POTUS – The Lollapalooza College Tour

In my early years as a Rock n Roll touring artist and before we moved upscale traveling on jets, we jumped on the bus driving all night from town to town ready to entertain our fans. Sometimes they threw flowers and other times they threw beer bottles. That’s the life of a musician. Rock n Roll has nothing on Washington and last week the President’s Lollapalooza College Tour kicked into full gear with President Obama speaking at campuses, telling students, “We’ve got a crisis in terms of college affordability and student debt”

The President’s plan unfortunately ignores the root cause of the problem. Easy money and a government backed student loan network is what drive skyrocketing costs. Colleges see how easy it is to get a loan, so they continually jack up tuition rates. Bloomberg points out in a recent op-ed that the plan contains a forgiveness boon for those paying off loans right now. That could easily encourage students to borrow more which in turn will be followed by colleges raising prices further.

We shouldn’t be surprised at the rising default rates because there’s no underwriting process. Nearly all students are eligible to receive federal assistance regardless of their credit scores.

Student loan debt now stands north of $1 Trillion with an average loan size of $26,500. School loans have now passed both auto and credit card debt. The backstop for this is of course, the U.S. Taxpayer.

Since the financial crisis, consumer debt has started to fall but student loans are still climbing at an alarming rate. While some of the president’s proposals may provide some relief, others simply miss the boat.

Linking federal aid to a ratings system that will assess how hard colleges are working to keep down costs, is a positive step. However, offering bonuses to colleges for the number of Pell Grant students who graduate doesn’t pass the smell test. If I’m a college administrator and bonus money is dependent on graduation rates, trust me, my students are graduating.

Waste in our Colleges

Many of our nation’s colleges and universities make questionable decisions as to how to allocate capital. Economist Richard Vedder, author of the book Going Broke By Degree, points out in a recent Wall Street Journal interview that Stanford offers more classes in yoga than Shakespeare. He goes on to say; New York University has provided $90 million in loans to administrators and faculty. (Many at Zero Interest) I don’t have the investigative manpower to check out all his claims but I believe there is enough evidence out there to justify just how large the problem and how vast the corruption is. More than likely, this is just the tip of the iceberg.

Earlier this year I had the pleasure of interviewing for Newsmax TV, former Secretary of Education William Bennett. His book Is College Worth It, should be mandatory reading for every parent and graduating high school senior. He starts off on page one saying, “You could get a better education in a coffee shop or your parent’s basement than you will get at most colleges.” If you’re a parent just about to send your son or daughter off to school, that line is going to shake your confidence.

We’ve developed a culture in this country where we’ve told our kids that they have to go to college regardless of their life’s calling. The apprentice system in our country where you could learn a craft is all but dead. Economist Vedder says, we have over 115,000 janitors in the U.S. with at least a bachelor’s degree. Does that really make sense?

Online Solutions

The private sector may offer the best solution. Online education could end up being the answer for an increasing number of students looking to further their education. A contributing factor to tuition inflation is that college is a service industry. Services have had a higher rate of inflation vs. other parts of our economy for decades. Technology has forced down the costs of manufacturing through automation but services require the human element. There are only so many people you can fit into a dorm or classroom.

While online education has been with us for some time, technology has made a quantum leap in recent years. Internet video streaming is changing the face of entertainment. Just look at success stories like Netflix (NFLX), Apple’s (AAPL) iTunes and Amazon’s (AMZN) Instant Video to see how far we’ve come. There is no reason this technology can’t be used to reach thousands as opposed to just 50 in a classroom.

According to Jim McTague in a recent article for Barron’s, Georgia Tech along with Udacity and AT&T (T) announced an online master’s degree program for just $6,600. When you compare that to the four year costs at some universities ranging from $30,000 – $100,000 you can see the potential.

To be fair, the online education industry has had its share of problems with some internet schools recruiting just about anyone with a pulse to boost revenue. However, how can we ignore this trend? The solution to the massive pile of debt that is starting to rival the housing bubble, may be staring us right in the face.

Common Sense Solutions – Advice to Parents and Students

Too many kids are going to college and getting little or nothing out of it. Many simply are not emotionally ready. Look, if you want to be an aeronautical engineer, you’ve probably patterned your academic program in high school to that end. By all means, go to school. If you have the work ethic, you will graduate and in all probability do very well. However, if you aren’t certain of what you want as a career choice and you’re going to college enrolled in a liberal arts curriculum thinking you will find yourself over the next four years, you are sadly mistaken.

For many, college will end up being a social experiment with majors in bong manufacturing and party techniques. Go out into the real world and work any job until you know who you are and what you want to be. When you go back to school, you will be focused and far more likely to succeed

David Nelson, CFA