College Debt is the New Sub-Prime Mortgage Debt + U.S. Caste System

August 27, 2012





Content Section

In Newsweek Magazine

Niall Ferguson: College Becoming the New Caste System

Aug 27, 2012 1:00 AM EDT

Higher education is becoming the new caste system.

School is in the air. It is the time of year when millions of apprehensive young people are crammed into their parents’ cars along with all their worldly gadgets and driven off to college.

The rest of the world looks on with envy. American universities are the best in the world—22 out of the world’s top 30, according to the Graduate School of Education at Shanghai Jiao Tong University. Once it was Oxford or Cambridge that bright young Indians dreamed of attending; now it is Harvard or Stanford. Admission to a top U.S. college is the ultimate fast track to the top.

Little do the foreigners know that all is far from well in the groves of American academe.

Let’s start with the cost. According to the College Board, average tuition and fees for in-state residents at a sample of public colleges have soared by 25 percent since 2008–09. A key driver has been the reduction in funding as states have been forced to adopt austerity measures. In the same time frame, tuition and fees at private universities rose by less (13 percent), but still by a lot more than inflation.

According to the Consumer Financial Protection Bureau, total student debt (which includes private loans and federal loans) climbed to more than $1 trillion. It is the only form of consumer debt that has continued to grow even as households pay off mortgages, credit cards, and auto loans. In real terms, students are borrowing twice what they did a decade ago.

It’s not only Facebook stock that Silicon Valley superstar Peter Thiel is selling. He’s shorting higher education, too, arguing that college is the new asset bubble—the natural successor to subprime. Remember when we all believed that a home was an investment that would never lose money? Now, Thiel argues, exactly the same thing is being said about a degree. To back up his point, Thiel is paying 20 of the country’s most promising students $100,000 to walk away from their studies and become entrepreneurs.

Thiel is not alone in his skepticism. “President Obama once said he wants everybody in America to go to college. What a snob!” Rick Santorum famously declared. “There are good, decent men and women who go out and work hard every day … that aren’t taught by some liberal college professor trying to indoctrinate them.”

The irony is that Thiel himself was a star student at Stanford, with degrees in philosophy and law, while Santorum himself has no fewer than three degrees.

Come to think of it, you probably do need a degree to get through the recent, voluminous literature on this subject. Start with Andrew Hacker and Claudia Dreifus’s Higher Education? How Colleges Are Wasting Our Money and Failing Our Kids, which slams professors at the “Golden Dozen” top U.S. colleges. Apparently, we neglect our students, while university bureaucrats squander gazillions on sports facilities with no academic value.

Despite being an alumnus of Brown, Michael Ellsberg, author of The Education of Millionaires, believes that college “can actually hold you back.” And in Academically Adrift, Richard Arum and Josipa Roksa argue that students’ skills scarcely improve in college, while their motivation may actually decline.

But doesn’t a degree improve your chances of getting a job? Not anymore. Recent graduates are just as likely as anyone to be out of a job right now. Globalization and technology aren’t just destroying unskilled jobs; many of the functions previously performed by graduates are now being off-shored.

Paul Barton / Corbis

As a professor, I can see much that is wrong with our system—but not so much that I would advise a smart 18-year-old to skip college. The real problem is not that our college system is failing. The problem is that it is succeeding all too well—at ranking and sorting each cohort of school-leavers by academic performance.

As Charles Murray has pointed out, our highly competitive admissions system has become a mechanism for selecting a “cognitive elite.” In 1997, just over a hundred elite colleges, which admitted fewer than a fifth of all freshmen, also accounted for three quarters of the ones with SAT or ACT scores in the top 5 percent.

Meritocracy in action? The problem is that this cognitive elite has become self-perpetuating: they marry one another, live in close proximity to one another, and use every means, fair or foul, to ensure that their kids follow in their academic footsteps (even when Junior is innately less smart than Mom and Dad).

Paradoxically, our universities now offer social mobility mostly to foreigners. For Americans, they risk creating a new caste system.

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