The College Quandry

Currently, there’s a law firm in South Carolina that says it is suing some 30 higher learning institutions for tuition and board payback (includes Columbia, Cornell, and UPenn). They are arguing breach of contract saying in effect these institutions charged students for a certain type of college campus experience this year and instead gave them virtual college lite.

We’ve seen an ongoing political debate over the past few years about student loans. One side argues that if young adults are having trouble paying, they should have known better, gone to a different (less expensive) college, or taken classes that taught more marketable skills. Maybe they shouldn’t have gone to college at all. The other side says that these loans should be forgiven. It’s not the student’s fault. They were told a college degree is the key to the American Dream and it hasn’t turned out that way.

What both sides are missing is that students have become a jobs and wage subsidy program for college professors and administrators. They are the primary beneficiaries of the current system, not the students.

The GDP value of higher education services totaled $196 billion in 2019. Meanwhile, federal loans and grants totaled $134 billion in the 2018-2019 school year. These figures exclude spending sent to the colleges directly. In other words, a large portion of the revenue that funds the salaries in academia comes from the government.

Unfortunately, both sides of the political spectrum are more than willing to keep this government gravy train intact. This, despite the fact that the current system uses young adults to deliver wealth to the privileged elite in higher education while at the same time having no accountable for the future success of those students. At the same time, the vast majority of these privileged elites are hostile toward free-market capitalism and they consistently impinge on the free speech of their students.

Here are few suggestions to end this windfall for these elites and force them to have some skin in the game. First, let’s require a 50% claw-back of federal loan money from a college if its students don’t repay their student loans. If they default, the student would be on the hook for only 50%. If the college thinks a defaulting student can actually repay in full, it will be up to the college to go after the student for the other 50%. Second, because colleges have abused their charitable status by engaging in political activity, they should no longer be tax exempt. Third, wealthy colleges with massive endowments should be taxed as hedge funds because that is what they are.

“The road to hell is paved with good intentions”. It’s time to take a different road with higher education.

Source: Financial Advisor Magazine, September 2020 Issue (Article: The College Quandary Today)

Source: Brian Wesbury, Chief Economist w/ First Trust Portfolios Holding Colleges Accountable 7/13/2020

The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

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