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Student loans and moral outrage

This week I’m fascinated by the issue of where student loans live on the spectrum of moral outrage versus sympathy, which I’ve been discussing with my friend Martha Poon recently. It’s also a very timely issue.

Let’s start on the sympathy side of things. The Corinthian 100 students, who were largely sympathetic figures organized by the group Strike Debt, decided to refuse to pay back student debt they accrued from going to Corinthian College, which was charged with all kinds of false advertising and fraud by, among others, the California Attorney General. I wrote about these protesters back when the group was only 15 large.

Just yesterday Education Secretary Arne Duncan announced that their debt would be forgiven, with certain caveats, that the organizers complained about. Indeed the forgiveness is not automatic, and the paperwork looks to be onerous, or even undoable, for the ex-Corinthian students. Even so, what’s interesting to me is Arne Duncan’s comments to the New York Times:

“You’d have to be made of stone not to feel for these students,” he said. “Some of these schools have brought the ethics of payday lending into higher education.”

On the other side of the spectrum, we have Lee Siegel’s recent New York Times opinion piece, where he explains his decision to default on his student debts. My Slate Money co-host Jordan Weissmann called him an “unrepentant leech” on his Slate response piece, noting that Siegel got a B.A., an M.A., and a masters of philosophy from Columbia University before deciding that his goal of being a writer didn’t jibe with his student debt, so why not just default.

This is a general trend when you talk to most people about student debt: the moral obligation is generally there, you need to pay it back or be considered a bad person, unless the circumstances are extreme, which means you can give evidence that the debt itself is fraudulent.

But there’s a third way of thinking about these things, which I picked up from finance (where, I like to say, you “learn to think like an asshole”). Namely, that there’s no morality attached to debt at all. I saw bankers and hedge funders defaulting and “renegotiating” debt contracts – especially things like long-term rental agreements – when things changed. It wouldn’t even be fair to say that they did it when they “couldn’t” pay the money they owed, because the accounting is so slippery in large companies. It was more like, they knew their lawyers were good, and they knew the other side knew that, and therefore they simply wouldn’t pay more than a certain amount that the other side would get in a dirty lawsuit that everyone wanted to avoid.

In other words, debt contracts, in the context of high finance, have been entirely removed from their moral roots. By contrast, the moral weight that individual consumers attach to what are tiny little contracts in comparison seem kind of random and quaint. Or are they?

It makes me want to conduct a thought experiment. Namely, what would it look like if we consumers thought of our debt in non-moralistic terms, like they do in finance? Would we even be able to do that? A test case is this guy, a failed condo developer profiled by the New York Times. Here are a couple of critical details:

The lender, Bank of America, had tried to foreclose after Mr. Rath stopped paying, but amid the craziness of the mortgage meltdown, it could not prove it was entitled to the property. Despite the bank’s pleas that Mr. Rath was seeking a “windfall,” a judge nullified the debt last year.

Mr. Rath has been renting out the condo for $10,000 a month since moving his family in 2010 to Connecticut, where they have taken up sailing full time. After spending this past winter in the Caribbean, the family is planning to sail to Europe this summer on a 55-foot Hanse 545 racing cruiser, before circumnavigating the globe.

Yeah, so, in other words, I’m not sure we can do it.

Even so, I’m interested in pushing ourselves to take a few steps towards it. I think it would be interesting to consider the effects of a widespread student debt strike, even if a bunch of those who would be involved are less than perfectly sympathetic. As Lee suggested, such a movement could result in more affordable college tuitions, a much more skeptical Department of Education, and a less commodified concept of social mobility.

Moreover, I think burdening young people with extreme debt is bad for the country, and especially bad for their ability to make good decisions about what to do with their lives. I’m all for a national discussion on this with the debt morality taken out.

Categories: Uncategorized

Student loans are a regressive tax

I don’t think this approach of looking at student loans is new, but it’s new to me. A friend of mine mentioned this to me over the weekend.

For simplicity, assume everyone goes to college. Next, assume they all go to similar colleges – similar in cost and in quality. We will revisit these assumptions later. Finally, assume that costs of college keep going up the way they’re going and that student loan interest rates stay high.

What this means when you put it all together is that sufficiently rich people, or more likely their parents, will pay a one-time very large fee to attend college, but then they’ll be done with it. The rest of the people will be stuck paying monthly fees that will never go away. Moreover, because the interest rates are pretty high, the total amount non-rich people pay over their lifetime is substantially more than what rich people pay.

This is essentially a regressive tax, whereby poor people pay more than rich people.

Other points:

  1. The government student loans don’t have interest rates that are extremely high, but there’s a limit of how much you can borrow with that program, which leads many people even now to borrow privately at much higher rates.
  2. In the case of government-backed student loans this “tax” is essentially going to the government. In the case of private student loans, the private creditors are receiving the tax.
  3. Since you can’t discharge student debt via bankruptcy, even private student debt, it really is a life-long tax. It’s even true that if you haven’t paid off your student debt by the time you retire, your social security payments get cut.
  4. What about our assumptions that all schools have the same quality? Not true. Rich people tend to go to better schools. This means the poor are paying a tax for an inferior service. Of course, it’s also true that truly elite schools like Harvard have excellent financial support for their poorer students. This means there’s a two-tier school system if you’re poor: you can go to a normal school and pay tax, or you can excel and get into an elite school and it will be free.
  5. What about our assumption that all schools have the same cost? Of course not true; we can look for better quality education for a reasonable price.
  6. What about our assumption that everyone goes to college? Not true, but it’s still true that going to college and finishing sets you up for far better wage earning than if you only have a high school diploma. And although going to college and not finishing may not, nobody think they’re the ones who won’t finish.

Conclusion: Either we have to keep costs down or we have to make college government-subsidized or we have to make student loan interest rates really low or we have to offset this regressive tax with a highly progressive income tax.

Categories: #OWS, finance

Forced Arbitration and the CFPB

This morning I’m studying up on the topic of forced arbitration clauses for my Slate Money podcast. That’s part of the fine print when you sign a corporate contract as a consumer or as an employee which states that you will not sue the company for bullshit they might pull, like unfair fees, no overtime pay, or even discriminatory practices.

What’s more, 90% of the time that “forced arbitration” clause is accompanied by an agreement that you also won’t be part of a class-action lawsuit, if by any chance you’d want to do something to address systemic injustice perpetrated by the corporation.

It’s a massively stacked deck; the calculation of how much it will cost, in terms of lawyers, versus how much you’d get if you won you case means that very few people choose the arbitration option. The arithmetic is particularly cruel since, once class-action suits are out of the way, you’re not even benefitting other people who will come after you and find the same shit being pulled.

And of those consumers or employees who do agree to arbitration, they often lose, partly because the actual arbitration process is much more favorable to corporate lawyers (which the other side has but you don’t) than a typical courtroom.

The process entirely depends on a arbitrator being fair and impartial but, believe it or not, the business in question chooses this person, and often for repeat business, which is to say they have at least indirect influence on the decision if the arbitrator wants more work.

So, here’s the good news. The CFPB has come out with strong rules this week which will render moot such forced arbitration clauses in the case of consumer financial lending products. This is great news, and well-needed, given how many of those contracts were flooded with such unfair fine print:

  • credit card issuers 53%
  • prepaid cards, 92%
  • student loans, 86%
  • payday loan 99%
  • checking accounts 44%

However, it doesn’t address other kinds of consumer products, and employee situations, that will continue to have these fine print clauses:

  • nursing home contracts
  • for-profit college contracts
  • employee contracts (22% of employees now sign such contracts)

To learn more, take a look at this fine report from the Economic Policy Institute.

Categories: Uncategorized

What are you thankful for in finance or economics?

It’s been a few days, I’ve been listening to Adele’s new album pretty much on loop while knitting and sewing curtains. So yes, it’s that nesting time of year, where we hunker down and seriously consume creamy spiked drinks.

Screen Shot 2015-11-24 at 7.12.52 AM.png

And by “we” I mean Americans, Canadians, Australians, and New Zealanders. Obviously we blame the hobbits on that last one.

Screen Shot 2015-11-24 at 7.13.05 AM.png

Well, here’s a question for you nog-quaffers: what are you thankful for from finance? I’ll extend it to the economy as well if you’d like.

The reason I’m asking is that this week, the Slate Money podcast I’m on is doing a special “thanksgiving” episode where we all talk about something we’re grateful for, and I’m having trouble coming up with something. Here’s what I’ve got so far:

  1. I’m grateful for consumer loans. After all, they help us out in rough times and allow us to invest in ourselves and our futures through mortgages and student loans. On the other hand, they also raise the price of everything through their availability. In fact I spent a couple of weeks ago on the show arguing that all college debt should be forgiven and that state colleges should be free. So I don’t think this works.
  2. I guess I’m thankful for inflation, in a sense. I mean, inflation makes it easier on debtors, since their debt is constantly dwindling in value, and it’s certainly better for an economy than deflation. But on the other hand, it can get out of hand and that’s bad, and it’s hard to control. So in the end I’m not actually all that excited by inflation.
  3. I could just be grateful for the entire financial system working at all. If you think about how much we depend on its functioning, to take out loans, to use our credit and debit cards, and to get paid monthly, it’s kind of amazing. On the other hand, if you think about the way finance deals with poor people, squeezing them for nickels and dimes, then you kind of lose respect. In fact it makes you want to be grateful for the CFPB instead, but that’s not financial enough.
  4. Finally, I’m thinking about how much I appreciate insurance. Yeah, I know there are plenty of problems with insurance (for example how cray-cray medical prices are for those without insurance, but I tend to blame a lack of reasonable transparency regulation on pricing in medicine on that, not insurance per se). But if you just think about how much insurance actually does for us, whether it’s medical or fire or car or life insurance, then you appreciate that it more or less functions as intended: to even out the bumpy risks of everyday life.

I’m still thinking about this question, and I’d love to hear your ideas!

Categories: Uncategorized

Aunt Pythia’s advice

Readers, Aunt Pythia is a bit sad and a pinch exhausted today. On Thursday, Aunt Pythia’s sweetiepie 7-year-old had an accident at school and broke his tibia bone. And it really caused him such excruciating pain, readers, that it was terrible to behold. You all would have been crying alongside Aunt Pythia if you’d been there.

Now he’s got a good cast on, thank goodness, and a waterproof one at that, which means he can take showers and even baths with it, and things are normalizing, but it isn’t great, and bathroom visits are a real ordeal.

The moral of that story is, thank goodness for casts.

You can even swim with it. The water goes in but then drips out.

You can even swim with it. The water goes in but then drips out.(this is not a picture of my 7-year-old)

For that matter, can we take a moment to just appreciate penicillin too? And our present-day understanding of hygiene? And surgical techniques and such? That stuff is amazing, and I’m glad I’m alive today to enjoy it all. Who’s with me?

After meditating on modern medicine, and digesting the questionable content below, please don’t forget to:

ask Aunt Pythia any question at all at the bottom of the page!

By the way, if you don’t know what the hell Aunt Pythia is talking about, go here for past advice columns and here for an explanation of the name Pythia.

——

Dear Aunt Pythia,

I need your help! I am a (relatively) young womanly person of late 20’s who is striving to become more conscientious about where to ethically invest my earnings. When researching how much I need to have prepared for retirement, all of the online calculators and financial advisers I’ve consulted have thrown a figure my way in the ballpark of $2-3 million assuming a retirement age of mid to late 60s and a 4% gradually increasing annual withdrawal rate.

While I make a decent income (70K), there is not much of a chance that I can save that much in the next 35 years without falling into the trappings of Wall Street investment returns. I can’t do much about the restrictions my employer has placed on my 401K investment options, but I do have control over my IRA and general savings/investment practices.

What micro-level advice do you have for people starting out in ethical retirement planning/investing? Any resources or must reads? Much obliged.

Confused And Tentative

Dear Confused,

First, let me just say that you are way ahead of your peers in planning this stuff. I really haven’t started planning myself, because kids cost so much and so on, and I’m figuring I’ll just work until I die.

Second, there’s really no way every person can have $2-3 million in retirement savings. I just don’t think it’s reasonable or realistic. Think about that as a social policy: hey everyone, I know you’re still paying off your student loans, and that the cost of renting is sky high, and homes are already overpriced and poised not to rise, and daycare costs more than ever, but please save $2 million on top of everything else. WTF.

Not a viable expectation for the average household. Politically speaking, retirement in this country is going to have to change as the post-Boomer population gets old and continues to be broke.

Also, you’re right, there are few options for ethical investing that aren’t risky. I mean by that that you can always sponsor your friend’s ethical business, but most businesses fail, so it is super risky. More generally, if you’re interested in avoiding fossil fuel investments, take a look at this, and if that catches your fancy, check out this website.

But my general advice is to do your best, and stay healthy, and not worry too much about money. If you have retirement investments, great, and think of putting some in an ETF that tracks the market just as a hedge against political manipulation more than anything else.

Good luck,

Aunt Pythia

——

Dear Aunt Pythia,

I love your column. It feels like a community of warm hugs. I have gone back and forth on sending this embarrassing question so many times, but I finally decided that I need your honest insight.

As a minority grad student in STEM, I routinely come across mean, patronizing jerks. I have learnt to survive my interactions with them with my sanity somewhat intact. However, what catches me off guard is my reaction when someone decides to take an interest in me and mentor me academically and personally. I end up developing a crush almost every time.

I want to make it very clear that I don’t want a physical connection with them at all. But, I do fantasize about an emotional and intellectual bond with them. Some of these relationships have actually led to some wonderful (strictly platonic) mentoring relationships.

Grad school and academia can be very isolating, so it’s so nice to have someone to talk. And if this someone has been in your field doing the work that you dream of doing one day, that’s even better. Still, I can’t help feeling guilty for feeling so vulnerable that even the slightest bit of attention or praise from them makes me feel so exhilarated.

I have friends outside of my field and am a somewhat social person with a fairly fulfilling personal life. So, what is it about charming, passionate, and kind STEM people that brings out these intense feelings in me? How do I avoid developing these silly crushes?

Lastly, (I’m not even sure that I am prepared to hear an honest answer to this), do you think my feelings are obvious to them? I am always respectful and deferential to them, but I wonder if they might have an inkling anyway. I love what I do and I don’t want my work to be undermined by these stupid feelings that I can’t seem to be able to control right now.

Great Regrets About Pining Heart

——

Dear Pining,

Oh my god, I am so glad you wrote. I am the same way. Seriously. And the crushes can be quite intense, sometimes, right? I remember when one of my sons (I won’t name his name because he’ll hate me for it) went through his first crush when he was about 6 and he said to me, “I love her so so much, it’s getting worser and worser!” and he looked positively anxious about what would happen to the explosion happening in his little heart. Well, I got him at that moment, and I get you now.

But wait, and here comes what will become my tag line, what’s the problem here? You haven’t actually told me why this is a bad thing except for how you sometimes get embarrassed by them.

To answer your question: do people notice your crushes? Maybe, probably not in an exact way, but even if they did it would be super flattering. And since it’s platonic, and you’re looking for an emotional bond, I’m thinking that’s exactly appropriate, and probably also what they want.

Finally, I’d say you are controlling yourself with respect to these feelings, in spite of your sense that you’re not. In other words, you can’t control your feelings directly, but you can control what you do in response to them. And since you haven’t actually done anything super impulsive, and stuff hasn’t developed beyond intellectual and emotional realm, I am not only proud to say I get you, I’m proud to say you’ve done great.

You know what? I feel sorry for people who aren’t like us, and for whom it takes weeks if not years to develop strong emotions for people and things. They don’t get to experience the intensities that we do! And yes, it means they spend less time lying on couches crying about broken hearts to dear friends who have heard it all before many times, but whatever, we always eventually pick ourselves up again and go find a new person to love. Plus we buy our friends beer and they merrily forgive us.

Many warm hugs,

Aunt Pythia

p.s. there really is no way to avoid this, it’s part of you, like your arm. I’ve tried. Just buckle up and try to enjoy the ride.

——

Dear Aunt Pythia,

I’m in my early thirties. I have a newborn, my first child, and I find it so damn hard to take care of him. He’s now 8 weeks old, and I’m on maternity leave for 6 months (luckily I’m in Europe, can’t imagine what I would have done in the States).

Both my husband and me live abroad and have no family around to help. I consider myself a pretty capable person, and I keep thinking how the hell do other people manage. There are so many babies, children, people in this world. How do all millions of moms manage, when I’m barely surviving?

I have figured out how to be highly successful academically and professionally. I have learned to have good relationships and a pretty good life. But I am probably average at taking care of a newborn. I find it so hard.

Dear Aunt Pythia, did you have a hard time too when you had your first baby (and second and third)? What helped? Any tips? Ideas? Strategies? What would you do differently if you had your first one again?

Maybe Overthinking Motherhood

Dear MOM,

Thanks for asking. I tell this to everyone I know with a newborn, especially if it’s their second.

Namely, the first 4 months of a baby’s life, and especially the first 6 weeks, is really really hard. In fact the way to survive it is to try to quantify how difficult yesterday was, and compare it to today, and take note of the minute differences. Give yourself a break, and a chance to cry, every time there’s been a regression, and give yourself a party every time there’s even the smallest amount of progress. In other words, keep your head down, in a day-to-day sense, and you will slowly begin to see how certain things have gotten easier (breastfeeding, putting them down to nap, walking around without pain) even as other stuff is momentarily harder (sleep deprivation, never getting a chance to take a shower, running out of groceries). It’s super painful, and surprisingly difficult, but after a few weeks you begin to see things improving, and then by the time they’re 6 months old, you almost feel human again.

Oh, and the moment they try to keep themselves up to say up with you when they’re tired is the moment when you can train them to sleep through the night. This usually happens at 5 months or so. And the trick there is, if you notice a bunch of fussing with an 8pm bedtime, then put the baby down at 7:30 the next night. And if they’re fussy at 7:30, try for 7pm the next night. Sounds counter-intuitive but it works.

Finally, the only moment where I really felt truly desperate was when I had a newborn and a 2-year-old and my husband went away for a math conference for a week, and I was working. Please kill me now, I thought, and I meant it. But even that ended, and now those two kids are like, almost adults, and they are my favorite people to hang out with. The younger one just explained fission to me the other day.

In the words of my wise mother, sometimes you just have to muddle through. Also, good babysitting is worth it. Go into debt temporarily if necessary, it’s still cheaper than therapy.

Hugs,

Aunt Pythia

——

Dear Aunt Pythia,

I want to fuck an aunt.

Manoj

Dear Manoj,

Thanks for the note. It reminds me that, as a WordPress Premium member, I get to look at all kinds of statistics with respect to how people got to my blog, what they looked at and when, and which links they click on while they’re here. It’s interesting, and I look at such statistics daily.

One of the categories is a list of search terms that people used to get to my blog, and by far one of the most common ones has been, over the years, something about aunts and sex, so a kind of incest fetish thing. For example, here’s a screenshot of today’s search terms:

Every day. Every single day.

Every day. Every single day.

So, what can I say? Aunt Pythia constitutes – possibly defines – her own bizarre porn fetish category. It’s somewhere in between flattering and repulsive.

So Manoj: thanks, I think.

Aunt Pythia

——

Readers? Aunt Pythia loves you so much. She wants to hear from you – she needs to hear from you – and then tell you what for in a most indulgent way. Will you help her do that?

Please, pleeeeease ask her a question. She will take it seriously and answer it if she can.

Click here for a form for later or just do it now:

Categories: Uncategorized

Aunt Pythia’s advice

Readers, did you know Aunt Pythia is a rabid biker? And did you know that the High Bridge just opened for the first time in 40 years? Aunt Pythia is itching to bike all over it as soon as she’s shot this Saturday’s wisdom wad all over your browser.

This is a pic from 1900.

The High Bridge in 1900 connecting Manhattan and the Bronx. I love biking to other boroughs.

Fun facts about the High Bridge:

  1. It’s been closed for more than 40 years.
  2. It used to be an aqueduct.
  3. It is the oldest standing bridge in NYC.

Let’s do this, folks, we got stuff to do today! You too, amiright? Enough already with the chitchat then.

After cleansing yourself from today’s drivel, please:

ask Aunt Pythia any question at all at the bottom of the page!

By the way, if you don’t know what the hell Aunt Pythia is talking about, go here for past advice columns and here for an explanation of the name Pythia.

——

Dear Aunt Pythia,

I apologise, in advance, for the long question. After years spent battling one identity crisis after another, I (sort of) figured out, a few years ago, that my shtick was: angsty, feminist, WOC in STEM, and social justice advocate with a love for funky thrift store fashion finds. Over the years, I have tried to train myself to channel all my angst into a dark sense of humor while perfecting the smokey eye look.

As a result, I supposedly “exude an air of confidence which can excite and/or terrify people” according to quite a few people. As someone who was an outcast growing up in an extremely repressed country, this transition has worked out surprisingly well for the most part after my move to the first wold. The issue arises when I’m with my fellow science grad students.

As the only female in my program in my particular subfield (and often the only female or POC in most of my classes) with a very low tolerance for bullsh-t, I seem to find myself isolated again. I don’t mind being labelled the feminist killjoy when I call out intolerant behavior or when I’m just bulldozing over people. I refuse to accept the notion that minority grad students have to be at the bottom of the food chain. I get paid too little and love my field too much to not take pride in my work. I have close friends in other programs, but in my immediate professional family, I feel like everyone shies away from speaking to me. I sometimes wonder if the problem is that there a is a savvier way of being myself that I just don’t know of. The emphasis on networking for grad students makes me feel like this is something that I should care about. Please help?

She sells sea–oh, screw it.

Dear SSS-osi,

There’s a lot there, but let me just start by saying, thanks for writing and you’ve come to the right place.

Just this morning, Aunt Pythia woke up with that familiar yet unnerving and highly anxiety-provoking feeling that she’s gone ahead and done it once again: she’s been too much, somewhere and somehow, and the poor sensitive folks of that place and that manner of the moment are still reeling from her awful behavior.

As a fellow bulldozer, in other words, I know exactly what you mean. And in my darkest moments I succumb – temporarily – to the idea that I need to stop calling out intolerant and/or obnoxious behavior, that I should just sit there silently not mentioning injustice, that I should lean towards making people feel comfortable over so rudely asking them to acknowledge bullshit.

But then, when fully awake and reading the newspaper, or walking around outside, or even just drinking my morning coffee, I change my mind. After all, you and I, we have benefitted more from our sassy approach than have we suffered. There are people who love us and that must mean we’re not intolerable to be with, right? And although we sometimes go overboard and make mistakes, the world really could use a few more hot-headed loudmouths with our perspective, no?

Public service, world, you’re welcome.

Truth is, people can’t handle you because they’re not secure enough. They don’t “know what to do with you” so they avoid you, and I think it’s a pretty good indication that they really aren’t much fun. It’s kind of like, when you’re looking for some action, and you ask someone, “on a scale of 1 to 10, how sexual are you?” and they say, “I’m a 4,” then you believe them. In fact, subtract 2. The answer I was looking for was 17. Time to move on.

Advice: Go find other people who can be real with you. They’re out there, and one great aspect of being completely over-the-top real is that other people self-select for us. The ones who stick around can be trusted. That’s not to say you don’t go to grad student mixers, but go with the intention of just being completely yourself, and hilarious and smokey eyed and angsty, and some people – me, me!! – will naturally gravitate towards your amazing self. If that doesn’t happen, their loss.

Good luck!

Aunt Pythia

p.s. in terms of being close to your colleagues, I’d suggest study partners for specific problem sets or classes. Ask someone to meet over coffee, since that’s highly unthreatening and could well blossom into friendship.

——

Dear Aunt Pythia,

I am a female in her late 20’s who also happens to be

  1. aspergian,
  2. asexual,
  3. religious/conservative (I guess the relational boundaries of the (3) are pretty easy to accept for me because of the (2)), and
  4. not particularly attractive.

I would really like to get married eventually, but I feel like I can’t understand and relate to people on so many levels, that P(marrying | (1), (2), (3), (4)) = 0. Actually, columns like yours are very useful to me to get to know what’s going on in other people’s minds, but the more I know, the more I feel like I belong to another planet.

My social life revolves solely around interest groups (nerdy and church-y), where I do meet quite a lot of nice guys. At best, though, they consider me a “bro”, which is great but not helpful, because even if I’m asked out, it is not a date. I have already tried asexy dating sites but unfortunately they are too sparsely populated.

What do you think? Should I just give up the thought of lifelong companionship and focus on my career and interests? Or should I decorate my laptop with a “lonely heart” sticker? Or what else? I’d really appreciate some advice.

Somewhat Preoccupied Individual Not Suited To Experience Relationships

Dear SPINSTER,

Fantastic sign-off, wow.

So, I never knew about adult asexuals before, but this Guardian article explains it pretty well, at least for the person who they interviewed. In his case, he found someone to marry by joining asexuality.org, which seems like a valuable resource and is a great example of what is so amazing about the internet.

So, it seems that asexual people like companionship and partnership like anyone else, just without sex. And, as long as that’s been made clear to both people in advance, and they are both cool with it, there’s really no issue at all.

Except for one thing, namely the rarity of your potential mates. As you are well aware, most men are sexual, and asking them to be in a long-term intimate relationship without sex would likely be a dealbreaker. So to optimize your chances, I’d give up on finding a boyfriend through your social groups, and I’d go straight towards asexual meeting places, either virtual or in person.

Turns out there are 44 asexual Meetup groups, and I suggest you start attending!

As for your concerns about being “not particularly unattractive,” you could either ask for advice from someone you trust on how to flatter your look, or you could just wear stuff that makes you very comfortable. That’s already an attractive feature. But in any case I’m guessing this society of asexual people is pretty open-minded.

Good luck!

Aunt Pythia

——

Dear Aunt Pythia,

How can I find meaning in my life as a pure mathematician? I am a tenure-track professor, and I spend so much time studying and giving myself so much of a headache trying to understand totally pure math notions like perfectoid spaces, almost ring theory, p-adic Hodge theory, etc. These may of course have some practical use some day, but not today. And of course, I teach calculus and whatnot to mostly disinterested students, but teaching is not really where my heart is.

I don’t have a significant other because I am short and fat and all I want to do is study the aforementioned esoterica all day. I love it, there is nothing else I would rather do, but when the going gets tough, like when I can’t follow a proof, or when the road to all the mathematical topics I have to learn seems too long, I find myself wondering why am I beating myself over and giving myself such a hard time trying to follow such technical minutiae that don’t have any impact at all on the world?

It makes me unhappy, and so my mom tells me I should go work for Google and make significantly more money and have a 9-5 job and do work that makes a difference. I have no interest at all in working for Google, i.e “industry,” or making lots of money. I love the freedom that academia provides. On non teaching days I can get up when I want to, stay home in my pjs, etc. And of course I enjoy the freedom to study what I want. But how can I make studying pure math meaningful?

Almost Going Into Industry

Dear AGII,

A few comments:

  1. It is not true that short and fat people don’t date. That’s a myth. Here’s an entirely unscientific article that supports me in this.
  2. You can definitely go out and “make a difference,” but what kind of difference?
  3. Your mom just wants you to be happy, and she thinks making more money will make you happy. Will it? I don’t think so, you said yourself you don’t care about money.
  4. Academia is painfully slow, but you love it. You said so yourself.
  5. Teaching is the shit work of academia. Some of your students – most, actually – are disinterested, but some are not. They are awesome.
  6. The shit work of other jobs is much less awesome and (often) much more like shoveling actual shit.
  7. Having said all that, I left academia, and you know that, so it feels like you’re asking me to give you permission to do so, which I do.
  8. But even as I give you permission, know that some people (like my husband) are made for academia and would suffer outside it, and other people (like myself) have left academia but it’s not like that suddenly made them happy, because they are just naturally identity crisis prone people who are never actually happy and always wonder what they fuck they should be doing with their lives.
  9. Plus, I don’t actually want you to be happy.

Hope that helps!

Aunt Pythia

——

Hi Aunt Pythia!

I am a 30 year old female in the tech industry living in Washington DC. My family and I immigrated some 20 years ago and I am by far the only one doing well. I am looking down the barrel of becoming my parents’ living retirement plan and housing provider in a few years and, as such, I am trying to get as much traveling and ‘living’ out of the way before I take up that job.

I am doing relatively well financially: make a decent income, paid off my student loans, rent a cheap place, live on a budget, and trying to save 14% of my income towards my own retirement, but I’m also looking at what’s coming and thinking I need to figure out a way to prepare financially for that and I just don’t know how.

How would you advise someone like me in financially preparing for what is coming when what is coming involves elderly parents:
– With no savings
– With no property
– With no retirement plan
– With no ability to help themselves (language barrier)
– With very small social security payments (~$500 for the both of them)

Please keep in mind that I am not resentful of the fact that my mom and dad need the help (my unhelpful siblings, on the other hand, I do resent), I’m just worried I’m financially unprepared for it and trying to balance that with my own wishes/dreams.

Future Caregiver

Dear FC,

Well, I really don’t know. I think you should talk to someone who does, lickety split. Here are some basic facts that you’ll need to have ready:

  1. Are you parents green card holders?
  2. Are they eligible for medicare? Look here for some useful info on that.
  3. Are they prepared to go back to their home country for retirement? Is it safe? Does it have a safety net for them? Is it cheaper to live there? Do they have family and friends there still?
  4. Maybe the good place to start with possible future scenarios is finding other immigrants who have features similar to your parents but are slightly older, and see how they are living. I’d interview their functional children to see what they learned.
  5. As for your siblings, it could be a major problem down the line, but first thing’s first. Don’t take on the whole world at once.

Aunt Pythia

——

Readers? Aunt Pythia loves you so much. She wants to hear from you – she needs to hear from you – and then tell you what for in a most indulgent way. Will you help her do that?

Please, pleeeeease ask her a question. She will take it seriously and answer it if she can.

Click here for a form for later or just do it now:

Categories: Aunt Pythia

College metrics of success

There’s a really interesting article over at the Wall Street Journal today, written by Andrea Fuller and entitled The Watchdogs of College Education Rarely Bite. The article discusses the accreditation system for colleges, and how it is more or less dysfunctional. Here’s an example from the article of how they are failing to do a good job:

At Bluefield State College in West Virginia, accreditors from the Higher Learning Commission suggested in 2011 that new electronic signs on campus might be difficult for students to read while driving, according to a copy of the report. The report didn’t mention the college’s graduation rate of 25% or less since 2006.

There is troubling evidence presented in the article that we should definitely pay attention to. It’s quite possible that the accreditors are being paid off, or at least have insufficient reason to come down hard on terribly performing schools. I hope we spend time rethinking the whole system.

However, I think it’s interesting to think about the metrics of success that were used in the article. It’s also an important step towards designing a more “data-driven” accreditation approach.

So, for the most part, the article described things in terms of graduation rates and student loan defaults. Not a bad start if you wanted to measure a school: you want high graduate rates, and you want low student loan default rates. Also, they did a good thing, namely compared these numbers to a baseline. In this case their baseline was the average for the schools that have lost accreditation since 2000. Here’s their plot:

accred_WSJ

Again, these are important metrics, but the logic of the above chart seems to be, if there is a school with a lower graduation rate or a higher default rate than these baseline numbers, or both, then you should also lose your accreditation.

And by the way, I’m not really disagreeing – there are too many bad schools out there, and this seems like a pretty good way of finding truly terrible outliers. Even so, as a data nerd, I need to make the argument that these statistics are highly misleading, or can be.

Say you are trying to compare two school, and one has a higher graduation rate than the other. Do you conclude that the one with a higher graduation rate is better? Well, no. It could just graduate people because it pushes people through the classes without really teaching them anything. Or, the other one could be lower because it takes a chance on more students. In other words, a graduation rate can be lower or higher for good or bad reasons, and taken alone is not a great indicator. Lots of community colleges, moreover, are set up to be transfer schools, and the students deliberately start at that school, then transfer to 4-year colleges, thus lowering the overall graduation rate. It’s a good thing that such schools exist, and we wouldn’t want to close them all down.

Similarly, higher default rates on student loans could be an artifact of a school taking chances on students that otherwise have fewer options, or a bad economy, or even just the type of education that is offered. Engineering schools tend to graduate students who find jobs quickly and easily, but that doesn’t mean every school should become an engineering school. So I wouldn’t compare default rates of two colleges and conclude that the college with a low default rate is necessarily better.

What I’m coming to is that deciding whether a given college has become a failure is actually pretty tricky, and we can complain – and should complain, apparently – about the current system of accreditation, but we can’t claim that it’s as simple as looking at two metrics and deciding what the cut-off is. Choosing a perfect threshold would be tricky.

Or rather, we could do something like that, but then it might have weird effects. If we closed all the schools that don’t keep graduation rates high and default rates low, we might see non-engineering students pushed out of the system, or we might see schools create partnerships with corporations and become federal aid-funded corporate training centers, we might just see (even more) widespread fraud in terms of reporting such things.

Categories: Uncategorized

I Love you Mathbabe, but 529 Plans are Awesome.

This is a guest post by FogOfWar, who disagrees with me about 529 plans and my plan to make paying for college harder.

I’m catching up on the 529 kerfuffle. First observation: this made a massively outsized splash in public perception compared to what one would expect from a technical tax provision, which (more on this later) has a budgetary impact within a 5% confidence interval of $0.

Second observation: my good friend Cathy, who has kids mind you, is arguing against the 529 plan. Huh? When did we enter the Twilight Zone? Beating up on 529 plans is like stealing oatmeal from orphans—they’re too small to defend themselves, you don’t really get much if you win and everyone loves the soot- smudged little munchkins.

So here is what may be patient zero: this GAO Report released in 2012. The headlines read right into the talking points people are quoting. If you’re going to read it, try an interesting thought experiment: mentally substitute “401(k)” for “529” and “saving for retirement” for “saving for college” everywhere you see it. That’s not a completely fair analogy, but neither is it completely unfair…

Also, right at the beginning of the report, there’s an interesting omission. It’s in the “who did we talk with to figure out what was going on here?” section. Not that the report did a bad job, but why didn’t they talk to the AICPA (the national organization of CPAs)? These are the people who are most commonly on the ground talking to clients (rich and poor alike) about whether a 529 plan makes sense for them. I think you’d get a slightly different focus in the report with this on the ground perspective.

529 Plans Work Really Well for Everyone but the Very Rich and the Actually Poor

You can define ‘rich and poor’ in a hundred different ways, so let’s pick 4 examples in a semi-arbitrary manner. All couples are two parents and 1 kid who is 3, and all live in NYC. Couple 1 (“poor”) earned $20,000 last year; Couple 2 (“middle class”) earned $75,000 last year; Couple 3 (“mass affluent”, or “the bottom 1% of the top 1%”) earned $250,000 last year and Couple 4 (“rich”) earned $3-5m last year. Each couple has $100.00 of extra funds and is deciding what to do with it.

Important note: that’s not “$100x” as code for $100,000.00, that’s really $100.00.

Everything we’re talking about here is downwardly scalable and transaction costs are minimal (the cost of a stamp or time to set up direct deposit/withdrawal). All the couples have student loans, which are charging them 5%. Assume a stable long term low-risk portfolio also returns 5% (this is a side debate, but for those wanting to make it higher, I’d say you should consider your returns on a risk-adjusted basis).

Each couple has 3 rough choices, A: contribute the $100.00 to a 529 for kids, B: invest the $100.00 outside the 529 plan for kids, C: pay down $100.00 of student loans.

Poor Couple: Well, these guys get no state tax advantage from making the initial 529 contribution, and given their tax rate, the compounding on the 529 earnings has a negligible tax impact. Plus they’re giving up liquidity, which has more value in their hands than it does in the higher income cohort. Not only that, but I believe (chime in if you know this for sure) that moving the $100.00 from parent’s account to 529 account moves the asset from “parent asset” to “child’s asset” on many (but not all) needs-based financial aid forms. In short, the 529 plan is a terrible idea for this couple.

The real question is whether they should pay down the student loans or invest the $100.00 outside. That question is more subtle, but the availability of the student-loan interest deduction (lower after-tax return on debt paydown) and liquidity considerations makes $100.00 outside investment the likely best option.

Basically the tax code (this portion) combined with student aid gives no incentive for this couple to save and maybe a disincentive (or maybe an incentive to buy physical silver and not declare it on fin aid forms).

Middle Class Couple: At $75,000 the couple is still getting the tax shield for their student loans. So, at a combined Federal/State rate approaching 25% (NYC is a very high-tax place to live), their ROI (Return On Investment) from paying down student loan debt will be only 3.75%, compounding. So cash in pocket of $3.75 in year 1, $3.89 in year 2, etc. Their return on outside investment is sorta the same, with a big caveat. It’s all in the taxes. If middle class couple is invested in mutual funds or bonds, then yes, it’s $3.75 in year 1, $3.89 in year 2, etc. If Middle Class Couple is tax smart, they’ll invest only in low-dividend/high-growth stocks that will compound over the next 15 years before being cashed out to pay for kid’s college. In this case, the taxes are much, much lower—not zero, but much closer.

Doing some quick math: if the $5 in appreciation is going to be taxed at 20% capital gains 15 years from today, that makes the current tax cost = ($5.00*20%)/(1+0.05)^15 or $0.48. So year 1 the stock investment gains $4.52 compared to $3.75 from paying down student loans.

That’s not the full analysis, however, as (i) that difference compounds over the next 15 years, and (ii) the compounding is on $5.00, not $3.75, so it’s even more powerful. Run a quick spreadsheet and the student loan deduction compounds to $173.70 over 15 years and the stock investment runs to $186.31 after cash-out capial gains. Note that I’m assuming that student debt “savings” are reinvested in additional paydowns of student debt (somewhat for simplicity).

There’s a more subtle point as well: income is dynamic, not static, and thus tax brackets and availability of tax benefits is not locked in. If their income increases over time (as is very likely to happen statistically), they may knock themselves out of the deductibility of the student loan interest, which would cut back to paying down debt. OTOH, liquidity concerns (which are hard to reduce to a single dollar value but are extremely important) push towards the stock investment. Complicated analysis and everything above should be the starting point not the ending point if you’re looking at this choice in real life.

Now let’s add 529 Plans to the mix. Because the couple is NYC resident, they get an immediate tax advantage of $10 cash-in pocket state tax advantage (this assumes no itemizing, which is just over the cusp of reasonable given the numbers). The compounding is 100% tax free, either now or on distribution, so right away the earnings are $5.00 in year 1, compared to $4.52 and $3.75 for the other two options.

But that’s not all: the $10 in pocket is also invested—let’s assume in 5% stock investments, as above, so there’s an additional $0.45 return on that, making the 529 earnings in year one a Patriots four-time superbowl championship winner at $5.45. Not only that, but the benefit compounds over time, so the 15-year return is $226.52, all in. 30% higher than paying off student debt on an after-tax basis.

Liquidity is still a concern, although 529 plans have more liquidity than paying off student debt (b/c of ‘wrong way risk’ but that’s another discussion)—you can at least get at the money, but you have to pay a 10% penalty. Also, all of these numbers get much more dramatic if you assume investment in the stock market at a 10% rate of return over time, rather than the more conservative 5% rate of return I’ve worked with. Also, if you factor in dynamic tax rates the 529 becomes even more attractive, as the tax cut from investment income gets higher in the out years.

Takeaway? The 529 plan is an extremely powerful tool for the true working class.

Second Takeaway: running some quick numbers, about 46% of the benefit over the ‘buy and hold stocks’ strategy here is from the state tax advantage and 70% is from the federal compounding and exemption on distribution of profits. If this couple has the misfortune to move to a state that doesn’t seem to care about the middle class saving for college, like, let’s say…Massachusetts or California (neither of which give a state tax advantage for 529 contributions), the 15 year return drops down from $226.52 to $207.89. Still not bad, but the state incentives are a huge part of the practical analysis. Note also, that anyone living in a state without an income tax (Texas, Florida) gets no state income tax advantage because there ain’t any state income tax to take the deduction against!

Mass Affluent Couple: Whew, that was a lot of ink on the middle class couple, and if you’re in the Mass Affluent income cohort and reading this for practical advice, go back and read the numerical analysis of the middle class closely, because with a few modifications it’s going to apply to you as well.

Before that, though, let me say that there’s been a lot of progressive spite (not sure what adjective to use here) thrown at this couple. Cries of “they really don’t need any help—we should take this away” are there either explicitly or just below the surface. Some of my best friends are mass affluent couples in NYC, and I will tell you that the cost of college is something that gives them grey hairs. It’s enough money to be able to pay for college, yes, but not as easily as it might look from the outside.

Plus, and maybe most importantly, earnings now are not a guarantee of earnings for the next 15 years. You’re free to say “cry me a river”, but these are people, and all they want is the best for their children and to villainise them for such doesn’t sit well with me. Also, as we said before, the state tax benefit is close to ½ of the total 529 benefit, and that benefit is capped out in NY at $5,000 per parent per year, so this isn’t reducing anyone’s state tax bill to $0.

OK, here are the numbers: paying off student debt is actually more attractive for this couple because they earn too much money to get the income tax deduction, which, by the way, now stands at 43% combined state & federal (I’m assuming, not unreasonably, that this couple are AMT taxpayers). So $100.00 paying down student debt compounds at the full $5.00 ending up at a full $207.89 at the end of year 15. Not too bad, and liquidity is sacrificed, which is still important, but probably less important for this couple than the others.

Investing on the side, even if done in a tax efficient manner yields only $186.31 after 15 years (I upped the capital gains rate to 25% to reflect higher taxes—this gets a little more messy in real life but it’s a decent approximation). Hmmm…

Takeaway: Mass Affluent couple is better off paying away their student debts than investing in the stock market, given our mathematical assumptions (and, critically, on a risk-adjusted basis).

What about 529 plans? Well, the 529 plan still yields $226.52. Definitely better than paying off student debt (and that investment opportunity doesn’t even exist after all debt is paid off).

Interestingly 100% of the benefit in that comparison is now state level. Let me say that again: for well off taxpayers who still have student loans, the federal tax advantage is in some ways $0 and the advantage is all at the state level.

Interesting observation, given that many of the cries were for Obama to remove this great federal incentive in 529 plans (neither Obama nor the US Congress has any input on what states decide to do with 529 tax treatment).

Takeaway: The well-off/upper middle class/mass affluent/merely wealthy/whatever you want to label them get some advantage from 529 plans, but mostly from the state level & that really has nothing to do with Obama one way or another.

The Rich Couple: Nothing we’ve talked about matters at all. For reasons I won’t get into, anyone earning this level of income who is contributing to 529 plans should chew out their tax planner and/or financial advisor. There are a few situations where they make sense, but usually 529s are an unbelievably sub-optimal use of your annual gift tax exclusion.

Takeaway: 529 plans aren’t relevant to the rich at all. They’re glad you’re spending your time thinking about 529 taxation rather than something that matters, like carried interest or the step up in basis at death…

OK, that’s great, but what about Cathy’s point?

Oh, right. Well, yes—when you subsidize an asset the price generally increases to at least some degree (there’s all sorts of complicated analysis on relative elasticity here), and in theory that impact of the 529 is hosing the poor at the expense of the middle class and upper middle class (and the rich, sortof/maybe). Still, I feel like there are a lot of much bigger moving pieces in the overall calculus of costs of college that 529 plan tax advantages aren’t really the primary driver moving the needle.

So, for example, the total budgetary impact from 529 plans & prepaid plans is scored at around $1bn/year (page 39 here). If you’ve never worked with OMB numbers that sounds like a lot, but there’s a special phrase for a number like $1bn/year in the beltway: it’s called “a rounding error”. This is less than peanuts in the overall scope of the budget.

Which leads me full circle to an interesting question: what’s really going on here? I mean, the Obama administration is, depending upon the color of your pin, either Reed Richards or Lex Luthor—you may hear that he’s evil or a Marxist, but not usually that he’s a moron. Yet, this was an unbelievably dumb thing to propose, and honestly, it was entirely predictable that it would be not only a hideous failure, but a very public hideous failure. Again, any on-the-ground CPA could have told anyone in the administration willing to listen that these plans are one of the only reeds the government gives to parents grasping at straws to find the money to cover college and pulling it away would be…well, like stealing porridge from an orphan.

Unless there really is a brilliant “I’m thinking 3 moves ahead of you” long-game/long-con (again, depending on the color of your pin) strategy. If so, could it be this:

The left wants to win the next election. Statisticians working hard have studied the impact of the Tea Party on electoral results for the right and have determined that the optimal game-theory path is to alienate and marginalize the Elizabeth Warren/Bernie Sanders progressive wing. To do so, Obama created a straw man (the proposal to cut back 529 Plans) that pretty much most of America would hate but die-hard progressives would love. This lays the foundation for important discussions of party planks between centrists and progressives, for the centrists to say “look at what your wingnut policies cost us on that 529 debacle”, thus isolating progressives from the central discussion in formulating policy and, you know, trying to make radical change or something crazy like that…

Paranoid? Or not paranoid enough….

FoW

Cathy’s short response: nobody except the affluent middle class (and the rich) has $100 extra to begin with.

Categories: Uncategorized

Will Demographics Solve the College Tuition Problem? (A: I Don’t Know)

November 14, 2014 14 comments

I’ve got two girls in middle school. They are lovely and (in my opinion as a proud dad) smart. I wonder, on occasion, what college will they go to and what their higher education experience will be like? No matter how lovely or smart my daughters are, though, it will be hard to fork over all of that tuition money.  It sure would be nice if college somehow got cheaper by the time my daughters are ready in 6 or 8 years!

How likely is this? There has been plenty of coverage about how the cost of college has risen so dramatically over the past decades. A number of smart people have argued that the reason tuition has increased so much is because of all of the amenities that schools have built in recent years. Others are unconvinced that’s the reason, pointing out that increased spending by universities grew at a lower than the rate of tuition increases.  Perhaps schools have been buoyed by a rising demographic trend – but it’s clear tuition increases have had a great run.

One way colleges have been able to keep increasing tuitions is by competing aggressively for wealthy students who can pay the full price of tuition (which also enables the schools to offer more aid to less than wealthy students).  The children of the wealthy overseas are particularly desirable targets, apparently.  I heard a great quote yesterday about this by Brad Delong – that his school, Berkeley, and other top universities presumably had become “finishing school[s] for the superrich of Asia.”  It’s an odd sort of competition, though, where schools are competing for a particular customer (wealthy students) by raising prices.  Presumably, this suggests that colleges have had pricing power to raise tuition due to increased demand (perhaps aided by increase in student loans, but that’s an argument for another day).

Will colleges continue to have this pricing power?  For the optimistic future tuition payer, there are some signs that university pricing power may be eroding.   Tuition increased at a slower rate this year (a bit more than 3%) but still at a rate that well exceeds inflation.   And law schools are already resorting to price cutting after precipitous declines in applications – down 37% in 2014 compared to 2010!

College enrollment trends are a mixed bag and frequently obscured by studies from in-industry sources.  Clearly, the 1990s and 2000s were a time a great growth for colleges – college enrollment grew by 48% from 1990 (12 million students) to 2012 (17.7 million).  But 2010 appears to be the recent peak and enrollment fell by 2% from 2010 to 2012. In addition, overall college enrollment declined by 2.3% in 2014, although this decline is attributed to the 9.6% decline in two-year colleges while 4-year college enrollment actually increased by 1.2%.

It makes sense that the recent college enrollment trend would be down – the number of high school graduates appears to have peaked in 2010 at 3.3 million or so and is projected to decline to about 3.1 million in 2016 and stay lowish for the next few years. The US Census reports that there was a bulge of kids that are college age now (i.e. there were 22.04 million 14-19 year olds at the 2010 Census), but there are about 1.7 million fewer kids that are my daughters’ age (i.e., 5-9 year olds in the 2010 Census).  That’s a pretty steep drop off (about 8%) in this pool of potential college students.  These demographic trends have got some people worried.  Moody’s, which rates the debt of a lot of colleges, has been downgrading a lot of smaller schools and says that this type of school has already been hit by declining enrollment and revenue. One analyst went so far as to warn of a “death spiral” at some schools due to declining enrollment.  Moody’s analysis of declining revenue is an interesting factor, in light of reports of ever-increasing tuition. Last year Moody’s reported that 40% of colleges or universities (that were rated) faced stagnant or declining net tuition revenue.

Speaking strictly, again, as a future payer of my daughters’ college tuition, falling college age population and falling enrollment would seem to point to the possibility that tuition will be lower for my kids when the time comes. Plus there are a lot of other factors that seem to be lining up against the prospects for college tuition –  like continued flat or declining wages, the enormous student loan bubble (it can’t keep growing, right?), the rise of online education…

And yet, I’m not feeling that confident.  Elite universities (and it certainly would be nice if my girls could get into such a school) seem to have found a way to collect a lot of tuition from foreign students (it’s hard to find a good data source for that though) which protects them from the adverse demographic and economic trends.  I’ve wondered if US students could get turned off by the perception that top US schools have too many foreign students and are too much, as Delong says, elite finishing schools.  But that’s hard to predict and may take many years to reach a tipping point.  Plus if tuition and enrollment drop a lot, that may cripple the schools that have taken out a lot of debt to build all of those nice amenities. A Harvard Business School professor rather bearishly projects that as many as half of the 4,000 US colleges and universities may fail in the next 15 years.  Would a sharp decrease in the number of colleges due to falling enrollment have the effect of reducing competition at the remaining schools?  If so, what impact would that have on tuition?

Both college tuition and student loans have been described as bubbles thanks to their recent rate of growth.  At some point, bubbles burst (in theory).  As someone who watched, first hand and with great discomfort, the growth of the subprime and housing bubbles before the crisis, I’ve painfully learned that bubbles can last much longer than you would rationally expect.  And despite all sorts of analysis and calculation about what should happen, the thing that triggers the bursting of the bubble is really hard to predict. As is when it will happen.  To the extent I’ve learned a lesson from mortgage land, it’s that you shouldn’t do anything stupid in anticipation of the bubble either bursting or continuing.  So, as much as I hope and even expect that the trend for increased college tuition will reverse in the coming years, I guess I’ll have to keep on trying to save for when my daughters will be heading off to college.

Categories: data science, education

White people don’t talk about racism

Here’s what comes up in conversations at my Occupy meetings a lot: systemic racism.

Maybe once a week on average, whether we are talking about the criminal justice system, or the court system, or the educational system, or standardized tests, or chronic employment problems, or welfare rhetoric, or homelessness. There are many very well-informed people in my group which can speak eloquently and convincingly about how the system itself, not any particular person (although they do exist), discriminates against minorities in this country.

As a group we cheered when Ta-Nehisi Coates came out with his Atlantic piece entitled The Case for Reparations. So much resonated, especially the parts about widespread reverse redlining of mortgages to minorities in the run-up to the credit crisis. And it finally taught me how to think about affirmative action.

Another thing that comes up sometimes, although less often: how white people, even liberals like Elizabeth Warren, don’t talk about racism anymore. They want to address education inequalities through class-based or income-based measures rather than race-based ones. They talk about unemployment and joblessness and the need for criminal justice reform without referring to the enormous and glaring racial disparities.

I’m left feeling a lot like I felt in 7th grade social studies when we studied the period of mass genocide of American Indians and called it “Manifest Destiny.”

This recent study entitled Racial Disparities in Incarceration Increase Acceptance of Punitive Policies might explain why white people are so reluctant to talk about racism. Namely, because white react strangely when you specifically point out systemic racism (they are OK with it).

So in other words, if you tell them how many people are incarcerated in this country compared to other countries, they think it’s terrible and we should stop putting so many people in jail. But if you tell them most of those prisoners (60% in New York City) are black, then they’re less likely to think it’s terrible. They also remember the number wrong, thinking it’s higher than it is. Here’s a succinct summary from this Vox article:

The question seems to be which instinct wins out: the belief that our prison system isn’t fair, or the assumption that a prisoner must be a criminal. According to the study, when whites are primed to think of prisoners as black, it’s the latter that wins out.

The conclusion of the Vox article is this: politicians and activists have figured out that, if they want to agitate for criminal justice reform, they can’t mention systemically racist unfairness, because that just doesn’t upset powerful people enough. Instead, they need to focus on important stuff like saving money, which is how you get white people people up in arms. That’s what flies in the focus groups, apparently.

It explains why Elizabeth Warren doesn’t talk about race when she talks about student loans, preferring to talk about “young people”, even though the problem is worse for non-Asian minorities. Similarly, Obama is targeting for-profit colleges without reference to race (but with reference to veterans!) even though for-profit colleges notoriously target minorities.

The problem with understanding stuff like this is that it’s primarily used to be politically cunning, which is not enough. I’d like to talk about how to get people to directly confront racism, starting with liberals.

Categories: rant

Great news: for-profit college Corinthian to close

I’ve talked before about the industry of for-profit colleges which exists largely to game the federal student loan program. They survive almost entirely on federal student loans of their students, while delivering terrible services and worthless credentials.

Well, good news: one of the worst of the bunch is closing its doors. Corinthian College, Inc (CCI) got caught lying about job placement of its graduates (in some cases, they said 100% when the truth was closer to 0%). They were also caught advertising programs they didn’t actually have.

But here’s what interests me the most, which I will excerpt from the California Office of the Attorney General:

CCI’s predatory marketing efforts specifically target vulnerable, low-income job seekers and single parents who have annual incomes near the federal poverty line. In internal company documents obtained by the Department of Justice, CCI describes its target demographic as “isolated,” “impatient,” individuals with “low self-esteem,” who have “few people in their lives who care about them” and who are “stuck” and “unable to see and plan well for future.”

I’d like to know more about how they did this. I’m guessing it was substantially online, and I’m guessing they got help from data warehousing services.

After skimming the complaint I’m afraid it doesn’t include such information, although it does say that the company advertised programs it didn’t have and then tricked potential students into filling out information about them so CCI could follow up and try to enroll them. Talk about predatory advertising!

Update: I’m getting some information by checking out their recent marketing job postings.

Categories: feedback loop, modeling

College ranking models

Last week Obama began to making threats regarding a new college ranking system and its connection to federal funding. Here’s an excerpt of what he was talking about, from this WSJ article:

The president called for rating colleges before the 2015 school year on measures such as affordability and graduation rates—”metrics like how much debt does the average student leave with, how easy is it to pay off, how many students graduate on time, how well do those graduates do in the workforce,” Mr. Obama told a crowd at the University at Buffalo, the first stop on a two-day bus tour.

Interesting! This means that Obama is wading directly into the field of modeling. He’s probably sick of the standard college ranking system, put out by US News & World Reports. I kind of don’t blame him, since that model is flawed and largely gamed. In fact, I made a case for open sourcing that model recently just so that people would look into it and lose faith in its magical properties.

So I’m with Obama, that model sucks, and it’s high time there are other competing models so that people have more than one thing to think about.

On the other hand, what Obama is focusing on seems narrow. Here’s what he supposedly wants to do with that model (again from the WSJ article):

Once a rating system is in place, Mr. Obama will ask Congress to allocate federal financial aid based on the scores by 2018. Students at top-performing colleges could receive larger federal grants and more affordable student loans. “It is time to stop subsidizing schools that are not producing good results,” he said.

His main goal seems to be “to make college more affordable”.

I’d like to make a few comments on this overall plan. The short version is that he’s suggesting something that will have strong, mostly negative effects, and that won’t solve his problem of college affordability.

Why strong negative effects?

What Obama seems to realize about the existing model is that it’s had side effects because of the way college administrators have gamed the model. Presumably, given that this new proposed model will be directly tied to federal funding, it will be high-impact and will thus be thoroughly gamed by administrators as well.

The first complaint, then, is that Obama didn’t address this inevitably gaming directly – and that doesn’t bode well about his ability to put into place a reasonable model.

But let’s not follow his lead. Let’s think about what kind of gaming will occur once such a model is in place. It’s not pretty.

Here are the attributes he’s planning to use for colleges. I’ve substituted reasonably numerical proxies for his descriptions above:

  1. Cost (less is better)
  2. Percentage of people able to pay off their loans within 10 years (more is better)
  3. Graduation rate (more is better)
  4. Percentage of people graduating within 4 years (more is better)
  5. Percentage of people who get high-paying jobs after graduating (more is better)

Cost

Nobody is going to argue against optimizing for lower cost. Unfortunately, what with the cultural assumption of the need for a college education, combined with the ignorance and naive optimism of young people, not to mention start-ups like Upstart that allow young people to enter indentured servitude, the pressure is upwards, not downwards.

The supply of money for college is large and growing, and the answer to rising tuition costs is not to supply more money. Colleges have already responded to the existence of federal loans, for example, by raising tuition in the amount of the loan. Ironically, much of the rise in tuition cost has gone to administrators, whose job it is to game the system for more money.

Which is to say, you can penalize certain colleges for being at the front of the pack in terms of price, but if the overall cost is rising constantly, you’re not doing much.

If you really wanted to make costs low, then fund state universities and make them really good, and make them basically free. That would actually make private colleges try to compete on cost.

Paying off loans quickly

Here’s where we get to the heart of the problem with Obama’s plan.

What are you going to do, as an administrator tasked with making sure you never lose federal funding under the new regime?

Are you going to give all the students fairer terms on their debt? Or are you going to select for students that are more likely to get finance jobs? I’m guessing the latter.

So much for liberal arts educations. So much for learning about art, philosophy, or for that matter anything that isn’t an easy entrance into the tech or finance sector. Only colleges that don’t care a whit about federal money will even have an art history department.

Graduation rate

Gaming the graduation rate is easy. Just lower your standards for degrees, duh.

How quickly people graduate

Again, a general lowering of standards is quick and easy.

How well graduates do in the workforce

Putting this into your model is toxic, and measures a given field directly in terms of market forces. Economics, Computer Science, and Business majors will be the kings of the hill. We might as well never produce writers, thinkers, or anything else creative again.

Note this pressure already exists today: many of our college presidents are becoming more and more corporate minded and less interested in education itself, mostly as a means to feed their endowments. As an example, I don’t need to look further than across my street to Barnard, where president Debora Spar somehow decided to celebrate Ina Drew as an example of success in front of a bunch of young Barnard students. I can’t help but think that was related to a hoped-for gift.

Obama needs to think this one through. Do we really want to build the college system in this country in the image of Wall Street and Silicon Valley? Do we want to intentionally skew the balance towards those industries even further?

Building a better college ranking model

The problem is that it’s actually really hard to model quality of education. The mathematical models that already exist and are being proposed are just pathetically bad at it, partly because college, ultimately, isn’t only about the facts you learn, or the job you get, or how quickly you get it. It’s actually a life experience which, in the best of cases, enlarges your world view, and gets you to strive for something you might not have known existed before going.

I’d suggest that, instead of building a new ranking system, we on the one hand identify truly fraudulent colleges (which really do exist) and on the other, invest heavily in state schools, giving them enough security so they can do without their army of expensive administrators.

Categories: modeling, news, rant

Does mathematics have a place in higher education?

A recent New York Times Opinion piece (hat tip Wei Ho), Is Algebra Necessary?, argues for the abolishment of algebra as a requirement for college. It was written by Andrew Hacker, an emeritus professor of political science at Queens College, City University of New York. His concluding argument:

I’ve observed a host of high school and college classes, from Michigan to Mississippi, and have been impressed by conscientious teaching and dutiful students. I’ll grant that with an outpouring of resources, we could reclaim many dropouts and help them get through quadratic equations. But that would misuse teaching talent and student effort. It would be far better to reduce, not expand, the mathematics we ask young people to imbibe. (That said, I do not advocate vocational tracks for students considered, almost always unfairly, as less studious.)

Yes, young people should learn to read and write and do long division, whether they want to or not. But there is no reason to force them to grasp vectorial angles and discontinuous functions. Think of math as a huge boulder we make everyone pull, without assessing what all this pain achieves. So why require it, without alternatives or exceptions? Thus far I haven’t found a compelling answer.

For an interesting contrast, there’s a recent Bloomberg View Piece, How Recession Will Change University Financing, by Gary Shilling (not to be confused with Robert Shiller). From Shilling’s piece:

Most thought that a bachelor’s degree was the ticket to a well-paid job, and that the heavy student loans were worth it and manageable. And many thought that majors such as social science, education, criminal justice or humanities would still get them jobs. They didn’t realize that the jobs that could be obtained with such credentials were the nice-to-have but nonessential positions of the boom years that would disappear when times got tough and businesses slashed costs.

Some of those recent graduates probably didn’t want to do, or were intellectually incapable of doing, the hard work required to major in science and engineering. After all, afternoon labs cut into athletic pursuits and social time. Yet that’s where the jobs are now. Many U.S.-based companies are moving their research-and-development operations offshore because of the lack of scientists and engineers in this country, either native or foreign-born.

For 34- to 49-year-olds, student debt has leaped 40 percent in the past three years, more than for any other age group. Many of those debtors were unemployed and succumbed to for-profit school ads that promised high-paying jobs for graduates. But those jobs seldom materialized, while the student debt remained.

Moreover, many college graduates are ill-prepared for almost any job. A study by the Pew Charitable Trusts examined the abilities of U.S. college graduates in three areas: analyzing news stories, understanding documents and possessing the math proficiency to handle tasks such as balancing a checkbook or tipping in a restaurant.

The first article is written by a professor, so it might not be surprising that, as he sees more and more students coming through, he feels their pain and wants their experience to not be excruciating. The easiest way to do that is to remove the stumbling block requirement of math. He also seems to think of higher education as something everyone is entitled to, which I infer based on how he dismisses vocational training.

The second article is written by a financial analyst, an economist, so we might not be surprised that he strictly sees college as a purely commoditized investment in future income, and wants it to be a good one. The easiest way to do that is to have way fewer students go through college to begin with, since having dumb or bad students get into debt but not learn anything and then not get a job afterwards doesn’t actually make sense.

And where the first author acts like math is only needed for a tiny minority of college students, the second author basically dismisses non-math oriented subjects as frivolous and leading to a life of joblessness and debt. These are vastly different viewpoints. I’m thinking of inviting them both to dinner to discuss.

By the way, I think that last line, where Hacker wonders what the pain of math-as-huge-boulder achieves, is more or less answered by Shilling. The goal of having math requirements is to have students be mathematically literate, which is to say know how to do everyday things like balancing checkbooks and reading credit card interest rate agreements. The fact that we aren’t achieving this goal is important, but the goal is pretty clear. In other words, I think my dinner party would be fruitful as well as entertaining.

If there’s one thing these two agree on, it’s that students are having an awful lot of trouble doing basic math. This makes me wonder a few things.

First, why is algebra such a stumbling block? Is it that the students are really that bad, or is the approach to teaching it bad? I suspect what’s really going on is that the students taking it have mostly not been adequately taught the pre-requisites. That means we need more remedial college math.

I honestly feel like this is the perfect place for online learning. Instead of charging students enormous fees while they get taught high-school courses they should already know, and instead of removing basic literacy requirements altogether, ask them to complete some free online math courses at home or in their public library, to get them ready for college. The great thing about computers is that they can figure out the level of the user, and they never get impatient.

Next, should algebra be replaced by a Reckoning 101 course? Where, instead of manipulating formulas, we teach students to figure out tips and analyze news stories and understand basic statistical statements? I’m sure this has been tried, and I’m sure it’s easy to do badly or to water down entirely. Please tell me what you know. Specifically, are students better at snarky polling questions if they’ve taken these classes than if they’ve taken algebra?

Finally, I’d say this (and I’m stealing this from my friend Kiri, a principal of a high school for girls in math and science): nobody ever brags about not knowing how to read, but people brag all the time about not knowing how to do math. There’s nothing to be proud of in that, and it’s happening to a large degree because of our culture, not intelligence.

So no, let’s not remove mathematical literacy as a requirement for college graduates, but let’s think about what we can do to make the path reasonable and relevant while staying rigorous. And yes, there are probably too many students going to college because it’s now a cultural assumption rather than a thought-out decision, and this lands young people in debt up to their eyeballs and jobless, which sucks (here’s something that may help: forcing for-profit institutions to be honest in advertising future jobs promises and high interest debt).

Something just occurred to me. Namely, it’s especially ironic that the most mathematically illiterate and vulnerable students are being asked to sign loan contracts that they, almost by construction, don’t understand. How do we address this? Food for thought and for another post.

Using retirement money now

This is a guest post by Micah Warren.

A few weeks ago the Census Bureau reported that more than half of all births in the US are non-white. The social implications are more widely discussed and reported, but the more interesting and worrisome fact is that overall births are sharply declining, especially among whites, ever since the recession hit.

My best guess is that the declines are mostly among the middle class, who are feeling squeezed by student loans, mortgage debt or inability to buy a home, stagnant incomes and employment uncertainty.

Since middle class Americans typically prefer to buy a house before popping out children, it’s fairly simple math: Years ago when the median house price to median income was a little above 2, and nobody was drowning in student loans, and you didn’t have to obtain advanced degrees to make a reasonable wage, most families could comfortably start having children by their late twenties.

Nowadays, the median house is 3 times the median income, people are finishing college/grad school later, have students loans which take a large chunk of what would otherwise be discretionary income, setting the time-line  back 5-15 years.  To most people, this means less kids. I took a different path, and am learning the hard way that I might have made a choice between a home and children in my (relative) youth.

I wanted to buy a house in my thirties, but savings has been hard to come by with three kids (including twins), student loans, high rent, on one income.  I had planned on using retirement funds, until my benefits office, said, “sorry, you can’t touch that money.”

Why?

In their own words, “paternalistic reasons.” They don’t want me to jeopardize my retirement.  My retirement has been growing at a very healthy rate, with employer contributions much higher than our discretionary income.

I griped around a bit and the common response seems to be that I would never be so foolish as to mess with the magic money in my retirement funds, to spend today. After all, if had invested $10,000 in Berkshire Hathaway in 1965, my holdings would be worth more than $50 million today, right?

Now I have two points in response to this.

  • Pulling money out of retirement to put on a house may actually be a good idea for an individual.
  • Individuals collectively pulling money out of retirement plans to put on houses is a good idea for the economy as a whole.

The individual

  • Retirement funds are in for a tough road. Firstly, the global economy has hit the skids and will take a while to rebuild. Secondly, the aging population: as these guys from the Fed pointed out, the P/E ratio appears to be linked to the ratio of retirees to people in their prime earnings years. This report seems widely ignored and/or downplayed. About $18 trillion is in retirement funds which will be coming out of the market as baby boomers retire and age. Note that those in the financial services industry have a vested interest in convincing people their retirement funds will grow at a 10.8%, which is bats.   Most retirement funds are in managed funds, which means that they are being eaten away by the typical 1.5% fees that fund managers take. That takes an optimistic 6% underlying growth rate down to 4.5% which is in the range of most mortgages
  • Private mortgage insurance is expensive.
  • Rent money is not equity in your home: 5-10 years rent saving for a down payment is a lot of money.
  • Tax is tax.  Your money will be taxed.  Yes, it may be at a lower marginal rate when you retire, but you don’t know that.  Further, because compounding is nonlinear, a small change in returns makes a much bigger difference than a difference in tax rates.

The economy

On the other hand, if we do pull money from retirement and put in on homes,

  • Home prices may find a bottom sooner. Clearly, if more people like myself have money to spend on houses, more houses will be sold at better prices.
  • Finance will have less money and markets will be more stable. (OWS rant ommitted)
  • More young middle class people will have more babies. Healthier, well-fed, well-educated children will support the economy in the future.  This is the main point here.   The greatest investment in our future economy is children today. Money in an account does nothing, unless you still believe in trickle-down theory.  The middle class is being depleted, and this will be made much worse in the future due to the simple reason that there will be less middle class children to squeeze. Things could get much uglier years down the road if the population continues to age and retire and expect the money they dumped in the retirement funds to be there without the economy to support it.

Bottom line: A large chunk of younger American couples/families are not able to buy homes and participate in the real economy (rather than just as debtors) and we are in danger of losing out on a whole generation of economic output.  This spells a much bigger disaster for our retirement funds than the loss of $20K to home equity.

Instead of choosing a better living standard when our children are young, we are expected to (somewhat selfishly) leave money in a fund that has no guarantee of growth rate, which we have no guarantee will be alive to use, and while optimistically may be spent on glorious retirement, it is also quite likely these funds will be depleted in a few short months by end-of-life care. In the meantime, Wall Street plays puff-puff-give with the money.

I personally would gladly accept financial comfort while my children are young in exchange for a smaller chunk of money later, which gives me little comfort at all, because there is no earthly way to discern what this money will mean to me when I am 70. On the other hand, I can tell you exactly how much a 20% down payment on a $300,000 house is, today.

Categories: finance, guest post

What if the bond markets priced in actual risk?

A friend sent me this article written by Daniel Gross, which talks about how taxpayers in Europe and in the U.S. are paying for the mistakes of bondholders. First he starts with Ireland:

When Ireland’s large private banks collapsed spectacularly a few years ago, the Irish government formally assumed the debts of the private banks. To ensure that bondholders of Irish banks would remain whole, the government undertook a massive bailout. To pay for it, it has inflicted vicious austerity on its populace.

He moves on to Greece:

As Liz Alderman and Jack Ewing reported in the New York Times this week, about two-thirds of the $177 billion in European aid to Greece given since May 2010 has been used to make payments to bondholders and other lenders. The upshot: Greece is imposing significant austerity on its citizens for the sake of preserving the value of bondholders.

And the U.S.:

Yes, it’s true that the U.S. in 2008 and 2009 acted to keep bondholders from taking big losses. The taxpayers formally assumed the debt of Fannie Mae and Freddie Mac without insisting bondholders take any haircut, just as the Irish taxpayers formally assumed the debts of their large banks. That was a big and expensive mistake. In a time of austerity, the U.S. government is channeling tax payer funds to make interest payments on bonds that were first issued by for-profit entities.

He points out that Spain appears to be taking the same approach, and that the actual people of Ireland and Greece are having second thoughts about paying all these bills, expressed through who they are voting for. I believe it’s left to the reader to wonder what’s going to happen to Spain.

Gross suggests a different tact for governments to use, namely to ignore old debt and to provide insurance for new debt issued by the banks and other private companies. The U.S. did this during the crisis, it was called the Temporary Liquidity Guarantee Program. His point is that we’ve made money off this program and we’ve let lots of really insolvent banks fail as well.

On the other hand, I’d argue, we haven’t let the big banks fail, so there’s a limit to its effectiveness (but I won’t blame this program for that, because that’s a problem of political will). And it’s of course not altogether clear that the insurance it sold was sold at market value, since if it had been, I’m guessing it wouldn’t have been such a boon to a given company to issue debt and pay for insurance versus just issuing debt at a higher risk premium. In other words, I think the “Liquidity” in “Temporary Liquidity Guarantee Program” is key.

But he’s got it basically right- taxpayers are definitely on the hook for risky bets other people took. And backups and guarantees by governments definitely skews the bond market. Specifically, big companies end up paying less than they should given their risk, and the taxpayers foot the bill in situations of default (which aren’t allowed to actually be defaults with respect to the bondholders).

So sufficiently big companies are paying too little for debt. That’s about half the story though. The other half is how normal people are paying too much for debt.

For example, with student debt, Bloomberg recently reported that private issuers of student debt are charging as much as credit card companies:

Tovar, who lives with her parents in the Chicago suburb of Blue Island, owes $55,600 to Chase Student Loans, a unit of JPMorgan, according to a May 17 statement provided by her. A loan for $24,794 carries an interest rate of 10.25 percent, as does a second loan for more than $2,619. A third for $28,187 has a rate of 8.97 percent. She has a balance of $42,326 in loans from a different lender.

Given that these loans are effectively undischargable through bankruptcy, what is the real risk for private issuers in getting their money back? What would a fair market price be for these loans? And why don’t we have a fair market?

Categories: finance

To my Libertarian friends

First, I’d like to say thank you to the people who have been writing me very nice comments about the PBS Frontline special. It’s cool that people dug it, and it makes me really glad I did it. Thanks!

Second, I had a blast with Reno the other night doing her “Money Talks” show. You should definitely check her out soon.

Also, I’m on my way to the third day of a modeling conference at the IMA (which is part of the University of Minnesota) called User-Centered Modeling. I’ll be speaking tomorrow and I expect to be blogging quite a bit on the other talks between now and Friday.

And with that, I’d like to use the rest of my GoGo Inflight Internet service to start a conversation about the libertarian mindset.

By the way, in spite of my annoyingly opinionated personality, I actually love having friends I disagree with. It feels much more comfortable to be around people who give me friction and challenge my opinions than to be around people who all think similarly to me.

Why? Because it’s a lot easier to spot other people’s hypocrisies than it is to spot one’s own hypocrisies. So if I’m around people who agree with me, we are all very likely being totally blind to something obviously flawed in our mindset, but nobody’s there to point it out.

With that in mind, I really do want this to be a conversation about why libertarians think the way they do- so please comment if you have something to say (and feel free to tell me not to post your comment). I’ll start with what I see as an hypocrisy of the libertarian perspective.

Namely, the cry I hear over and over from the libertarian in the room (whichever one happens to be there) is that big government and welfare and socialized programs are helping people out who should be able to make shit work on their own, whereas they never asked anyone for any help.

This myth of the “pulled myself up by the bootstrap” kind of drives me nuts. It’s like they completely ignore the system in which they lived and (usually) thrived, and how advantaged they are in that system.

When people go into that riff where they talk about how they never owe anybody any money, and they put themselves through college and don’t see why they should feel bad for the students nowadays who owe a collective $1,000,000,000,000 in student loans because they managed to be successful without extra help, here’s what I ask them: do you think you could have been as successful as you are if you’d been born a female subsistence farmer in Africa?

That’s kind of an easy one (and I go from there) but what it does it contextualize the idea of what it means to not ask for help. Namely, when you have a good infrastructure set up with a good education, available health care, etc, then you don’t need to ask for help, because you can help yourself. But it doesn’t mean you’re doing it all by yourself!

So, if you were born into an honest family with a good work ethic and strong skills and intelligence, then yes it’s possible to work really hard and do well, and I’m always proud of people who work really hard and do well, but it needs to be understood that anyone who is a success in our culture is a success partly because our culture allows for such success – and then there’s the individual contribution component which is much much much smaller.

Did you ever notice in the Ayn Rand novel that there aren’t any kids in them? Or for that matter any disabled people, old people, or sick people? It’s a grownup world where you’re either brilliant and yearn to be free from the shackles of petty people trying to repress your innovation, or you’re one of those petty people.

But actually our world isn’t like that at all. We have a community of humans, and like it or not we each contribute to our culture and do our part in defining success or failure.

I always like to point out that I hate laziness, and I have no patience for laziness. It’s a distraction to talk about how lazy whiny entitled kids expect us to pay for their college and then also expect to be given a cushy job afterwards (because libertarians tend to start talking about such symbols of what is wrong with social programs).

Even if there are examples of such people, there are plenty of other examples of people who genuinely worked hard but needed to take out lots of loans and didn’t understand their terms and now are desperately looking for work but can’t find anything. If the conversation is going well I’ll even talk about how if, as a culture, we are raising a generation of entitled kids (which is an exaggeration), then maybe it’s our fault and not the kids’ fault. Because it is.

Categories: rant

The student debt crisis

A few weeks ago I wrote about the higher education bubble that I saw at the individual level. This is the idea that, for a given student trying to decide whether or not to take on more loans to go to school, it’s essentially a no-brainer; it’s a cultural given that a college education pays off, statistically speaking, even if in a specific case it doesn’t.

As always, however, the situation at the individual level (a student going into debt) is informed by the overall system. Today I want to write a bit more about how this system got so out of whack.

I’ll actually write about a series of theories of mine, so please tell me if you think I’ve got the facts wrong. I don’t want to claim these are new ideas, but rather a storytelling version of a common understanding of how this all went down. In this case, it’s a story about money and perceived risk, no too dissimilar from the housing crisis.

Before I get into the details of the theory, let me throw in that the Ivy Leagues like Harvard and Princeton have always been super expensive, but that’s part and parcel of their brand. It’s actually intentional, they wouldn’t have it any other way, because part of being elite is being out of control expensive (although it needs to be said that their financial aid to poor kids is exemplary). In other words, I don’t think my theory is going to work on super elite colleges, but that’s fine because most people don’t attend those colleges.

And college always cost some money, although some state schools were really quite reasonable back in the day. It’s just a question of how long after college someone would have to wait or work before their student debts would be gone so they could move on with their lives and think about buying a house (more on that connection below).

Okay, with those disclaimers, let me get started. Namely, it’s all about bankruptcy laws. I know that sounds unbelievable, but it’s really true. From Justin Pope:

Until 1976, all education loans were dischargeable in bankruptcy. That year Congress began requiring borrowers to wait at least five years before they could discharge federal student loans. Since 1998, borrowers have been unable ever to discharge federal student loans, and in 2005 the then-Republican-controlled Congress made private loans almost impossible to discharge.

Why does this matter?

Because it meant that people lending to students wouldn’t need to worry about getting their money back. That sets up a perverse system where young people who are not creditworthy can take on piles of debt.

On the one hand, it’s good for students to be able to finance their education- you wouldn’t want young poor kids to not attend colleges at all for want of enough funding.

On the other hand, it meant that the tuition and fees could essentially rise without pause, since there was nothing to force them back- no supply vs. demand situation.

This is especially true because students aren’t told and do not generally “shop around” for a good deal in college, and moreover colleges are incredibly underhanded about making their tuition and fees clear (I am giving the CFPB about 3 more months to force them to present packages in a standard form before I really start complaining).

Another example: Pell Grants. These are grants given to poor kids to go to college, and they aren’t loans – the government pays them straight to the college. But the colleges have not really made it easier for kids to go to college because of this free money, but rather have raised their tuitions by the amount of the expected Pell Grant. Some colleges are better at getting Pell Grant money than others, and in particular for-profit colleges get 7 out of 10 such grants.

[Speaking of for-profit colleges, how are they allowed to exist? They are the worst of the worst and in particular have outrageous practices in terms of disclosing fees and tuitions, giving commissions to financial aid officers who then urge students to lie on their financial aid forms. Not to mention providing questionable educations.]

I hope it’s not too hard now to understand why student debt has just surpassed $1,000,000,000,000 in this country, ahead of credit cards. On the banker side of the room, these student debts are being bundled up and securitized and sold to investors just like old mortgage-backed securities (which, as you recall, couldn’t fail because the housing market always goes up) who are being told there’s very little risk since students can’t discharge student debt through bankruptcy. There’s a strong analogy with the previous housing bubble and the current education bubble: even ignoring the individual’s goal of becoming an educated citizen and qualified worker, there’s the demand side from the banking system itself which feeds on the fees of securitized products that seem riskless.

But the cost to those individual borrowers is heavy; we have a system whereby young people are being saddled with enormous and unreasonable debt in order to even qualify as a worker, and they are carrying it around like a noose. It is, for example, one thing preventing the housing market from recovering, because the generation of young people who should be buying a house right now is instead still trying to pay off student loans.

What should we do about this?

First of all, let’s focus on the culture of education and how we think about it. Is it a certification process that people should pay for? Or is it a part of what we offer our citizens as their right?

If the latter, it’s time we rethink why state schools should exist, and fund them accordingly, rather than removing more and more funding while expecting them to uphold their state-school mandates. I went to UC Berkeley in the early 1990’s and it was completely awesome, but it’s getting more and more squeezed by the state of California, which is forcing it to choose between becoming a bad school and becoming a private institution. And yes, that means taxpayer money going towards the investment of broad education rather than to banker bailouts.

Second of all, let’s rethink the bankruptcy laws. At the very least for private student debt. For public student debt it also needs to be negotiable in certain circumstances. We need to get the colleges themselves to lower their fees enough that the debt loads are tolerable.

Finally, let’s rethink how much to expect someone to pay down their debt depending on their salary. From Bloomberg:

The second crucial step is to mitigate the burdens of already distressed borrowers. The Obama administration has made progress, for instance by proposing an initiative that would let some students limit their loan repayments to 10 percent of their discretionary incomes next year and would forgive balances after two decades. Private lenders should be given incentives to offer more modifications and flexible payment options.

Yes, this means that some of those securitized student debt loans will default, just like mortgages. And that will mean that already undercapitalized banks will be even more so, because they’ve been taking risky bets yet again, and Sallie Mae will be up Shit’s Creek. But the alternative, of a continuing debt trap for young people, is an even worse alternative.

Categories: #OWS, finance

Bloomberg joins Occupy Wall Street

Yesterday I was astounded to read this article in Bloomberg, explaining how the debt collectors hired by the Department of Education have been illegally screwing people to the ground on their debt. This could have come straight out of an #OWS Alternative Banking meeting. From the article:

Under Education Department contracts, collection companies “rehabilitate” a defaulted loan by getting a borrower to make nine payments in 10 months. If they succeed, they reap a jackpot: a commission equal to as much as 16 percent of the entire loan amount, or $3,200 on a $20,000 loan.

Incentive Pressure

These companies receive that fee only if borrowers make a minimum payment of 0.75 percent to 1.25 percent of the loan each month, depending on its size. For example, a $20,000 loan would require payments of about $200 a month. If the payment falls below that figure, the collector receives an administrative fee of $150.

That differential provides an incentive for collectors to insist on the minimum payment and fail to reveal when borrowers are eligible for a more affordable schedule, according to Loonin, the attorney at the National Consumer Law Center, which is representing borrowers in the Washington talks with the Education Department

Here’s a closeup of Pioneer Credit Recovery, one of the debt collection agencies in contract with the U.S. Education Department. From the Bloomberg article:

Pioneer maintained a “boiler room” environment, with high turnover among those who didn’t perform, said Joshua Kehoe, a former collector. Kehoe worked in Batavia, New York, from July 2006 through October 2008 after managing a pizza stand at a theme park.

Pioneer rewarded collectors with $100 restaurant gift cards, a $500 mahogany jewelry box, televisions and a trip to the Dominican Republic, according to Kehoe, who said he earned $9.60 an hour before the incentives.

It would be “a cold day in Hades” before collectors would tell borrowers about options with lower payments, according to Kehoe, who said “rehab cash was king.” The company pushed collectors to sign borrowers up for the rehabilitation plans, which often required payments equal to 1.25 percent of their loan amount monthly, he said.

Just in case you think student debt is someone else’s problem, read this post from ZeroHedge from a couple of days ago. In it, Tyler Durden throws down two statistics we might want to keep in mind:

  1. … of the $1 trillion + in student debt outstanding, “as many as 27% of all student loan borrowers are more than 30 days past due.” In other words at least $270 billion in student loans are no longer current, and
  2. … the unemployment for 18-24 year olds is 46%. Yup: 46%.

When you throw in that student debt cannot be expelled through bankruptcy, you have a major problem for young people. And that means a major problem for all of us.

Categories: #OWS, finance

Quants for the rest of us

A few days ago I wrote about the idea of having a quant group working for consumers rather than against them. Today I wanted to spell out a few things I think that group could do.

The way I see it, there’s this whole revolution of data and technology and modeling going on right now, but only people with enough dough to pay for the quants are actually actively benefiting from the revolution. So people in finance, obviously, but also internet advertising companies.

The problem with this, besides the lopsidedness of it all, is that the actual models being used are for the most part predatory rather than helpful to the average person.

In other words, most models are answering question of the form:

  1. how can we get you to spend money you don’t necessarily want to spend? or
  2. how good a credit risk are you? or
  3. how likely are you to come back and spend more money? or
  4. how can we anticipate the market responding to end-of-month accounting shenanigans? I just threw this one in to give people a sense of how finance models work.

It all makes sense: these are businesses that are essentially bloodthirsty, making their money off your clicks and purchases. They are not going away.

Then there are some models that are already out there trying to make the user experience more enjoyable. They answer questions of the form:

  1. If you like that, what else may you like? (Pandora, Netflix, Google)
  2. If you bought that last week, maybe you’d like to buy it again this week?
  3. If you bought that, maybe you’d like to buy this now?

The problem, as you can see, is that these second, helpfulish kinds of things quickly devolve into the first, predatory kinds of things. In other words, you’re being bombarded by ads and suggestions for spending more money than you actually want to spend.

What about stuff that you actually don’t want to do but that is probably not directly profitable to anyone? I’d love to see technology used to tackle some of these chores:

  1. Figuring out what the best deal is on loans (credit card, student loans or mortgages), without becoming a lawyer. Here I’m not just saying they should all be clear about their terms- that’s a job for the CFPB. I mean there should be a website that asks me a few questions about what I need a loan for and points me to the best deal available.
  2. Finding the best price for something. I discussed this briefly here.
  3. Warnings about weird conditions and agreements, like mandatory arbitration.
  4. Help finding a good doctor or a good plumber etc.
  5. Help knowing when to go to the DMV or other public services building so the lines are bearable, or even better a way to do stuff on your computer or phone and avoid the trip altogether.
  6. Getting your kids’ medical records to their schools and camps safely and efficiently.
I’m sure I’ve missed a bunch of things (please tell me what I’ve missed!). In general, the consumer is constantly being asked to make decisions in situations where there’s unnecessary information asymmetry. A quant model for consumers should try to rebalance that asymmetry.

Some of these things already exist (like the doctor thing) but aren’t well-known or well-publicized, so wouldn’t it be cool if this quant group also provided an app that would aggregate all these services into one place?

And for the things like #4, where you want to be warned before you buy, it’s too much work to go back to a webpage to check everything before buying. Instead, the app could follow you around the web when you’re shopping and overlay a “bullshit warning” icon on the potential purchase in situations where people have complained about unreasonable terms and conditions.

Let’s use technology in our favor. Instead of the companies collecting information about us, let’s collect information about them. Come to think of it, the CFPB should start this quant group today.

Categories: data science