Over Price Education, Getting a Job and Wages

On December 21^st, Yahoo Finance had an article from Business Insider by Abby Jackson where a 35-year-old was suing his law school for his inability to get a job (1). The legal notion is that the school falsely advertised the resultants of what a college education will provide in income. In short its advertising created the illusion that he would get a great job earning a bunch of money upon graduation. Okay the article goes on to say he couldn’t pass the bar exam. A legal degree without passing the bar is sort of useless which makes one really question not the degree but the process of getting into the law field overall. Sort of begs the question, why even have a degree when the key thing is just passing the bar exam?

Meanwhile, back in 2011 a paper was published by Fastweb.com and FinAid.org that talked about the need for greater consumer protections where Private Education Loans are concerned through the new powers granted to the Consumer Financial Protection Bureau under Dodd-Frank (2). The paper suggests a series of to do lists most of which deal with providing loan education to students and families, but also the notion of restoring bankruptcy protections for borrowers of private loans (a really good idea and something that would probably help our law student) (2).

Okay the ideas in the 2011 paper are great, but this doesn’t help those who have went to the Bank of Ed (i.e. education loans provided by the Federal Government). These loans are basically what the Street would call junk bonds or penny stocks. They have no collateral under writing them and there is nothing ensuring that they can be paid except the premise that people with college education get more money.

While I do not disagree with the statistical fact that higher education has historically provided greater income then lower amounts of education these facts are based on observations mostly of the 20^th Century where the bulk of our populace shifted from lower amounts of education to higher amounts as society and technology shifted to the modern era. In my opinion most of what accounts for the higher incomes is the social wage construct that the work associated with higher education should earn more.

When we started the 20^th Century society we pretty much had a three tiered system of wages. The base wage which pretty much everyone got, the middle wage for managers and the like, and the top wage which was given to owners of businesses and socially elite. But once the minimum wage was legally created this created a new fourth and bottom tier. Since that point educational attainment has been imprinted greater on to these four tiers. The minimum wage tier is for the non-educated which has shifted to include now high school diploma holding individuals, the next tier is for bachelor degree holding people, the next tier is for masters and doctoral degree individuals, the highest tier is reserved pretty much for the socially elite or 1% as they have come to be known.

With our law student, he complains about being in the minimum wage tier and inability to support his college loans, which is a big duh since in the social construct of wage distribution he should be at least in the next tier up but he isn’t. Here we have the inherent problem of socially constructed wage distributions -- they are not guaranteed except for the lowest tier currently. There is nothing in the law to automatically provide for support of college loans based on educational attainment.

Currently there is a great focus and talk about raising the minimum wage, and no doubt some of it would be coming from those 20 and 30 somethings saddled with college debt and no way out. A lot of the talk these days is focused on how raising the minimum wage will kill jobs (3). While I do not doubt that on a micro-economic level raising the minimum wage will impact certain localities and particular businesses, overall all in the macro-economic sense this impact doesn’t seem to be as big. Below is chart I created from ALFRED showing two major industries typically where minimum wage work is found and the change in the Federal Minimum wage over the last 75 years or so (4-6).

What you will really note is the fact most declines in employment with these two industries appears to be more related to the up and downs of business cycles than increases in the minimum wage. If the Federal Minimum Wage was linked to a COLA adjustment then we might see a greater macro influence on these employment numbers, but it seems to me the raise in the minimum wage is more impacted by political pressure during tougher times economically. In fact, during periods of business expansion one tends to see the cost of goods and services rise since usually during these expansion periods inflation can occur eroding the value of income. This could explain some of the political pressure during certain periods of time. There also appears to be politically the idea of raising the minimum wage during declining business cycles will somehow improve the economy overall (note the changes during recession periods marked in grey). Although I think this is more politicians catering to a voting public than actual economic policy.

My point is we may be forced to raise the minimum wage politically to ensure the Federal Government is not saddled with a large amount of unpaid student debt. The minimum wage is the only tool the Federal Government has to ensure there is enough income to pay these loans off when the labor pool for higher education work is over crowded with too much supply. This is what one gets for years of promoting higher education will lead to economic prosperity, not unlike that early 20^th Century idea that owning a home will do the same thing and look where that got us in 2008.

Citations

(1) Jackson, Abby. (Dec. 21, 2015). A guy with $170,000 in student loans who can’t find a job in the legal profession is suing his law school and working full time for Uber. By Business Insider published on YahooFinance. Retrieved from http://finance.yahoo.com/news/guy-170-000-law-school-204811509.html?soc_src=copy

(2) Kantrowitz, Mark. (2011). Education Lending Suggestions for the Consumer Financial Protection Bureau (CFPB). Published by Fastweb.com and FinAid.Org.

(3) Soergel, Andrew. (Dec. 22, 2015). Fight for $15 Not All It’s Cracked Up to Be- Research suggests a higher minimum wage could increase costs for consumers and weigh on job growth. U.S. News & World Report. Retrieved from http://www.usnews.com/news/articles/2015-12-22/minimum-wage-increase-comes-with-cadre-of-potential-complications

(4) US. Bureau of Labor Statistics, All Employees: Service-Providing Industries [SRVPRD], retrieved from FRED, Federal Reserve Bank of St. Louis https://alfred.stlouisfed.org/fred2/series/SRVPRD/, December 24, 2015.

(5) US. Bureau of Labor Statistics, All Employees: Retail Trade [USTRADE], retrieved from FRED, Federal Reserve Bank of St. Louis https://alfred.stlouisfed.org/fred2/series/USTRADE/, December 24, 2015.

(6) US. Department of Labor, Federal Minimum Hourly Wage for Nonfarm Workers for the United States [FEDMINNFRWG], retrieved from FRED, Federal Reserve Bank of St. Louis https://alfred.stlouisfed.org/fred2/series/FEDMINNFRWG/, December 24, 2015.

Ashley Fleming’s Story

Okay below is a link to video of 24-year-old (Ashley Fleming) up to her eyeballs in debt (1). It is a pretty sad story if you think about it, and no doubt also one that is more than likely common with those of her generation.

https://screen.yahoo.com/100k-debt-1-semester-left-193814146.html

What is sadder I think is the in the December 18^th Yahoo article by Vanessa Sanchez, “financial aid expert Mark Kantrowitz” said “if your total student debt is going to be more than your income once you graduate, you should probably look into another school.” (1).

How do you even know what your income will be once you graduate? Okay you might have a rough idea, but it is not like the college is going to guarantee the degree will automatically yield enough to pay for the loan. Let us take Ashley’s situation…she is attending a college with a $43,000 a year tuition.

Okay let us assume for a moment the following-

1. Ashley doesn’t’ start paying the loan until she graduates.

2. She actually just went four years straight (unlike the actual story).

3. The current loan rate is 4.29%.

4. The term of the loan is 10 years.

5. The present value of all debt owed is $172,000 (4 years at $43,000 a year).

This would mean for each of the ten years her annual payment is $21,513.29. Let us assume for a moment that the debt to income ratio should be similar to that of a mortgage which most say is around 28% to 36% (2).

This would mean right of the gate Ashley would need to be earning an annual income of $59.7K to $76.8K.

Could be possible but it is not guaranteed in our U.S. society. In fact, the only legally guaranteed wage is that of the minimum wage.

All the talk we hear of college graduates making $X more dollars than non-college graduates is primarily the resultant of a social construct from the 20^th Century. During the 20^th Century our U.S. population shifted in educational attainment from basically grade school to high school to then college. In doing so the accepted social construct of higher wages for greater educational attainment pretty much stayed the same (i.e. grade school got you X, high school got you X+1, college got you X+2). But now with pretty much everyone going to college we have leveled the workforce to a common reality which in time will cause everyone’s wages to be basically the same (standard supply/demand economics) if not fall to the lowest common denominator (i.e. minimum wage).

The solution proposed to this economic reality will no doubt be just adding more education to the equation. If people, simply keep getting higher and higher degrees (i.e. more education) we can keep the income growth curve from collapsing. Although how higher can one go than Post-Doc degrees?
And exactly how much debt will all this cost our economy? And exactly how much sales would be required for a business to support all these highly educated Americans? Wow I hope the Chinese are willing to pay a lot for our highly educated workforce.

Now don’t get me wrong. Education is a good thing, but when tied to certain economic realities such as income and debt there becomes a distortion where the haves and haves not become increasingly obvious (as with Ashley’s story).


Citations

(1) Sanchez, Vanessa. Dec. 18, 2015. $100K in debt, 1 semester left and no cosigner in sight. Yahoo Finance. Retrieved from http://finance.yahoo.com/news/-100k-in-debt--1-semester-left-and-no-cosigner-in-sight-190859531.html?soc_src=copy

(2) da Costa, Polyana. (2011) Why debt to income matters in mortgages. Bankrate. Retrieved from http://www.bankrate.com/finance/mortgages/why-debt-to-income-matters-in-mortgages-1.aspx

Will you make more money with a college degree?

This is hard to tell because with every story of financial success shown, one can show financial failure as well. What I can tell you is that 2013 & 1940 medians appear to be higher for those with a college degree vs. a high school degree. But that difference currently is only 1.7 times for 2013 and 1.5 times for 1940 (1, 2, 3). Clearly there has been some growth between the two points over time, but still not much suggesting the population spread may be similar to each other.

The problem becomes with how to measure bottom-line concerning such an “investment” (and I use this term very loosely) because there are lots of ways to look at this problem. Many governments and other organizations tend to look at the over-all costs of the education vs. the long term total income output associated with the degree, but I have trouble with such a view. Since the medians for a college degree is typically higher logically the outcome would be that the long term income output will be higher as well. But this view doesn’t take into account the fact that the median income represents the 50% point, as such 50% of the people are not making the median but less than the median. So does it really pay off then for those people? Maybe and maybe not.

I honestly think the better approach is to look at things from more of an accounting perspective on this one (4). A college degree clearly is a non-transferrable intangible personal asset which actually does have a useful life span. That life span is only as relevant as the knowledge the degree contained is relevant and as such over time that knowledge will become obsolete in nature (case in point at one point many thought the sun circled the earth, but this was proven otherwise over time with careful observations). In general the life span of college degree is about 10 years (5). After this point the information the degree contains will be considered obsolete in nature and will require updating.

This means the cost of the college education can be amortized over the first 10 years after graduation against the first 10 years of annual income earned less the other annual living expenses (or net income). Since we don’t know exactly what the person’s income will be once graduated since it is possible to obtain work that does not require a college degree or through whatever means a person could obtain a very high paying job let us then proceed to look at the financial outcomes for various income levels to see the effects.

I will be making the following assumptions for these calculations- 1. The observed current growth rate of the wages for Bachelor degrees appears to be at a -1% rate (3), 2. The current observed inflation rate is at 2% making for a net resultant of -3% (-1%-2%) for overall income growth (2), 3. The annual expenditures assumptions will be based on Bureau of Labor Statistics data for consumer spending by educational attainment adjust to 2013 values and I am going to assume that even if you have a college degree that your living style is more dictated by your income than by the fact you have a degree(6). 4. Annual loan payment will be based on 6% APR over a 10 year period with the initial loan amount is based on current trends noted by the New York Federal Reserve Bank estimation on student loan amounts (7). Note- Any variation in the size of the loan, APR, and period will change the results of these calculations.

	Total Net Income (10 years summed, 2013 dollars)
	Less than high school graduate	High school graduate	High school graduate with some college	Associate's degree	Bachelor's degree
College Loan	($33,148.22)	$8,062.31	$13,349.11	$80,776.86	$187,608.72
w/o College Loan	$8,062.31	$48,640.95	$53,927.75	$121,355.50	$228,187.36

As one can tell by the table above it is clear that if one takes a college loan out that the potential total net income earned is significantly reduced than if you had not taken a college loan. In fact if you happen to take out a loan and end up working a job that is typically paid the amount of money associated with a person who has less than a high school degree (i.e. say a minimum wage job), you will be basically bankrupt (without the ability to bankrupt against the loan). 

When trying to determine if you will make more money with a college degree, the question really is about what kind of pay you will make once you get out. This fact tends to be very variable depending upon current market conditions associated with how many jobs are open for your degree when you graduate, the current unemployment rate for your degree, and the total number of possible college graduates in your degree (larger volumes of those with a similar degree can cause a supply demand issue with the labor if there is few jobs available for large numbers). When calculating such risks it helps to understand that in the first ten years of one’s post graduate state, that there is the possibility of having to work jobs which will not earn enough to pay for a loan. So knowing the loan specifics (like APR, and size of the loan) can dramatically affect the outcome of these possibilities. 

In general though, what these numbers are indicating is that when a taking out a student loan you must have already lined up a good outcome with regards to future work (i.e. you need to know where and how much you will be earning at the end of your studies), and if not then it is best not to take the loan.

Thus you will no doubt make more money with a college degree provided you land a job that has income associated with a college degree and you will make even more money without the student loan.

But with all things considered, one must remember and take into account that we have no laws that guarantee the current typical income associated with a college degree and as such through market actions it is possible that current social pay norm associated with a college degree can become over time the same as the minimum wage law requirements.

Citations 

(1) U.S. Census (1940). Table 2 - Wage or Salary Income in 1939, For Native White Males 25 To 64 Years Old Without Other Income, By Years of School Completed and Age, For The United States, Urban and Rural-Nonfarm: 1940. CPS Data on Educational Attainment: Educational Attainment. Data. Retrieved on 5-10-14 from http://www.census.gov/hhes/socdemo/education/data/cps/1946/p46-5/tables.html

(2) Bureau of Labor Statistics (2014). Consumer Price Index- All Urban Consumers. Series ID: CUSR0000SA0. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/

(3) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (first decile), Employed full time, Wage and salary workers, High school graduates, no college, 25 years and over. Series ID: LEU0252917100. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(3) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (first quartile), Employed full time, Wage and salary workers, High school graduates, no college, 25 years and over. Series ID: LEU0252917200. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(3) Bureau of Labor Statistics (2014). (unadj)- Median usual weekly earnings (second quartile), Employed full time, Wage and salary workers, High school graduates, no college, 25 years and over. Series ID: LEU0252917300. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(3) Bureau of Labor Statistics (2014). (unadj)- Median usual weekly earnings (second quartile), Employed full time, Wage and salary workers, High school graduates, no college, 25 years and over. Series ID: LEU0252917300. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/

(3) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (third quartile), Employed full time, Wage and salary workers, High school graduates, no college, 25 years and over. Series ID: LEU0252917400. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(3) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (ninth decile), Employed full time, Wage and salary workers, High school graduates, no college, 25 years and over. Series ID: LEU0252917500. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/

(3) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (first decile), Employed full time, Wage and salary workers, Bachelor's degree only, 25 years and over. Series ID: LEU0252918900. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/

(3) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (first quartile), Employed full time, Wage and salary workers, Bachelor's degree only, 25 years and over Series ID: LEU0252919000. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(3) Bureau of Labor Statistics (2014). ((unadj)- Median usual weekly earnings (second quartile), Employed full time, Wage and salary workers, Bachelor's degree only, 25 years and over. Series ID: LEU0252919000. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/

(3) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (first quartile), Employed full time, Wage and salary workers, Bachelor's degree only, 25 years and over Series ID: LEU0252919100. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(3) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (third quartile), Employed full time, Wage and salary workers, Bachelor's degree only, 25 years and over. Series ID: LEU0252919200. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(3) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (ninth decile), Employed full time, Wage and salary workers, Bachelor's degree only, 25 years and over. Series ID: LEU0252919300. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(4) FASB (2012). Intangibles—Goodwill and Other (Topic 350). Financial Accounting Series, Accounting Series Update, No. 2012-02, July 2012. Retrieved on 5-10-14 from http://www.fasb.org/cs/BlobServer?blobkey=id&blobwhere=1175824275038&blobheader=application/pdf&blobcol=urldata&blobtable=MungoBlobs .
(5) U.S. Department of Education (2013). Repayment Plans. Retrieved on 5-10-14 from http://www.direct.ed.gov/RepayCalc/dlindex2.html .

(5)Central New Mexico Community College (2012). Updating Certificate or Degree. Retrieved on 5-10-14 from http://www.cnm.edu/student-resources/academicrecords/indexed/updatingcertordegree.html .

(6) Bureau of Labor Statistics (2013). Table 2010- Highest education level of any member: Annual expenditure means, shares, standard errors, and coefficient of variation, Consumer Expenditure Survey, 2012. Consumer Expenditure Survey. Combined Expenditure, Share, and Standard Error Tables. Retrieved on 5-10-14 from http://www.bls.gov/cex/csxcombined.htm .

(7) Federal Reserve Bank of New York (2013). Student Debt by Age Group. Retrieved on 5/12/14 from http://www.newyorkfed.org/studentloandebt/.