College Education Funding - Fraud On Steroids

If you liked the Stimulus Package and the Omnibus Spending Bill - a $1.2 Trillion dollar giveaway from the Democrat Party to the Democrat Party, you've got to love the College Financing boondoggle that's unfolded over the past 15 years.

On that subject there's been some recent and interesting developments in Higher Education here in my home state of Texas (and no doubt duplicated nationwide) and those developments reinforce the fact that government-guaranteed college loans like the Texas Tomorrow Fund are nothing more than a scam indistinguishable from the Mortgage lending practices promoted by Fannie Mae and Freddy Mac. In both cases, government guaranteed loans promoted speculation, hyperinflation and eventually disaster.

For some background, the Texas Tomorrow Fund guaranteed parents a college education for their children with the "investment" of a fraction of the actual cost of that education, roughly $12,000 over ten years. The contributions were invested in stocks, bonds, money markets and other investment vehicles. The theory was that the fund would grow with the stock market, and that the cost of a college education in the future would not exceed the "present value" estimates of the Fund's managers.

Right out of the blocks, there were at least three things that stunk to High Heaven about this Plan. In order to be successful:

- Government employees would need to be able to predict inflation in the Education market.

- Government employees would need to produce an investment return that exceeded the inflation of Education costs.

- Government employees would need to be able to predict both the supply and demand for College Education, and how low-cost government-subsidized financing programs would affect both.

Since Government employees at all levels are not known for their ability to balance their own budgets, much less predict markets and long-term investment trends, the Fund's managers were also oblivious of the fact that the very Plan they implemented would distort the market for Higher Education, and blow all of their financial projections out of the water, with Taxpayers left holding the bag.

Here's where the comparison with no-obligation, no-down payment government-backed mortgages comes into play. Because both tuition and mortgages were backed by "the full faith and credit" of taxpayers, the price of both an Education and homes have skyrocketed since the mid-90's. In the case of EZ mortgage credit, that strategy created millions of over-valued homes and an unsustainable glut of inventory which precipitated the crash of the stock market. In the case of the Texas Tomorrow Fund, it caused Texas in-state tuition to almost triple in the past fifteen years against a relatively static supply, making the Texas Tomorrow Texas Fund insolvent well before the Stock Market crash of last year. Ironically, the mortgage-induced stock market crash only made things geometrically worse for TTF.

And in both cases, it is only responsible Taxpayers who got the short end of the stick: the ones who bought a house they could afford, or put aside money themselves for their children's tuition.

On the heels of these State-sponsored disasters, George W. Bush and his successor Barack Obama decided to double down on the fiscal irresponsibility by a) squeezing private lenders out of the college loan business, and b) then setting up sweetheart re-payment schedules on all existing and future loans that virtually assure that they will be paid off to the tune of mere pennies on the dollar. On one of OffHisMed's favorite topics, the new repayment programs being created will allow Government Employees to default on their loans after a mere 10 years, whereas anybody in the Private Sector will have to wait 15 years.

The results of these new initiatives on college loans is that most students in America will qualify for a heavily taxpayer-subsidized college education, with the prospect of a tiny repayment spread out over ten or fifteen years upon completion. Perversely, these initiatives will compete with participation in investment funds like TTF, further exacerbating their decline.

The net of all this will of course result in yet more hyper-inflation in college tuition, since a) the investment in a Fund or the repayment on loans represents a risk-free commitment of only a fraction of the actual cost of an education; b) universities will be relieved of any necessity to control costs by competing for business; and c) demand will far outstrip supply, allowing our universities to further lard themselves with Education specialists of all stripes, each working at least four hours per day, and loafing their way to a 75% pension after twenty year's of a part-time job, causing a back-end deficit that our politicians have not even begun - or care - to contemplate.

So there you have it: State taxpayers are currently on the hook for untold billions in guaranteed tuition because a bunch of social engineers decided they were Wall Street Whizzes; taxpayer subsidized loans to those disinclined to save can be defaulted on by their recipients; and both of these will be indexed or re-legislated in the future to match Inflation in the Education sector, costing taxpayers yet further untold billions in the decades to come.

And there's no end in sight.

It's understandable that Democrats support such Boondoggles, since they are immune to an understanding of even basic market concepts, and inflated government spending of any type perpetuates their political advantage. Thus, the Stimulus Package and the Omnibus Spending Bill are of a piece with giveways in the Education sector.

It's worse when Republicans - supposedly the fiscally responsible party - support the subsidy of unsustainable Education spending just as enthusiastically. They should have protested both just as vigorously as they protested the Stimulus Package.