This fall, 5,400 freshmen will have joined the University of Minnesota community. Unfortunately, odds are that for hundreds of them, it will turn out to have been the biggest mistake of their lives.
During the period preceding the 2008 economic crisis, a number of large, well-respected financial institutions were marketing mortgage-backed securities that were much riskier than they were advertised to be. While Lehman Brothers and their siblings on Wall Street deserve all of the blame that has been heaped upon them, there were two mitigating circumstances. First, these risky securities were sold almost exclusively to large institutional investors whose size enabled them to better absorb higher levels of risk. Second, these institutions had the know-how and resources to make their own risk assessments.
If the education that the U is offering is viewed as an investment, then the school does not even measure up to Wall Street's dubious standards. Like Lehman Brothers, the U is selling an investment that is much riskier than is generally perceived. But unlike Wall Street, the U markets its product to asset-poor investors, most of whom have to borrow money to make their educational investment. In addition, the U does not target savvy investors, but high school students. Most students should expect to leave the U with unhealthy debt/revenue ratios on their balance sheets.
For many of our incoming freshmen, attending the U will be a losing proposition. Forty percent of them will not graduate within six years -- and most of these will never get a diploma. Their investment with the U will be a dead loss. Those who do graduate will face stellar opportunities, but for many the realities will never measure up to that promise. A national survey done at Rutgers found that the average salary for recent graduates who had obtained full-time employment was $27,000. One in four of them was employed in a job that did not require a college degree.
Most students finance their education investment by taking on debt. Last year the average student loan debt of U graduates was $27,000 (eighth-highest among public colleges in the United States). For hundreds of students currently at the U, this will be an unmanageable level of debt. The National Center for Education Statistics did a study tracking student loan repayment over 10 years. Unsurprisingly, one of the findings was that the default rate increased with the amount owed. For those owing the equivalent of $22,000 in today's dollars, the default rate was 20 percent.
The consequences of excessive debt go beyond an unhealthy balance sheet. Student loans that go into default can have a 25 percent penalty added to their loan balance, making an unmanageable level of debt into an impossible burden. In our society, credit scores are not just financial measures -- they shape lives. For many, the payback for attending the U will be that they are filtered out by perspective employers because of their credit scores. They will never start a business, never own a home, and they may have rental applications rejected. Unlike those ruined by Wall Street's shenanigans, individuals who are drowning in student-loan debt do not have the option of discharging them through bankruptcy.
The future plight of today's freshmen is dire enough that it ought to inform every decision made by the U. During the past year or so, the school has hired a new president, has spent $100,000 on inauguration festivities for this new hire, has terminated an athletic director then promptly rehired him as a personal assistant at $400,000 a year, has spent $780,000 to renovate the president's residence, has hired a vice president at a salary 14 percent higher than her predecessor, and has increased tuition at twice the rate of inflation. In a June 8 Star Tribune interview ("U calculates the full cost of educating a student"), university President Eric Kaler stated: "I have been, frankly, tired of the charges that we don't do things efficiently, that we are fat and bloated."
Well, we're all tired.
Still, there are two things that ought to be done. First, the U should provide a prospectus to all applicants that would honestly lay out the risks and likely outcomes of making this education investment. Second, the U should take steps to improve students' future debt/revenue ratios. Operating expenditures at the U increased at twice the rate of inflation from 2000 to 2010, going from $1.2 billion to $2.9 billion. If the U scaled back its spending so that expenditures grew at a rate even 50 percent higher in real terms, tuition could be cut by 25 percent. Can the U provide a good-quality education with this level of expenditure? This is a risk that we cannot afford not to take.
Robert Katz is a library technician at the University of Minnesota.