David Nelson is chief strategist of Belpointe Asset Management and a Moneynews contributor.
In my early years as a rock and roll touring artist before we moved upscale traveling on jets, we jumped on the bus driving all night from town to town ready to entertain our fans. Sometimes they threw flowers and other times they threw beer bottles. That's the life of a musician.
Rock and roll has nothing on Washington, and last week, President Obama's Lollapalooza College Tour kicked into full gear with Obama speaking at college campuses, telling students, "We've got a crisis in terms of college affordability and student debt."
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The president's plan unfortunately ignores the root cause of the problem. Easy money and a government-backed student loan network is what drive skyrocketing costs. Colleges see how easy it is to get a loan, so they continually jack up tuition rates. Bloomberg points out in a recent op-ed that Obama's plan contains a "forgiveness boon" for those paying off loans right now. That could easily encourage students to borrow more, which in turn would be followed by colleges raising prices further.
We shouldn't be surprised at the rising default rates, because there's no underwriting process. Nearly all students are eligible to receive federal assistance regardless of their credit score.
Student loan debt now stands north of $1 trillion, with an average loan size of $26,500. School loans have now surpassed both auto and credit card debt. The backstop for this is, of course, the U.S. taxpayer.
Since the financial crisis, consumer debt has started to fall, but student loans are still climbing at an alarming rate. While some of the president's proposals may provide some relief, others simply miss the boat.
Linking federal aid to a ratings system that would assess how hard colleges are working to keep down costs is a positive step. However, offering bonuses to colleges for the number of Pell Grant students who graduate doesn't pass the smell test. If I'm a college administrator and bonus money is dependent on graduation rates, trust me, my students are graduating.
Waste in our Colleges
Many of our nation's colleges and universities make questionable decisions as to how to allocate capital. Economist Richard Vedder, author of the book Going Broke By Degree, points out in a recent Wall Street Journal interview that Stanford offers more classes in yoga than Shakespeare. He goes on to say, " Since 2000, New York University has provided $90 million in loans, many of them zero-interest and forgivable, to administrators and faculty to buy houses and summer homes on Fire Island and the Hamptons."
I don't have the investigative manpower to check out all his claims, but I believe there is enough evidence out there to justify just how large the problem and how vast the corruption is. More than likely, this is just the tip of the iceberg.
Earlier this year, I had the pleasure of interviewing for Newsmax TV former Secretary of Education William Bennett
. His book Is College Worth It should be mandatory reading for every parent and graduating high school senior. He starts off on page one saying, "You could get a better education in a coffee shop or your parent's basement than you will get at most colleges." If you're a parent just about to send your son or daughter off to school, that line is going to shake your confidence.
We've developed a culture in this country where we've told our kids that they have to go to college regardless of their life's calling. The apprentice system in our country where you could learn a craft is all but dead. Vedder says, "We have 115,520 janitors in the United States with bachelor's degrees or more." Does that really make sense?
The private sector might offer the best solution. Online education could end up being the answer for an increasing number of students looking to further their education. A contributing factor to tuition inflation is that college is a service industry. Services have had a higher rate of inflation relative to other parts of our economy for decades. Technology has forced down the costs of manufacturing through automation, but services require the human element. There are only so many people you can fit into a dorm or classroom.
While online education has been with us for some time, technology has made a quantum leap in recent years. Internet video streaming is changing the face of entertainment. Just look at success stories like Netflix (NFLX), Apple's (AAPL) iTunes and Amazon's (AMZN) Instant Video to see how far we've come. There is no reason this technology can't be used to reach thousands as opposed to just 50 in a classroom.
According to Barron's Jim McTague, " Georgia Tech, along with Udacity and AT&T (T), announced creation of an online master's degree program at the bargain-basement price of $6,600." When you compare that to the undergraduate program four-year costs at some universities ranging from $30,000 to $100,000, you can see the potential.
To be fair, the online education industry has had its share of problems, with some Internet schools recruiting just about anyone with a pulse to boost revenue. However, how can we ignore this trend? The solution to the massive pile of debt that is starting to rival the housing bubble may be staring us right in the face.
Common Sense Solutions — Advice to Parents and Students
Too many kids are going to college and getting little or nothing out of it. Many simply are not emotionally ready. Look, if you want to be an aeronautical engineer, you've probably patterned your academic program in high school to that end. By all means, go to school. If you have the work ethic, you will graduate and in all probability do very well.
However, if you aren't certain of what you want as a career choice and you're going to college enrolled in a liberal arts curriculum thinking you will find yourself over the next four years, you are sadly mistaken.
For many, college will end up being a social experiment with majors in bong manufacturing and party techniques. Go out into the real world and work any job until you know who you are and what you want to be. When you go back to school, you will be focused and far more likely to succeed.
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