My $0.02 POV #1: Deconstructing Student Loans

With all the political discussions going on about how much of higher education each politician plans to write off how much of student loans has become a critical discussion. I shall put forward my unqualified common persons opinion for education loans restructuring as my POV.

Political Background

Currently this prime political discussion that is driving this article and my $0.02 inputs. For the 2020 positioning politicians are desperately trying to woo the voters by outdoing their competition. In the case of Higher Education Tuition, the offers are ranging from total free educations to all higher education students to continuing the same as we do today. At the same time while student loan are crippling the backs of those that have taken it also denies education to deserving students that cannot afford to take these loans and thus fall through the cracks of national potential. 

The Definition of Success in a Product or Service: In our digital world there are two mandatory components that drive the definition of success of products and services. Behind these two criteria’s is the experience-explosion of digitized customers – wherein they share their experience and thus pull more and more new customers into the fray. In order to succeed providers must fulfill both these attributes to succeed. The first is [1] increase in Quality and the second is [2] decrease the Price. Take a service example that I have not included in the graph below. For years I caught a Taxi from my home to the airport for my travels. The cost was a rounded number of $100 per one-way trip. Often my driver would not arrive on time resulting in my being a very anxious passenger, or sometimes missing a flight, or paying higher rates for an emergency ask. In comes Uber and I became a long-term customer due to three fronts. The first was [1] Predictability- I was guaranteed a ride even if I ordered 15 minutes before the start- never got delayed or missed a flight due to my ride. In cases where I did it was my fault for not planning. The second was [2] Higher quality. The Uber and later Lyft cars and drivers were consistently better speaking and in better cars. The Third was [3] Lower costs- my rides were consistently in the $50 to $60 range and sometimes I got rides for as low as $35 too. As a reference I need to point out that Education is a service too.

QP Comparison: QP is the Quality vs. Price comparison. It is important start by using the QP facts between two points of time, i.e. 1985 to 2019 period. It is equally important to lay a foundation between these two points of time: high-end wages increased by an average of 40% while low end wages have increased by an average of 20%- giving us an total average of around 30% increase. Cost is the price of any standard item on the market. Quality consists of improvements in functionalities, capabilities and throughput.

In this graph we compare various free market products as a reference with college education as one of the attributes

A TV: If we look at the chart on the left, we see that the cost of a 42” TV has gone down from $5,600 in 1985 to $175 in 2019 while its quality has increased by 20 times. This is a 97% drop in price and a 20x increase in quality.

Some of us are numerically inclined so here is the data behind the above graph.

A Computer: Similarly, while the cost of a similar computer has gone down from $95,000 in 1985 to $900 in 2019, while during the same period a computer’s storage and speed has gone up by a minimum of 40 time. This represents a 99% decrease in Cost and 40 times increase in quality.

Education: While, during the same time-frame education costs have risen from $20,000 per annum to an average of $143,999 in 2019 with the quality in education having increased barely 1 time. There are more varied courses today than there were in 1985 but for this article we have taken two subjects of Economics and Mechanical engineering as our baseline. If you study economics or engineering the quality of education has barely gone up by a factor of 2. This is a 720% increase in price with 2x improvement in quality. On one side is TV or your Computer and on the other is education. During this reference period universities have amassed 10-20 billion in unused funds as they demand more and more state and federal funds while charging students 720% more to get approximately the same education. Just as a reference in 2018 Harvard raised endowment funds of around $1.42 billion while Stanford and Columbia crossed the $1 billion mark. Fund-raising is now a big business within the universities and the senior-staff members play an important role in collecting these funds. Their salaries are paid for by the students. These monies come from donations and endowments generation by universities. For example, Harvard tracks such funds in a ROEA (Return on Endowment Assets) and currently holds $40.9 billion as of June 30, 2019. These funds are not taxed as endowments are not taxed. On the other side we have TV producers that have dropped their prices by over 90% while delivering higher quality. If we allow universities to only become profit centers of the rich, if a university’s power is measured by the non-taxable endowments they hold, if education becomes relegated to the rich and mighty who can use the system, misuse actually, to define rules and regulations that are driven more by profits than any national interest of educating children and thus corrupting the fundamental education system. If the future youth is not properly educated, no matter for what the reason, then they will become more disgruntled and violent towards everyone else. this could be immigrants who deservingly earn better salaries and live better lives. Not investing in education for any nation is a self-cannibalistic strategy that is short lived.

Education is the foundation and fundamental right of every individual and represents the national strategic potential and its global competitive positioning. Defund fundamental education standards and the nation will predictably produce citizens that have few skills and unrealistic personal demands. Fund education and the nation assures the continuity of national intelligence that benefits democracies, rights and the overall health of nations.

Further Referential Information: As a president of the US had once said that ‘The US needs to remain a beacon of democracy on the hill’ and shine a global light on the rights and wrongs of this democracy.

Elementary and Secondary Rankings: Nations that have bet on elementary and secondary education will predicatively succeeded in the long term. In this class countries like Norway, US, Belgium, south Korea, UK, OECD nations and Norway come to mind, it also includes outliers like Zimbabwe, Malta and Senegal. While nations that do not invest into structured education have systematically produced anarchists, terrorists and the disgruntled citizens. Just to level the playing field what I am stating here is that world-class primary and secondary education is the fundamental foundation for nations. Between 2005 and 2015 US has increased spend by only 5% while Iceland and Greece have decreased spend. The reason for Iceland may be declining population, however the impact of Greece is visible if one googles its youth satisfaction scores. Education is the key to strategic survival of nations.

Post-Secondary rankings: At the same time the cost of Post-Secondary education is a direct indicator of global hire-ability of resources by nations.

The over arching discussion for this article is primarily more for the post-secondary education. There is enough evidence that very deserving students do not pursue their optimal path of education for two important reasons. The first being that the costs are outside their family’s sustainable capability. The second is that the average student debt when they pass out is $37,172. There is a total of $1.5 trillion student debt as of the end of 2018. The reported lowest student loan interest is 1.2% whereas the reality is more of 5.8%. Just as an example the fixed federal loan rates can range from 4.53% to 7.08%. Private loans can range from fixed rates from 4.02% and variable rates of 3.08% to 12.62% . Students often must refinance, and these rates can range from fixed rates from 3.14% to 9.49% and Variable rates from 2.01% to 9.24%. Also, it is important to note that while students need make no payments while in school their interests keep accruing from the date of loan. Just as an example the average student loan for a medical student currently stands at $196,520 from an average medical university., while 20% of med students take over $200,000.00 in loans before they get their first paycheck. This becomes $11,600 per annum or close to a $1,000.00 per month. $1,000 per month just pays back the interest with a zero impact on the principal. So, in 5 years when a student passes out their $200,000 amount could have increased by $46,400 with a starting principal of 246,400 that keeps cumulatively accruing the amount. This computes to an annual payment of $14,268 per annum or a interest only payback of $1,189.00 per month. Add a little principal into this mix and we see a monthly payment of $3,000.00 to $3,500 per month to pay back the principal at around 3000 per month for a loan that takes 82 months or around 7 years return cycle. It is also reported that over 40% of the loan amount is paid to banks and institutions in the form of interest only. 40% of $246,400 is $98,560.00 to institutions.

Unfair: Education among other things is becoming more and more unfair. Unfit rich children are getting into prime universities a form of social accomplishment with no intention to study or excel in their education. Many of them believe that they inherently deserve the best-of-best because they can afford it. Be it cheating or getting someone to sit for their child’s exam to them it seems appropriate when done with a lost of cash behind it. We have probably just touched the tip of a very large iceberg with only a few victims even in this cycle of identified criminals. So the rich not only get better education but also study less and pass from the best of schools with the highest scores possibly by cheating. Our structure needs to recognize this and create checks and balances to this very serious issue.

Question 1: Should politicians be allowed to give freebies at will: World over the democratic goal seems to be ‘Give more freebies, get more votes. In a globally competitive environment this can get cities, states and nations to go bankrupt. I had written an article ‘Identifying patterns of Economic Meltdown’ that does not deal specifically with universities but demonstrates how pubic funds allocations for votes can become a political snowball that has severely detrimental impacts on the economic allocations. So, the important question becomes whether each politician is trying to win more and more student votes by promising stil more write-offs than their competitor. Bernie Sanders wants to make the total higher education free, or total education free for anyone wanting to join a school, college or university. Other politicians are on a scale from current to the Bernie model. Some want to promise a blanket write-off to a trillion dollars’ worth of current student loans.

Question 2: Does total Free Higher education make sense: Not at all. I know many folks that would happily stay in the university doing one PhD after another till they grow old while living on free university grants. This would also encourage university to add non value courses as it then becomes a revenue stream per student and results in useless courses delivered to students that could get them nowhere.

My $0.02 POV to education reforms

A.     Zero Interest: The federal government should give student loans with ‘Zero’ interest from time of loan till 3 years after the student has passed off from their courses. Rather than forgiving a trillion dollars create a loan fund with ‘zero’ interest rates for students- No accrual of interests for 3 years after passing out.. Currently a lot of students end up paying close to double the loan amount and that is extremely unfair for our nation and to the student. These loans do not allow bankruptcy declarations as most other loans do. Its as-if we want to penalize students for pursuing their passion, opportunities and studies.

B.      Weighted Score Scholarships: Loans must be structured not by a flat salary earned by parents by a weighted score applied to a location index of the parents. For example, a family earning $150,000 in San Francisco or Santa Clara is probably living on the poverty line compared to the same in Fresno or Plano Texas. As parents mostly cannot chose when they work thus live, i.e. all the SF and Santa Clara parents cannot move to Fresno or Plano so that they can afford to educate their Children. So it becomes the responsibility of the government to create a weighted average calculator for FAFSA loans that is reality based on not simply on generic numbers.

C.      Deserving Students: Deserving students must get all and every assistance from the state and fed funds for continuing education. In order to keep their loans and scholarships active they must get a minimum score to remain active or on ‘Zero’ interest path. Apply the rules of three strikes or misses on their grades with an oversight provision from their professors, i.e. if a student gets concussion and their grades drop whereas they still have full potential to continue. The minimum score should be a B or a B+ in every subject or collectively. Again, I’m no expert and the right group should be able to define this accurately.

D.     Floor for Education assistance: Any parents that earn more than $500,000 should pay full fees as determined by the university/college.

E.      Selective Subjects: Student loans must be for specific subjects that are career specific. Type A could be STEM, engineering and medicine, Type 2 could be soft sciences like math’s and economics and so on and so forth. I am not expert in distribution of subjects or it job potential and leave that to experts to figure out. I don’t propose it but there cloud potentially be non-supported courses too. However, the plan must not support students taking some non-value courses for 1tens of years living on government funds at universities.

F.      Penalize the Fraud-Chain: Last but not the least and something no politician has focused on. Unfortunately, it is the rich and powerful that fraud the system and their scores in universities. Universities must be made to open books for the last 30 years on past frauds that can be traced with AI driven pattern recognition. For example, someone getting admission for a sport they had never played prior to admission or never played since. Or someone passing out with great scores while they almost never attended classes. Very severe penalties for parents, university and their participating staff, intermediaries that assist in ‘admissions fraud’. In 2019 it was a less than a handful parents that got a few weeks and no one else in the fraud chain were reportedly penalized. . Education fraud is a very serious crime committed by the rich and it must bear appropriate penalties across the total fraud chain. Fifty people were charged for fraud, bribery and paying to cheat the education system. All were very wealthy. Some parents and children lost sponsors and gigs but little else. Some of the parents and their children are back on their prior gigs as if nothing happened. To the best of my knowledge no intermediaries or university handlers of the crime were indicted. This should change across the whole supply chain of student fraud must be penalized.

This is a non work related article and my independent POV. It has nothing to do with my company or any company I work with. I have zero conflict of interest in these views other than that I too have children and see their pains on various fronts.