Purdue's Road to Perdition

"Teach a man to fish and he'll eat for a lifetime. Teach all men to fish and the return to fishing will fall below subsistence levels." Noah Smith

Much has been written about cost of Higher Education but the debt burden has reached a point of a critical mass, and is now manifesting itself in restraining home sales, soaring rental costs, and distorting traditional consumption patterns throughout the economy. Unfortunately, our policy makers have slept through yet another avoidable crisis just as they did with health care: without market constraints to keep a lid on costs, prices will continue to soar for a product that can only offer less value even as more is paid for it. What stoked this particular piece was something that came my way from Purdue University:

"WEST LAFAYETTE, Ind. - Purdue Research Foundation announced Wednesday (Aug. 5) that it will begin a formal solicitation process to find a partner firm to establish and manage income share agreement (ISA) funds, a proposed new way to help Purdue students pay for higher education.
“This no-debt, low-risk option is another way we can help keep our land-grant school within financial reach of all qualified students,” Purdue University President Mitch Daniels said. “And I’m convinced that those who support the education of a student at Purdue are making a very sound investment.”
The program is a new type of market that gives students another choice in funding their education. The agreements would give students the option of drawing funds from an investment pool to cover their education costs, in exchange for agreeing to pay an affordable percentage of their post-graduation income for a set period of time. An ISA has no explicit principal balance or interest, so its payments adjust with the student’s income over the life of the contract; if a student makes less than expected, he or she is not beholden to the investors for any more than the agreed-upon percentage. "

You do not have to be a behavioral economist to figure out what a perverse set of incentives this program will bring about. To me, this is nothing more than indentured servitude and neo-feudalism. And for an institution of Purdue's standing to characterize this as "no-debt?" It's hard to imagine greater sophistry. But once again, instead of dealing with the root cause of the expense, those who benefit from the largesse of the racket they created will figure out yet another way to keep the cost inflated no matter how much damage is done, and how much wealth is sucked out of the economy. This marks the death of the public ethic of yet another sector of the American professional class: Medicine is no longer an honored "practice," but more akin to owning a transmission repair franchise, and Higher Education is driving down the same path. With the same rank cynicism that my local hospital system is legally considered a 501(c) corporation, the Higher Education mobsters have a partner in crime. You.

And this comes on the heels of a newly released study by the New York Federal Reserve showing that all this "aid" amounts to is little more than a massive wealth transfer from the public to America's universities. Given the utter lack of underwriting standards in student loans, we're creating an education bubble just as we did with housing. Easy credit inflates prices, and you don't have to be a Wharton grad to figure that one out. (What's galling for me is that I sometimes FIND Wharton grads who can't figure that one out.) Moreover, otherwise sane people in the Education Industrial Complex have become deluded enough to believe that a making a "loan" to someone is the equivalent of "aid."

With health care, one could point out causational reasons for part of the soaring costs: over testing in fear of litigation, the long tradition of hospital bill padding, the gaming of drug mark-ups by Big Pharma and medical device manufacturers, etc. All of these are artificial cost inflators that we've paid dearly for. Similarly, from 2000 to 2014, a sliver of a time sample, tuition costs rose at a rate of 6% per annum,and there is nothing intrinsically inflationary about the cost of a degree in marketing, statistics, literature, or even economics and law that could possibly drive such hikes in cost. Prices are raised simply because, well, they can be. Higher Education has been turned into a business.

And the result? While older Americans toss any amount of free cash flow that comes their way to eliminate their debt, the young rush headlong in precisely the opposite direction.

How are people going to be able to pay for anything else, especially if it's for something they won't even use 90% of once they join the workforce?

Our obsession with what we call "education," born out of America's perverse insecurity on competitiveness has created a monster. Hardly a day goes by where we're not scared into being "out-educated" by the foreign hordes. And Higher Ed Incorporated is quite skillful in leveraging this fear for maximum profit. This has even spilled over into the investment space: University endowment managers are now ranked with hedge fund and pension managers for performance. They have become investment superstars like Warren Buffet or George Soros. Running a multi billion dollar endowment is considered ordinary, yet, in the face of their "success" and growth, tuitions keep skyrocketing. Does any one know what Yale's $20 billion endowment fund is being used for?

Predictably, the idea that everyone should go to college has diminished the value of a degree: today's high school grad is the equivalent of yesterday's high school dropout, and today's college grad is the equivalent of someone who "merely" finished High School. Anyone whose perused a job website will note employers demanding a B.A. for something as menial as a telemarketing job. Small wonder the unemployment picture by "education level" has metastasized into this:

If you have a bachelor's degree, the unemployment rate is well under 3%. The rate is nearly double for that of a high school grad, and remarkably, that rate is astonishingly similar to those who have had 2 years of college education.

With health insurance, it was "your money or your life." With Higher Ed, it's "your money or your future." That's precisely the leverage any industry needs to gouge as much money as it can. And there's no sign of it leveling off.

In the midst of this, employers complain about grads "not being qualified" for today's jobs, and we're now letting business dictate to educators what an education should be. Higher education's mission isn't to prepare you for a "job." To my mind, it is better to be "learned" than simply "educated," but the sneering at someone with "merely" a Liberal Arts degree is proof we're hell bent on turning our schools into the production of better drones as opposed to building a trulyeducated society.

But the Purdue bait-and-switch scheme is sure to catch on, because the more I learn about behavioral finance, the more I learn the "false economy of things" is an easy sell. We have let things get out of control, and no one has the courage to put any constraints on this.

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Donald R. Davret, Investment Advisor Representative

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