Alma Mater

Kennon-Green & Co. Fiduciary Financial Advisor, Wealth Management, Global Value Investing

This May will be 10 years since Aaron and I graduated from university.  I just looked up the cost for the upcoming academic year, which includes tuition, room, board, fees, and books, and it’s running at a rate of around $53,000 per annum.  Assuming even modest annual increases, a 4-year degree would cost just shy of $252,000 per person before scholarships.  That means to get the same two degrees before financial assistance, Aaron and I would have had to spend almost $504,000.  It’s madness.  Total, complete madness.  Sure, 40% to 60% of our costs would have been covered by music and academic scholarships, but it’s still deranged.

Alma Mater

This is what happens when Congress tries to mess the free market where supply and demand can’t do its thing.  You want it fixed?  There are only a few reforms necessary.

  1. All low-cost government student loans need to be ended immediately.  It has created a localized hyperinflation as more dollars face a limited set of services and spots.  If you can’t pay cash, you find a different school or go without a degree.  Society would adjust quickly and universities would be forced to radically cut costs, mass layoff, and rightsize their operations with resources devoted to the most useful programs to the civilization.  It might seem unfair in the short-run but like Volker with interest rates in the 1980’s, you have to take a 2×4 to the cost structure.  Students can’t afford the price now and the availability of artificially cheap money makes them think they can.  By the time they wake up to reality, it’s too late and they are stuck in a Faustian contract.
  2. Bankruptcy protection must be immediately restored to individual student borrowers.  From its earliest days, one of the secrets of the United States was its ability for debtors to start over, getting a fresh start.  What would have happened if Henry Ford couldn’t have started Ford Motors because he was still paying for his 3rd or 4th bankruptcy?  It also causes lenders to be far more stringent in their underwriting standards as the risk of loss is real, while removing the incentive to sign up clueless young people by selling them false hopes and dreams, shackling them for life.  (This is not an abstract opinion.  I say this with my biggest family stockholding and dividend payer being Wells Fargo & Company.  Even if it causes a year or two of horrendous losses, it’s too damn bad.  Society needs to get young people back into household formation mode and those profits are not, in my opinion, entirely ethical as they were achieved in part by bribing Congress to pass laws that gave them special protected status.)
  3. Colleges that do not meet certain established standards for post-graduation success lose their accreditation and are shut down without mercy.  Half of these for-profit schools that prey on minorities and first generation students are schools in name only rather than the ladders of upward mobility that they pretend to be.  If 50% of your students are dropping out after the first year, you shouldn’t be eligible for participation in the higher education system.

Most people are responsible – the average student loan debt projected for a graduate with a four-year degree this year is still only $29,400 – but that is up from $15,561 a decade ago.  We’re approaching “lost generation” territory if something isn’t done, though there is a chance that enough teenagers will hear horror stories and opt out of the system entirely, forcing a change in cost structure despite a lack of reform.

Sometimes I think the United States has gone nuts.  We place an incredibly regressive payroll tax on the poor and young to transfer it to the old, which is the richest demographic in the country.  We then strap these young people with non-forgivable debt.  Then we put things like rent control in place in cities like New York, which has proven, beyond a doubt, to distort supply and demand so it drives lower and middle families out and transforms the municipality into a place for the superrich as it changes the incentive system.  The road to hell is paved with good intentions and I don’t understand why people are so illogical.  They’d rather feel good in the moment than make difficult decisions that drastically increase the probability of long-term success.