Education Is The Key To Combating Income Inequality So Why Destroy It With A Bad Plan?

It would be difficult to disprove the fact that education helps people move up the income ladder. There are few other better predictors of future income than level of attained education. People with college degrees earn many times more over their lifetimes compared to those who jump off the education train after a high school diploma.

So, in theory, easy loan money to finance a college education should help move all college graduates up the earnings ladder and help alleviate high levels of income inequality.

But now all we hear about is the approaching college debt crisis…

Now that the bill is coming due and millions of people equipped with college degrees actually need to pay for that education there seems to be a lot of whining going on.

What happened?

Simply put all college educations are not equal…

A newly minted computer programmer can earn over $80,000/year while a Political Science major might earn $30,000/year because demand is sort of low for Political Science majors and they may end up in retail, fast food, or making your morning latte a Starbucks.

It is much easier to pay back $25,000 in college debt when you are working as a computer programmer than if you are crafting fine premium coffee beverages. I don’t think computer programmers are whining about their college debt since the return on their loan is about three times their loan amount just in the first year on the job while the valuable yet less employable Political Science graduate is looking at just over a one times return on their college investment.

Yes… Maybe college students should look at their college cost as an investment in their future. The same way they will someday invest in a home, car, or IBM stock.

Maybe before signing on the dotted line for their college loan they should consider how much they might earn after they graduate in their selected field. If these loans were not government guaranteed and their repayment was the sole risk of a bank or educational institution I’m sure future ability to repay the loan would be a key factor and it might be quite difficult to get a loan for a Political Science degree which costs the same as a Computer Programing degree.

Here’s the scary part…

There has been some talk of loan forgiveness. If a college graduate can’t pay back their loan after a few years then the balance will be wiped away. Like magic.

Nice… And very dangerous!

If we start forgiving loans because people made a decision to pursue the wrong education. An education that has a low future earnings potential, then we will just end up with more people earning low future wage degrees that do not help them move up the income ladder.

And that is the goal of the entire education system… To move people up the earnings ladder.

If someone’s passion is to study Political Science, Philosophy, Anthropology, or and of the other less marketable degrees then great. They should pursue their passion. But it is a catastrophe just waiting to happen when a government offers to pay off their debt when that government has not even figured out how to pay for a near universal medical program, social security, or a bloated government bureaucracy.

Taking on a new expense like this will have two guaranteed effects:

Political Science Graduates... Welcome To Your New Office!

Political Science Graduates… Welcome To Your New Office!

1) Add to a national debt that we all will pay for at some point now and in the future.

2) Act as a disincentive for college attendees to choose areas of study that will move them up the income ladder to help alleviate and income inequality trend that is moving in the wrong direction.

There is only one downside to a program where college graduates are made to pay for their debt…

Future students will be incentivized to pick more marketable areas of study and Starbucks will need to raise wages as less people need those low-skilled jobs.

The cost of our daily lattes will certainly rise.  But I am ready to deal with that inconvenience if it will help alleviate income inequality.

Is Obama Missing A Simple Fix To
The College Debt Crisis And Income Inequality?

NYTCOver6-20-2014A recent article in the New York Times brings a lot of solid information together related to the College Debt Crisis we have been hearing about for some time now. The article has the wrong title (It’s Official: The Boomerang Kids Won’t Leave) but the facts the writer lays out are pretty grim and have some serious implications for the future of Income Inequality in this country.

The bottom line is that tens of millions of young adults have taken on over $1.2 Trillion (yes, that’s with a “T”) in debt and they just don’t have the jobs to pay that debt off in any reasonable number of years. Some of these people owe over $100,000 and are earning barely a minimum wage.

Somewhere someone got this rumor started that people with a college degree are guaranteed a future of high paying jobs.

Well… They, and by “they” I mean probably the colleges and universities that have profited the most from that false rumor, left out an important little caveat to that secure future myth of nice paychecks. While you are at college you need to pick up some skills that companies find valuable.

So here’s the basic scenario…

1) An eighteen-year-old kid itching to move out of the house gets accepted to the college of his/her choice.

2) This newly accepted kid has no idea what to major in so picks something fun like English, Latin, Physiology, Political Sciense, Art History, Communications, etc…

3) The kid finds out that it will cost $100,000 for four years and since mom and dad are struggling to save for retirement they can’t write a $100,000 check right now.

If you major in French you can read this menu.  Unfortunately, you will probably also be the waiter.

If you major in French you can read this menu. Unfortunately, you will probably also be the waiter.

4) The college has a nice office where kids sign on the dotted line and get a loan. Boom! Four years of freedom, parties, casual sex, and even a little learning. What kid wouldn’t sign up for that package?

The biggest problem here is that the college gets their money no matter if the kid even graduates and the funny thing about student loans is that the only way to get out of the payments is to die. Bankruptcy will not wash this debt away.

So you’ve been hearing about this College Debt Crisis for a while now. Smart people even say it is affecting the housing market since this generation of kids have to pay this debt off before they get on the home buying ladder.

Then Obama gets up there and in his smooth fashion throws an “executive order” out to allow these borrowers to cap their payments at 10% of their income and he is supporting a plan to refinance the loans at a lower interest rate.

Very nice indeed but that is what I would call “lip service”. They still have to pay off the huge debt while working at a minimum wage job.

These people are in a hopeless situation and over the next few weeks the next wave of college freshmen will be signing their lives away on the dotted line adding to the huge problem.

This needs to stop now!

And here’s a simple way to actually stop this College Debt problem from getting even worse.

When you take out a consumer loan for house, car, boat, computer or what ever, the lender is obligated to show you a truth in lending form that spells out clearly how much you are borrowing and what it will cost you to pay the loan back.

Why not an Obama “executive order” that forces the colleges to include a paragraph in the loan paperwork to be signed by the new student that clearly shows them their future income potential. These statistics are easily available for each possible major a student might select.

Here’s an example college loan full disclosure paragraph….

I, Joe College, has elected to attend Party University and major in Political Science at a cost of $98,252 for four years. After graduating I will be paying approximately $1,042 per month for 10 years to repay this loan. The latest statistics show that those students who major in Political Science have a 2% chance of getting a job in their area of interest at an average after tax monthly income of $2,983 so if I am one of the lucky 2% to land a job I will be spending over on third of my take home pay to retire this F#&@ing loan. and if I end up in the 98% of people who do not get a job in Political Science I will probably be in a minimum wage job that did not even need a college degree. In that case I will not even have enough take home pay to make this monthly loan payment and provide for a basic life style even close to what I have living at home with my parents right now. 

college-partySo… If that new college student signs this he/she will know right up front what they are really in for so when they can’t make the loan payments later they can’t say they were not warned.

Of course the “College Loan Full Disclosure” paragraph would read differently for Accountants, Finance Majors, any of the many variety of Engineers, or other majors that deliver people to employers hungry for people with real skills.

And what about the tens of millions of people already caught up in crushing student loans?

They better treat their parents well or find somewhere else to live.