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Monday, July 4, 2011

Strange Days in the World of Educational Finance

It appears, as Jeremy Grantham notes in his most recent missive (1Q 2010), that the Days of Abundant Resources and Falling Prices Are Over Forever.

He is talking, mostly, about the recent apparent paradigm shift in commodity prices. The days of cheap everything is over.

Our obsession with economic growth at all costs is running up against a slight problem in the real world, known to the general public as math. Specifically the feature in math known as compound growth.

Hellasious touches on this with repsect to his various discussions on permagrowth.

The problem is as follows: No compound growth is sustainable.

In terms of debt, this means that no real (non-inflationary) compound growth in debt is sustainable over the long term.

Resources are no longer abundant. Good-bye real compound growth.

What does this have to do with the financing of education? Everything.

The educational finance model permits real compound growth with respect to student loan debt. This is then passed on to colleges and universities in the form of real compound growth in tuition with students taking on the risk of paying this money back.

Put simply, colleges and universities increase tuition faster than inflation. We all know this. Everyone complains about it. But nothing ever happens.

Colleges and Universities use the compound tuition growth model to ratchet up costs, year after placid academic year, with no discernable improvement in anything except massive resort-type facilities for students. However, this idiotic system has never come face to face with a major economic paradigm shift before.

The fuse for the coming major discontinuity in the world of educational finance has been lit.

Let's just wait and see what happens when the now permanent feature of price pressure and shortages of resources hit student loan debt system and the ivory tower.

6 comments:

JP said...

I tried to post this in April when Blogger was on the fritz.

Dink said...

There is all manner of outrage here in Seattle about the UW raising tuition to ~10k a year. Granted, 40k in loans for tuition alone is nothing to scoff at, but if you choose your major right its still a bargain. I suppose students are getting loans for more than just tuition, because hell, money is fun.

Permagrowth expectations along with overpopulation. The math is terrifying....

Dr John said...

It's been a while since I have been around. I have been so focused on my own health issues and slowly recovering. Not 100% but so so much better than 1 yr ago.

This was a great post. I have been enraged for 20 years at what I have felt has been the reckless spending of Universities. I put myself through the local state college working summer and nights. Since then tuition has increased over 500%!! The only think I can see students have gotten for their money is a pretty campus.

The elite have slowly made college education impossible for anyone who is not wealthy or willing to take on staggering debt. I look forward to it all imploding.

nice post Dink.

John

Dink said...

Hey Dr John! Wish I could take credit for the post, but its JP's work.

I have to agree that in many cases all that the students are getting for the extra cash is a pretty campus. When you measure outcomes... well, its really difficult to measure that because you'd have to account for the personality differences going in (i.e. ivy league slacker vs. state U. slacker, ivy league go-getter vs. state U. go-getter).

I'm just finishing Guns, Germs, and Steel. What a kick-ass book on how societies evolve! I can't recommend it highly enough.

JP said...

I'm trying to think about this problem in the aggregate. There have always been slacker students and studious students.

However, the problem at this stage is the exponential tuition growth overlaid on stagnant wages.

I took out $120,000 in loans. But that was back in 2000, when I easily got a job and paid them off.

Law school is much much worse than the undergrad situation.

The real problem for students is that the loans can't be discharged.

Dr John said...

I agree JP.My entire life I promised myself when I had children they would do what I did which was put myself through school. The sad fact is that this is just not possible. I was forced to either ask my children to take on huge personal debt they would service for most of their life or pay for their college. I chose to pay. They all work but the best they can do is contribute 20% at most of the costs.

I feel very lucky I make the kind of money where I can offer to do this.

What will all these schools do when there are not enough students and people decide a college education is no longer a good investment?

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