Tag Archives: cost of debt

Academia is responsible for the devalued degree

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You’ve probably heard the phrase “bad money drives out good”. That’s Gresham’s Law expressed in its colloquial form.

If you want to know one of the big reasons six, seven or more years in higher education (with the resulting costs or debts) doesn’t guarantee you a job; why the few position advertisements you see all demand other credentials on top of degrees; and why, if your résumé doesn’t show that you’re constantly taking new programs and acquiring new credentials, it gets binned on arrival, just think about Gresham’s Law for a moment. If the “money” is good (your degree is worth something) it doesn’t need endless add-ons and you don’t need endless new degrees on top of your old one. If it’s debased in some way, on the other hand, “more” will be better (think of it as just another form of inflation at work).

Now take a look at what Karl Denniger posted this morning, in “That College Degree? It’s Worthless.

Before all those of you who have your credentials from a Canadian, British, Australian, French, etc. university start snickering at the “perfidious effects of making the football and basketball coach the highest-paid person on campus” that’s so prevalent in the United States, and patting yourselves on the back for having gone to a place that “put the academics first”, hold on. Debasement and the graduation of students who should never have been allowed to pass isn’t just found around the athletic scholarship community.

Any school that debases grades — or simplifies course materials to ensure a higher pass rate — or reduces the amount and types of work required — or poses multiple-choice tests as “examination” without other means of testing what’s been learnt — is engaged in the same game as passing through the point guard or linebacker who can’t read, can’t write, can’t do much of anything, really, other than play the game.

That kind of “bad” degree has been driving out the quality ones for a long time now.

First of all, the dumbing-down of the public school system has meant that much of the first two years of a bachelor’s degree now is taken up with teaching things that used to be part of the high school curriculum, back when many people went to work on the strength of less than a high school graduation. Staying in the university-bound stream say, sixty years ago, meant you were doing what is now second-year calculus and algebra in your Grade 12 math class — the same for the hard sciences, the social sciences, and the humanities — because by the start of Grade 11 everyone else had peeled off, into a different work-bound program, or left school and taken employment.

(My father built his entire career on a Grade 10, Business and Commerce stream education, rising to high management in a major corporation. On the way through his employed life, he also invented a solution to an on-going problem that gained a patent — and not one of the phony, lawyer-driven ones like “one-click ordering” that pervade the patent system today.)

As an undergraduate in the 1980s, my papers came back to me dripping with red ink. Every misuse of the English language was picked up and criticized. Class averages ran in the C to C+ range — Bs really were “exceeds expectations”, and the As you received reflected “outstanding” work.

I’ve been a university professor in three different faculties at two different universities in the 1990s, 2000s and 2010s, all teaching Master’s level courses. Had I marked as I had been marked (and since, in my elementary school years, I was marked on a scale where 70% was the pass-fail point, and therefore was used to a demanding system) there would have been a riot in the streets. Every time I’ve taught, there’s been a line of whinging students at the Dean’s door complaining about having to be evaluated by oral examination, by written examination, and by presentation in a class setting with no multiple-choice in sight. Every time there’s been complaints about the red ink correcting their language (even though they, unlike me, didn’t lose marks for it). Anyone getting less than an A- moaned because I “wasn’t being fair”.

Every time, as well, the Dean would force me to “redo” my marks, to keep the institution’s “A-level reputation” intact.

You pass out students who don’t deserve bare Cs with As and you devalue your degree. It’s as simple as that.

Gone are the days when simply seeing Cambridge, Oxford, Toronto, McGill, Harvard, Yale, etc. on someone’s résumé meant you didn’t have to think about whether or not they were competent. The Ivy League and the Canadian schools have long ago gone down the same “can’t fail anyone, everyone’s ego is too fragile not to be classed as really exceeding expectations or being outstanding in some way” trap the public schools went into.

Take a look at business communication today. Riddled with errors. Unable to express coherent thoughts. Or business numeracy: missing in action (people who can’t figure change without a computer to tell them precisely what to pull out build spreadsheets which we all just use and treat as gospel). Or logic in decision making. I see a fair number of strategic plans that have contradictions on the same page — often in the same table or paragraph — and no one bats an eye.

No wonder employers now demand very specific additions to your degrees. After all, credentials like the Securities course (CSC), HR Professional program (CHRP), or Project Management credential (PMP) don’t come with the residual “odour of success” that a name-brand university offers. They have to be effective at transferring skills, or they go nowhere in the market (like the ISP that the Canadian Information Processing Society tries, year after year, to foist as the “mark” of an IT professional).

The on-going addition of more and more letters after your name, in turn, is driven because all that “effective skilling” comes at a price: it’s not education (giving you abilities for a lifetime) but training (giving you specifics that expire as the world changes). That the typical method of job evaluation to set pay grades used in most organizations is driven by educational qualifications — and because managers’ pay bands go up if the staff under them are raised — the quest for pay increases has led to the specification of increased qualifications, one piled on another.

Your responsibility is to ensure that you get value for money in your education. That means, first and foremost, that you get one. A paper dripping with red ink and an honest “C” will teach you far more about communicating effectively than any degree program in “communications” will. Find the toughest old-school types, and learn from them.

Then recognize that in today’s world your institution of higher learning is probably debasing your degree anyway. But if you’ve really learned (as opposed to just passing through) you’ll be prepared for what life throws at you.

With 3 out of 4 white Americans (just about 4 out of 4 blacks and Hispanics) now expected to experience at least one period of significant unemployment and poverty in their lifetime, you had better have gotten something permanent out of it, eh?

The trend has changed, and that changes the rules

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Two years ago, a good friend of mine (who spends far more time monitoring the investment markets than I do) argued with me about my daughter and her choices.

His view was that she should go straight on to graduate school from undergraduate studies, even if she needed to take out a student loan to do so. Her view (and mine) was that paying cash was the smart way to get an education, and therefore her plan to take a year off between her BA and MA to restock the bank account made the most sense.

Well, in 2011, that “just borrow” — as my friend said, “money’s never been cheaper” (i.e. interest rates never lower) — was correct, but the end of the low interest rate period was in sight. In 2013, we’re already up and continuing to climb.

In other words, debt gets more expensive from here on in.

We’ve lived through a thirty year period where debt (by and large) got cheaper every year. It didn’t just get cheaper because you went from being a poor recent graduate to a mid-career heavyweight. It got cheaper because, year over year, interest rates fell. That let old debt get renegotiated into cheaper payments periodically (such as, when a mortgage renewed, or when credit cards got rolled into a line of credit, or when you switched lenders and they gave you a deal).

The next few decades, on the other hand, will have a different secular trend. In it, the cost of money will go up, year after year. Being debt free will bring security that no amount of “buy it now, pay for it later” can do. (My friend’s pressing to “take a loan and carry on” was based on getting the credentials as quickly as possible, to jump into the job market while there were openings.)

Think about that, if you’re advising your children. Everything you think you know about money is wrong, unless what you’re advising them is to treat debt very cautiously indeed.

Rising interest rates don’t mean they’ll just go steadily up, of course, just as falling ones didn’t just go steadily down. As with any market, there’ll be reversals. But the long-term trend line will be clear.

(The people who do technical analysis, drawing all those charts and marking them with lines to show the long-term trends, can show you how 1980-2010 was a period of steadily falling rates, and steadily rising bond prices [as yields fell]. They can also show you how the core government bonds all broke out of their thirty-year-long trend lines in 2013, showing that the new direction is now well established. People buying US government debt — say, the 10 year treasury bond — have raised their interest rate ask by a full percentage point this year, despite the Federal Reserve holding the “official” rate constant. They want 3 per cent to loan capital for ten years, while the Fed says interest rates are at 0.25 per cent. I don’t think central bankers are in charge any more, if they ever were…)

So, if you’re planning to go to higher education, you might want to pay cash, or do without. The alternative is to become one of those people who, failing to get the big job payday at the end of their degrees, continue to take one or two courses each year to keep taking out new loans because “as long as they’re in school, they don’t have to repay the loans they have”. That’s a growing part of the young population in the United States, by the way (in the USA, you can’t bankrupt your student debt).

The same is true for those working, of course. We all know that “first you go to school, then you go to work, then you retire” has been a cliché but not reality for years. Going back periodically to pick up a continuing education credential, a community college certificate, an industry certification, or another degree from a university is the norm (if it wasn’t, multiple faculties wouldn’t offer “executive” degree programs that run on weekends, and the average age of the students at online universities like Athabaska, Royal Roads, etc. wouldn’t be forty).

Again, “pay cash” rather than take on debt. There are few guarantees with education these days. Such debt as you do take on — and let’s face it, there aren’t many of us buying our housing for cash — had better be focused, and kept as small as possible. Borrowing will, as rates climb higher and higher, become less and less frequent.

For all that student debt might not make sense, education still does. But notice what happens when you start paying cash.

You start taking programs that suit you, and your needs, rather than trying to match up a set of financial commitments to future income.

A philosophy degree focusing on issues in bioethics, philosophy of law, etc. might serve you just as well as going to law school might, especially if you remember that 90 per cent of people practising law in the United States are earning less than $50,000 per year after the expenses of their practice. A degree in applied mathematics coupled with courses in political economy and history might serve just as well as an MBA. What’s more, these “lesser” degree programs might serve in more places than an LLB or MBA might, and at a lot less cost.

Stretching the mind, in other words, will pay off, just not necessarily enough to cover a honking big pile of student debt. Fully paid for education, on the other hand, can generate positive returns on investment immediately.

Due diligence as applied to our personal lives begins with knowing what the world you’re in is really like.

Debt is the great killer of your future

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Personal due diligence goes far beyond simply keeping a weather eye on the market for your skills and the health of your current employer.

It turns, in fact, on seeing the world as it is.

So let’s make it clear: being in debt (for the wrong reasons, or for too much) is going to choke off your future.

Debt attracts interest. Interest requires growth to pay for it (while still paying off the principal, and while paying for everything else).

If the economy isn’t growing (this includes “growing anemically”) then paying back debts becomes more difficult.

Even if you’re making your payments just fine, others aren’t. Or they’re not buying your company’s products or services as a way to make ends meet.

Meanwhile, since there isn’t enough growth, pension plans aren’t growing, either. (Most are planned to grow at at least eight per cent per year.) Gaps between assets available to honour commitments and the earnings of the assets under administration are made up by supplemental contributions. That’s another point of contraction.

Ultra low interest rates — the same ones that encourage people to take on debt — turn into a growth trap.

Now most of us these days start our careers off with a whole pile of debt facing us from having gone to school. Few attend on a cash basis any longer.

That implies that, right from the get-go, we ought to be evaluating the utility of our education with a beady eye on how much involuntary servitude it’s creating: how many years of risk you’re taking on for the repayments (remember, in the United States, your student loan debt isn’t even able to be cleared in bankruptcy).

At the same time as there are too many graduates (other than in science, technology, engineering and medicine, where there are gaps still, and in the skilled trades) chasing too few opportunities, the cost structure of the normal university is way out of line with what it could be in today’s day and age. Charles Hugh Smith, the author of Of Two Minds, explored how an innovative approach to higher education would undercut today’s costs by an order of magnitude or more.

It will happen, and as it does the value of a piece of paper saying “Harvard”, “Stanford” or “University of Toronto” goes way down.

If you paid cash for your degree, no worries. It’s the same as saying “the neighbourhood I used to live in is now a slum”. An interesting data point, but that’s all it means in terms of affecting your future.

If you racked up the debt, however, you’ll be competing for positions with people coming behind you who didn’t. They’ll have flexibility you won’t have.

A quick trip to beautiful British Columbia can tell you how this plays out. People have been retiring and moving to BC’s South Coast and Okanagan for years. (It’s the rumour of a far less severe winter that attracts them.) Arriving there, they hang up their shingle and become consultants “to keep their hand in”. As their pension is adequate, they don’t need top dollar for their work.

The net effect is that rates fall for everyone. Work that goes for $600.00/hour in New York, $400.00/hour in Toronto or Ottawa, goes for $125.00/hour in Vancouver. Same work. Same quality. Fine for the retiree “keeping their hand in”. An endless grind for the local person in mid-career trying to build their business up and not be away from home and family constantly.

After all, why pay Vancouver’s prices to live in Vancouver if you’re never home?

That’s the benign side of the risk of dying by debt. The malign form is not being able to find the work, period. Or have a relatively risk-free job.

After all, the student starting out with no debt may not have lived the high life while in education, but they can afford to bid for that job at $15.00/hour and feel wealthy. The one with $25,000 — $50,000 — $100,000 or more in outstanding loans needs to find something at $25.00-30.00/hour just to start.

Want to bet the former entry level post at $25.00 will end up going at $15.00 if it’s not there already? It’s precisely the same phenomenon as the retirees “keeping their hand in” and driving local prices down doing so, after all.

These days, a paid-off small residence with fewer things, and a transit pass rather than a car loan, might well make more sense than a far suburban McMansion on acres of lawn and three vehicles in the driveway, all requiring monthly commitments. But even more so, paying off an obsoleted set of degrees years later (few ever end up working in the field their degree ostensibly is in after a few years, except tangentially, and in the meantime the entry requirements have changed, in effect “expiring” your educational credentials as they stand) is the same as paying off the whopping pile of credit cards for weeks in the sun. Debt servitude, for no current benefit.

What worked for the previous generation (whichever one you’re in) isn’t the right answer now. Helping you identify your risks and navigate to a better future for yourself is what the advisors at Personal Due Diligence do.