Ask Uncle Bill: A REALLY Stupid Idea

"Clueless, totally clueless." My daughter's description of her friend's knowledge of finance, credit cards, debt, careers, investments--the financial world in general. "Write a book, Dad." So I wrote a book proposal, got an agent (New York City, no less) and realized that college students and people just starting out don't have any money to buy books AND they get all their information off of the internet. Forget the book. So here is the site for all your money questions and how to get rich. If you don't see what you need just ASK UNCLE BILL.

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A REALLY Stupid Idea

Have to take a break from Jonathan this morning to tackle something that is politically attractive but financially stupid. Finance and attractive ideas usually don't mix because attractive ideas (take your pick--minimum wage, universal health care, subsidized housing) almost always don't make finanicial sense.

So at the risk of being a Scrooge at this time of year, here is another really stupid idea. The quote from this morning's paper--

Alarmed by a rapid rise in student debt, Democratic leaders in the coming Congress are promising to lower payments on new college loans by cutting the interest rate in half.

This makes about as much sense as trying to cut back on drug use by cutting the price of cocaine in half.

But first some facts. Seems the Dems want to cut the rate from 6.8% to 3.4%. And how do they do this, wave a magic wand? If the going rate is 6.8% (pretty low, historically) and the Dems want to cut it in half, than again, how? No bank or lender is going to go, "Hey, you are right. The rate is too high for those poor college kids so we are going to cut it in half." They are going to say, "Hey, the rate is 6.8% and if you want the rate to be 3.4% then somebody, you, are going to pay the other half." But who is "you." You is the government. Oh, great, let the government pay. But the government is us which means taxpayers which means higher taxes. Great. When you see a deal like this, always try to figure out who the YOU is. It is usually you.

But you heartless jerk, give the poor kids a break. The paper then trots out the 'victim.' In this case it is "Nikki Schwartz, a University of Minnesota student who has racked up $66,000 in debt after five years of college and figures that she'll owe $200,000 when she finishes graduate and law school."

Whoa. Whoa. $66,000-I would like to see the breakdown of that number. I just put my daughter through a state school for $40,000. How did Nikki spend $66,000? Well, one reason is taking five years. College is four years, Nikki. Then she wants to rack up $200,000 going to graduate school AND law school. Nikki says "I would love to to see the interest rates go down." You think.

Ok, ok. A little too rough on Nikki. But c'mon. Actually, the real culprit isn't Nikki, it is the schools and the existing system of student loans.

There is no industry that has the pricing power of higher education. Let's say you are the CFO of State U. Your chancellor and faculty want 1) raises, 2) a new engineering building, a new lab, a new libary, a new liberal arts building 3) more importantly, a new football stadium and 4) most important of all, a new football coach at $2 million plus a year to beat the old conference rivals.

You as CFO, say No Problem. Because you can price your product to pay for all this and more because your customer gets cash from the government...oopps, the taxpayer.

Here is the whole mess boiled down into two numbers--1) over the last five years, the median household income has declined by $1,300 while 2) tuition at the average four year PUBLIC college rose by 57 PERCENT.

See what I mean by pricing power.

Now the CFO is really licking his chops because it is going to get better. Now the goverment will increase the customer buying power by half. Get out the bubbly--Christmas is coming early this year.

Maybe it won't happen. Not likely. Hear this from Rep. George Miller, D-California, the incoming chairman of the House education committee, "The price of tuition should never stand between a qualified student and a college degree." Sounds nice? Sure does.

And it's money in the bank for the guys in the education business. Get out the bulldozers and build that new stadium. New coach?--go for $3 million.

Don't worry about paying for it. Done deal.

Hate to be a smart ass but this is exactly what is going on. How to fix it? Beats me, this egg is scrambled. But if I were a parent, I would be saving more and hoping Junior can get a tryout with that new coach.

December 19, 2006 | Permalink

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