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October 18, 2012

Why We Are Having a College Loan Crisis

The college loan crisis is on and continues to grow in the United States, but the factors causing this crisis are way more obvious than mortgage/financial crisis.

Financially Illiterate 18 Years Making Debt Related Decisions

In my secondary schooling, I was never required (nor was available) to take a personal finance course.  In 7th grade, I took a Home Economics class which showed me how to use a sowing machine and wash dishes.  Schools are way out of tune to the changing times when it comes to teaching kids how to manage a household and make financial decisions.

On top of this, a student's decision to go to college typically is the most significant debt related decision of the first ten years of their adult life.  So, we have teens (who by the way think they are going to make $145,000 a year) deciding how much debt to take on to go to college.  If you do not know your debt limits, is money going to be an object when deciding between schools?

Unmarketable Degrees

Look, I'm all for studying whatever you want in college, but too often I see graduates discover that the job market is not hiring for their degree AFTER they obtain it versus before they decide what to study.  I was one of those people.  While we may argue how much the college is palpable, it's important to note that degree offerings are provided for those who are interested in studying the material versus those who want the most marketable education.

A little research and responsibility by the individual would go far here.  If not, the end result is a college graduate, with tens of thousands of dollars of debt, hitting a job market with no opportunities and immediate obligations.

People Who Have No Business Going to College, Do So Anyways

We've turned college from an opportunity to an entitlement.  It has essentially become a part of the centralized public education program in America.  Central planners want all of their taxpayers to participate in the program, because to them "giving" someone the college experience leads to re-election.  Unfortunately, you have individuals who were neither cut out for leadership or management, going to college out of obligation.  These people do what has been mentioned above and come out of college to lead a disappointing career.  They would have kept more of their wealth (because they would have had less debt) had they never went to college. 

Distortion of Supply, Demand, and Price

Since the federal government has subsidized a college education, and everyone virtually feels obligated to go, the market for education is distorted.  From the supply side, colleges are actually hard to start, therefore there is a limited amount of opportunities.  Some students are unable to find anything, but can do so by dropping their standards low enough.  On the other side, demand is unlimited, because we've changed college to an entitled obligation.

The combination of fixed supply and unlimited demand has created an upward pressure on pricing.  These high prices don't sink in with students because they are financially illiterate.  To make matters worse, when they graduate from college, they are competing with 4 to 6 graduates for every job open.  Because of this, employers can cut pay to the lowest bidder.  The result is 5 students applying for one job, the person getting it making $12 an hour and having to finance their debt, while the other four students have debt to pay with no income.

This is what happens when any product or service is universally expanded by government as an entitlement.  Are you still surprised as to how we got here?

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