It has long been speculated by financial observers that the next fiscal bubble to pop may be in higher education, much like the housing crisis of last decade.
This week a new report from the Roosevelt Networks will only add to dreary prognostications. The report examines the toxic financial deals universities and colleges are engaging in with Wall Street, including interest rate swapping.
Financial Times defines an interest rate swap as a contract to exchange fixed payments for floating payments linked to an interest rate, and is generally used to manage exposure to fluctuations in interest rates. They can be profitable, however, if markets move in an unexpected way, they can also produce losses.
With all the growth higher education institutions are experiencing, it would not be hard to believe there are some bad financial dealings underpinning the pristine facade. The numbers from the report are staggering. They used a case study of 19 schools and identified $2.7 billion in unnecessary swap costs already incurred by these schools.
According to the report, the costs associated with swaps have siphoned billions of dollars out of these schools’ budgets, at a time when schools are increasingly passing on their increased costs to students.
Rana Foroohar of Time.com examined the huge student debt and missed the major issue surrounding it when she writes,
“The fall in state funding for public universities over the last two decades is a core part of the story; those cuts are due not only to the financial crisis but over the longer term to the tax revolt in various red states (thank you Grover Norquist and the Koch Brothers).”
No, the issue isn’t a lack of state funding. All that basically does is transfer the debt from the student to the taxpayer. The debt will still be there.
The main issue with the higher education bubble is a cultural one. Why are millions are young adults willing to go into huge debt before they even start a career?
Because the American public idealizes a college degree (much like we did home ownership in the last decade) and are willing to going into huge debt to attain it. There is no policy remedy to the cultural attitudes surrounding college education, but a burst of the higher education bubble might be a shock to the system.
A college degree is an applaudable investment, when paid for in a fiscally responsible way.
Another issue is the increasing devaluation of a college degree. The number of young adults with a college degree is at an all-time high, therefore, having a degree on your resume has lost its luster.
Young people are increasingly going into debt for something that is losing value. It’s like buying a mobile home. Sure, you need somewhere to live, but it only depreciates.
Senator Marco Rubio caught heat from liberals when he hinted at this idea during the Republican primary. He said,
“Welders make more than philosophers. We need more welders and less philosophers.”
He was on to something. There needs to be a de-stigmatizing of vocational training. The workforce has changed, but colleges and universities haven’t made any adjustments to this reality. They just raise their prices for a four year degree.
The report also noted how schools are competing with each other by “increasingly courting wealthier students with fancy amenities built with borrowed money.”
Show me the money!
A college degree is in such a high demand they’re going out of the way to distinguish themselves by building state-of-the-art the facilities. Rock walls, work-out facilities, luxury dorms are all the rage on Campus USA.
If getting a college education was truly a priority, the quality of the education would be all that mattered. Too many students are choosing the big name schools with a nice gym and student center, without considering the increased costs for those amenities. The Millennial generation has lost the ability to make a pragmatic and cost-effective choice about higher education. They view it as a “right”.
The higher education financial bubble is a multi-layered problem, but the progressive answer is simple to increase funding.
Throwing money at the problem won’t fix anything. It’s simply like handing a twenty dollar bill to a drug addict and being surprised when he buys drugs.
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