US student Loan Crisis, an Education Bubble?

I started following the student loan crisis when I noted that student loans seemed to be neck and neck with health care as the primary grievances on the We Are The 99% site.  I was very lucky to get two pretty regular guest posters Alan Collinge and Tim Smith, who have written on the issue from different angles.  I was astonished to get a call from Sallie Mae asking me how they could get their side of the story onto Forbes.com.  At the risk of being prosecuted for impersonating a journalist, I did a brief interview with John Remondi, President and COO of Sallie Mae.  I’m still hoping for some guest posts from Sallie Mae, but nothing has come through yet.  Sunday, I heard from Tim Smith, who let me know that the New York Times was picking up on the issue with this piece.  I invited him to share his reaction.  Here it is.

The Education Bubble Won’t Create A Disaster, Right?

“Looking back, anyone could have predicted the housing bubble.”  This sentiment has been echoed many times, and graphs of the past housing bubble almost make it seem obvious before the bubble burst.  The education bubble?  While many acknowledge the soaring cost – especially those in the education fields – fewer agree that we’re about to see the education bubble pop and create a bigger mess than the housing bubble.  Education may have its critics, but it also has major defenders.

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However, the chorus seems to be changing.  Even the New York Times recently joined with an article that compared the education bubble to the housing bubble (this analogy has been used multiple times, but like the above graph shows, under predicts the mess that the education bubble will cause).  Even while other media players have finally seen this bubble, the warning signs were spelled out on this blog :

These warning signs would be favorable laws toward discharging student loans in bankruptcy (making it more challenging for students to receive money for education); a societal zeitgeist toward education changing (for instance, businesses preferring certification or a degree from something similar to the Khan Academy over traditional colleges); a major recession coming back to the United States, taking away more employment (making it more difficult for student with loans to pay back their loans); students becoming discouraged by negative news toward education (causing many to drop out or to avoid college).
Of course, some readers might wonder if all four signs must appear for the education bubble to pop, and the answer is “No”.

Even though the education bubble has received attention, few expect the consequences to be bad.  In fact, the Times’ article mentions that economists don’t see the consequences being similar to the housing bubble – in other words, the education bubble pops, and everything is fine.  Consider the potential reality:

1.      High student loan balances discourage future and current demand for other products and services (consider the attitude, for instance, of Natalia Antonova, who faced a debt crisis with her student loans).  This subtracts money flow from the economy to provide jobs in other areas.  Even without the bubble popping, this is the current situation.
2.      If the demand for education drops, the consequences will affect those in the education system – schools will need fewer professors, advisors and others in the education field.  This will create a terrible job hunting situation, where graduates will be placed against high-credentialed people (some of whom may have been their professors).  Remember that in order to keep these people employed, the demand for education must remain the same or rise.
3.      If the demand for education declines, the demand for educational products will decline also – textbooks, construction, and many of the expenditures that some colleges think are necessary to provide a good education.  This drop in demand will cause business, which sell products and services to educational institutions, to cut back on their staff to offset their losses.
There is one way in which economists might be right – if wages began to soar.  Like the housing bubble, Americans felt the mess because the decline in housing prices meant that debt was owed on something that had little value.  If education continues to rise, while wages stagnate or slowly rise, a college degree will be like a home, which has lost its value.  If wages soar, however, a college degree will still mean the path to prosperity.

Tim Smith blogs on the “Echo Boom”, also known as Generation Y (Americans born between 1980 – 1995). Tim has previously appeared here discussing his generation’s attitude towards homeownership and education.

I’m beginning to think that the “bubble” metaphor may not work that well for education.  In the case of the stock market and real estate people own assets that they think they can sell at any time for some minimum price.  Then something happens and everybody heads for the door at once.  At that point the seeds of the next bubble are sown, because the assets have some level of intrinsic value and somebody will buy them for something and may get rich on the next turn of the wheel.  Educational credentials, on the other hand, are not at all fungible.  They can only be cash flowed, not liquidated.  If they are not used when fairly fresh, their value erodes rather quickly.  The actual economic value of the credential will often be quickly replaced by the experience which the credential enables.  

By Peter J Reilly, Forbes Contributor Newscribe : get free news in real time

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American mounting student loans a 'debt bomb' waiting to explode! Inside America’s Student Loan Bubble!
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A "great haircut" for U.S. growth  

PTPTN l student loans: stick to its guns, written off, learn to pay back ?

A promise that can be written off

Datuk Seri Anwar Ibrahim’s latest plan – to abolish PTPTN study loans and provide free higher education – may seem attractive, but it just goes to show how desperate Pakatan Rakyat is politically.

BOTH Barisan Nasional and Pakatan Rakyat are announcing populist measures to influence voters and get their attention as the general election, that is expected to be keenly contested, draws near.

While Barisan has numerous popular projects from the 1Malaysia clinics to Bantuan Rakyat 1Malaysia, Pakatan leader Datuk Seri Anwar Ibrahim, not to be outdone, has come up with his plan – to abolish PTPTN study loans and thereafter, provide free higher education.

He is proposing to use Petronas funds to write off the RM43bil in PTPTN loans taken since 1999 and provide free higher education for subsequent generations of students.

 Varsity cheer: Anwar’s proposal to write off outstanding PTPTN loans and provide free higher education is attractive but will he deliver on his promise should Pakatan Rakyat come to power?
 

At first hearing, his scheme is attractive, especially to the 1.9 million students who have received study loans under the PTPTN scheme up to 2011.

Who will not want their outstanding study loans written off and for future generations of students to study free using Petronas funds?

It’s simple - all the students and their parents need to do is vote and ensure that Pakatan captures Putrajaya in the general election and then wait for Anwar to deliver on his promise.

The vast majority of PTPTN loan takers have paid up or are paying their loans. About 144,000 borrowers have been blacklisted for not paying and they will have reason to rejoice with Anwar’s promise to write off the loans.

The cost of higher education has shot up since the mid-1990s and it now costs more to study and even more for the Government to subsidise higher education.

For instance, a year’s tuition for a medical course in a public university, before any subsidy, comes to RM166,000. But students only have to pay RM9,000, which means 94.6% of the fees are subsidised.

Higher Education Minister Datuk Seri Mohamed Khaled Nordin, in clarifying the cost structure to reporters last week, explained that a first-year engineering course costs RM61,000 but students only pay RM6,800. He said 90% of the cost is subsidised by the Government.

Students in public and private institutions of higher learning need only pay between 5% and 10% of the cost of degrees that they are pursuing and even then, they are already subsidised in the form of PTPTN loans.
Students who take PTPTN loans pay a minimum of the course fees and take care of their living costs in the cities and major towns where they are located.

When students have completed their studies and are gainfullly employed, they start repaying their loans and many have done so.

Abolishing PTPTN loans sounds good but it is impractical because higher education is heavily subsidised, up to 90% or more, by the Government with students paying only under 10% of the course fees.

And even for that amount, they take PTPTN loans.

But because elections are near and Anwar feels pressured, he has come up with a grand scheme to write off the entire RM43bil PTPTN loans given out since 1996 and use Petronas funds to finance future generations of students for free.

Petronas is the national oil corporation and it deals with our own oil, which is beginning to deplete, and oil in other countries, which it explores, refines and markets for a percentage of the profits that it brings home.

Nearly half of Petronas’ payments to the Government — and the percentage is rising — is from dealing in oil in other countries.

Anwar should not use Petronas as a Santa Claus to promise parents free higher education for their children.

The oil corporation is footing a huge part of the national budget and it can’t be milked anymore to write off PTPTN loans and underwrite higher education.

Taxpayers, who are also subsidising higher education, should not be burdened with more taxes by a Pakatan policy of offering free higher education for all if it captures Putra-jaya.

PTPTN loans are very low-cost loans for students to pursue their dreams of getting a diploma or a degree or to arm themselves with a skill to face a challenging future at local colleges and universities.

It is reckless for Pakatan to promise that it will write off the outstanding loans and offer free higher education if elected to Putrajaya.

It is a big promise from a man whose penchant is to make ever bigger promises as the general election nears.

And he will make them in a dramatic and striking manner, which just goes to show his desperation that the political momentum is slipping away. 

Analysis By BARADAN KUPPUSAMY

Learning to pay for a better future

Doing away with PTPTN loans will not only burden taxpayers but also deprive many of a higher education.

THERE was much joy at the latest family gathering as my brother’s eldest son joined the ranks of medical doctors in the family – he graduated a month ago and is the sixth in the extended family to put the MBBS to the back of his name.

In a few more months, two more of his cousins will also be graduating as doctors from the same private medical college.

The total cost of educating the three of them is more than RM1mil.

The elder one managed by taking loans from the National Higher Education Fund Corporation or better known as PTPTN. Without such a loan, I doubt whether my nephew could have pursued his ambition to be a doctor.

PTPTN has disbursed loans to 1.95 million students, totalling RM43.60bil, from 1997 to February this year.

Now it seems some people want to can this and want the Government to provide total free education from “cradle to grave” – as stated by Solidariti Mahasiswa Malaysia (SMM) chairman Muhammad Safwan Anang.

SMM is a pro-opposition student movement.

His call was supported by Opposition Leader Datuk Seri Anwar Ibrahim, who again pointed to Petronas’ oil revenues as a means to pay for the higher education needs of all Malaysians.

This is obviously just a populist move meant to please a certain quarter – mostly the more than 100,000 defaulters of whom about 70,000 have not even paid up a single sen since completing their studies some 14 years ago.

Who would not like to have their loans cancelled? The almost two million borrowers are a very big electorate for any political party to woo.

For the record, PTPTN loans recovery has not been very good. Over the past 14 years, a total of RM5.6bil was to have been collected in loan repayments, but only RM2.7bil had been received.

The corporation has tried all means to get back its money including the rather unpopular blacklisting at all exit points that prevents defaulters from leaving the country.

This is what is unpopular with PTPTN.

Previously, the corporation was criticised for not making a serious attempt at ensuring loan repayments, but when it makes an effort to do so it is accused of being a bully.

Learning to pay for your own needs and wants, including debts, is as important as a formal education. This is called a lesson in responsibility. Cancelling the study loan is like an uncompleted course.

Despite the contentious blacklisting move, the PTPTN loan is the single largest enabler of education in this country. Without this loan scheme more than half of the some two million borrowers would not have been able to further their education.

I know of several students who only made it to a tertiary institution because they were able to get a loan.
An uncle of one of them said he was willing to provide support in terms of pocket money and even accommodation.

“Unless he makes it into a public university, tertiary education will be beyond us,” the uncle said. The nephew is already grateful because he knows his future is assured either way.

He is not alone.

A good friend, who lives and works in Hong Kong, is very proud of his daughter’s independence because of the PTPTN scheme.

“I do not have the money to send her overseas for a higher education and she couldn’t get into a public institution. But she managed to get a PTPTN loan, and with that she could study in a local private college.

“She did everything herself, and was even able to save some money to buy herself a car. She made sure she passed all her exams and is now working. She is also paying back the loan on her own,” this friend said, adding that he never expected her to be so independent.

When the Government first liberalised the education system in the early 1990s, the number of those aged below 24 who received tertiary education was less than 15% but this has risen to 45% currently and should reach 50% by 2020 – and all this is due directly to the PTPTN scheme.

PTPTN can also be credited with the growth of the number of higher education institutions in the country. As of October, there were 20 public universities, 26 private universities, 23 private university colleges, several branch campuses of foreign universities, 28 polytechnics, 74 community colleges and 434 private colleges.

Providing free higher education, ironically, will result in many of these institutions being beyond the reach of the middle class and the poor because they will have to go to Government funded colleges.

For a simple three-year business related degree from a local private university, the tuition fee will be between RM30,000 and RM40,000. A local medical degree will cost more than RM300,000.

Without a doubt many of these private colleges are decent institutions of higher education, and a viable alternative to the expensive foreign education that most Malaysians dream of.

Just like everyone cannot be a doctor or a prime minister, not everyone can afford a foreign education.
These almost-500 private institutions provide a channel for our young to pursue their education dreams.

PTPTN makes this possible.

Why Not? By WONG SAI WAN

> Executive editor Wong Sai Wan is glad he can afford to pay for his children’s education but realises many need financial help to educate theirs

PTPTN should stick to its guns

QUESTION TIME By P.GUNASEGARAM

The most efficient way to educate those who can’t afford it is through loans as it ensures that future generations will similarly benefit.

IT’S a bad part of human nature that the more you get the more you want, especially when you get something relatively easily.

And since according to common wisdom elections are supposedly around the corner, now’s the time to demand and hope that the Government will accede simply to please in the hope of getting more votes.

But there is a need to be more responsible than that. If goodies are handed out every time they are demanded, we are going to have problems, real problems.

We should not be going anywhere near forgiving other people’s debts as an election manoeuvre but that’s exactly what is being asked for.

There are many hundreds of thousands of people who have taken loans from the National Higher Education Fund (Perbadanan Tabung Pendidikan Tinggi Nasional or PTPTN) but now incredibly they want their loans to be waived – just like that. I wish my housing loan was waived too.

Not only should their requests be flatly turned down, the Government should review its entire system of scholarships on which it spends tens of billions of ringgit yearly in favour of a system of loans.

The PTPTN loans require repayment only after those who have taken them get jobs or six months after graduation whichever comes first and is to be paid through the Inland Revenue Department. They carry low rates.

We are talking about really big amounts – as at end of February, 1.9 million students had loans totalling RM43.6bil from the PTPTN. That’s a huge amount to be written off and the Government simply cannot afford to do so.

Based on the figures, the average loan per borrower works out to around RM22,000 and it should be possible for PTPTN to work out some arrangement with the borrower if it is not possible to repay the loan within the prescribed period due to unemployment or other reasons.

Eventually, most graduates do get employed and when they get jobs, they will stand to earn a lot more than non-graduates and they should be made to repay society for the help they received in getting a leg up.

Many others were unfortunate enough not to get a proper education because they could not afford to pay the fees or take time off from work to study. They often never earn graduate salaries in their entire lifetimes.

The attitude of borrowers who have taken money from PTPTN and now do not want to repay is selfish because they deprive other similarly disadvantaged students from financial assistance in the future.

The PTPTN was conceived as a fund that will be largely self-financing from repayments and that’s the way it should be operated so that the most number of people benefit from it.

Most of the loans are taken by borrowers in public universities to cover the cost of living as fees are already low in these universities. The timely repayment of such loans ensures that future students will continue to benefit from the programme.

The politicisation of this issue is terribly unfortunate not only because it puts pressure on a scheme, which if properly administered, will result in the emergence of a sustainable operation largely funded by repayments but because it inhibits consideration of loan schemes to replace scholarships.

The scheme can be made more attractive by making repayments completely interest-free and free of any maintenance fees as is the case in countries such as Australia for their own citizens.

The Government can then expand this scheme so that all qualified students are eligible for loans and even extend the scheme to those who want to study overseas.

Then it can reduce the amount of scholarships allocated and restrict these largely to a select list of merit scholarships and to fund those it wants to employ in future.

That way the Government will be able to help more people get access to higher studies without having to break its financial back by providing outright scholarships and grants.

However, that would require some courage because the rolling back of scholarships which were relatively freely made available earlier would meet with a considerable amount of opposition from all quarters.

You can sometimes give too much but try and take that away and you can get a lot of problems.

Governments all over the world are moving towards interest-free loans to help needy students. It’s the right way to go because only those serious about their education would take such loans and they will tend to limit their loans to what they need because it has to be repaid.

That’s a good way to allocate scarce resources by making people who can’t afford it take interest-free loans and defer payments until later. Instead, those who have taken loans are demanding they be turned into scholarships instead. That’s really too much.

Acceding to such demands would be populist, what move would not be when you give something valuable away for free, but it would be wrong simply because it is going to deprive future generations from access to education.

Resources are finite after all and we must find the best way to allocate them. Sometimes, you have to be cruel to be kind.

> Independent consultant and writer P. Gunasegaram believes that both lender and borrower have a joint responsibility to ensure that funds are properly used.