. 

So if you get the above job making $45,000 per year means your payment would start out at $234.38 (rounded up) per month. That would free up over $400 a month. Hey weird, you could actually save to buy that house now WHILE going to School!

I know it's sounds really simple. That's cause it is. You're also not saddling future graduates with crippling debt, but what about those who are already wearing a saddle. 

Put PAYE and loan forgiveness back. Require that the substantial payments made after the 10 or 25 years be paid by the school(s) where they incurred the loans. This part I think should apply to all schools, not just public ones. If the federal government is going to back the loans, the schools should have some level of accountability. Oh and kill the tax bomb, that's just dumb. 

So why this manifesto?

As I said at the beginning, I've seen a lot of people talking about something that they really know nothing at all about. Don't try to compare your experience with what today's incoming college kids are facing. It's a completely different world than when you "bootstrapped" your way through college. Try to understand the actual problem before being judgmental about those who are dealing with it. This whole million student march thing comes from a place of frustration, not from a place of entitlement. The baby boomer generation is the first in American history that will be leaving the country worse off than when they began to take power. That in itself says enough that you should be careful who you're calling the "entitlement" generation. 

Comments? 

2 comments:

  1. Well put Dan. I graduated 8 years ago, had two scholarships, one being workstudy where you work on campus get a paycheck and that is matched to go towards your tuition. My parents paid for the rest, and my grandma gave me $600 every semester for books. I was lucky and able to graduate without any debt for myself or my parents, but my situation does not mirror that of the average student. If I were still in school there would be no way that I would have been able to escape taking on a loan. I was discussing this with Kat earlier so I looked up my college tuition rates per semester, and it is double ($200/cr now up to $392/cr) what I remember it being for my career 03-07. It's madness and something has to give.

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  2. It's scary just how rapidly it's increased. I started undergrad in 07. In '09 it was $118.25 (plus fees) per credit. This year it's still $150 per credit and that's if you don't do business, engineering, arts, or honors. And they still tack on the fees. There is no reason it should rise that quickly.

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