"Yay, College!" Part 1 - The Narratives of American Higher Education and Their Imminent Collapse

A little more than 6% of the American economy, about $1.6 trillion per year based on current GDP levels, is spent on education. That's more than national defense (about 3% of GDP) and less than healthcare (about 18%), but haha! everything is less than healthcare. So yes, a quarter of the sum total of all American economic activity is devoted to our schools and our hospitals. All of our jobs, all of our incomes, all of our expenditures, all of our construction ... a quarter of it is education and healthcare.

But the power and political importance of these two institutional pillars of American society go far beyond their economic scale.

Both of these institutional systems - schools and hospitals - enjoy intensely positive narratives, particularly at the higher end of those systems. There is no more powerful common knowledge in the world today - what everyone knows that everyone knows - than that American universities and medical centers are the best in the world. These institutions are our narrative superheroes in a world where we don't have many superheroes left.

Of these powerful and positive social narratives, those surrounding American higher education are the most powerful of all. Why? Because we don't want to go to the hospital, no matter how prestigious the medical center. But when it comes to our colleges and universities, particularly our 'elite' or 'highly selective' colleges and universities ... oh yes, we WANT very, very much. We want keenly for ourselves. We want desperately for our children.

And because we want so very, very much, the narratives surrounding American higher education are intensely political. Not in the red vs. blue or Democrat vs Republican sense of the word 'political', but in the power sense, in the maintenance of political stability sense, in the channeling and control of our hopes and dreams sense. In narrative-world, American colleges and universities - especially our most prominent ones - are our Superman, our most powerful and respected institutional superhero. They are at the core of our common knowledge of truth, justice and the American way.

And so we cheer.

Yay, College!

The Boys is a dystopian comic book series brought to TV by Amazon, where the 'superheroes' are all debauched bullies who get away with (literally) murder so long as they do The Man's dirty work and wrap themselves in (literally) the flag. This scene shows Homelander, the Superman-esque leader of the debauched superhero bullies, right after he murders an anti-superhero protester with his laser eyes. It's all very bloody and awful, and Homelander is not at all sure how the group of civilians around him will react, even though they're a pro-superhero crowd. And then they start to cheer.

I believe that the modern American system of higher education - especially its most prominent public and private universities - is less our Superman than our Homelander, a smiley-faced faux superhero who does The Man's dirty work in exchange for wealth, privilege and ... our cheers.

I believe that our cheers of "Yay, College!" will grow muted and ultimately cease over the next 12 to 18 months, under the weight of a political catalyst that collapses the narratives supporting public debt financing of college tuition.

I believe that the collapse of these narratives will lead to a financial crisis in American higher education, an outright depression in economic sectors levered to American higher education, and a political crisis that completely reshapes the relationship between American society, American government, and American colleges and universities.

Here's how I see it playing out.

Doing The Man's Dirty Work For Wealth, Privilege and ... Our Cheers

The Man has two sides - a corporate side (what we call the Nudging Oligarchy in Epsilon-speak) and a political side (what we call the Nudging State) - and they each have a nasty itch that only our colleges and universities can scratch.

In service to the Nudging Oligarchy, our colleges and universities have created a caste system of enormous power and universal acceptance.

Our lifetime incomes are driven by the reputational dynamics (aka narratives) of where we go to college and graduate school. Not IF we go to college or graduate school, but WHERE we go to college or graduate school. Is this fair? Is this right? Are Ivy League students so much more talented or educated than all other students? No, no and hell no. But fair or right or true, this disparity IS.

It's the 'one of us' caste system.

Even more than an IQ test (another sorting function traditionally fulfilled by American higher education), employers want to know if a job applicant is 'one of us'. Sometimes that 'one of us' quality is race. Sometimes that 'one of us' quality is gender. Sometimes that 'one of us' quality is political orientation, sexual orientation or age. Far more often, however, to the point where it has become the water in which we swim, that 'one of us' quality is educational class, a status system defined and stratified by first, a set of highly selective universities with global narratives, second, a set of highly selective universities and colleges with national narratives, third, a set of selective universities and colleges with regional narratives, fourth, a set of selective-I-guess colleges that people nod their head at but have no narratives, and fifth, everyone else.

Yes, this stratification has little to no bearing on the actual education delivered by the college or university in question. Yes, I think this stratification is ridiculous and unfair, just as I do any caste system.

And yes, this stratification is absolutely real and absolutely sets the path of your adult life. And yes, this stratification is a largely hereditary status that is mostly determined by the educational class of your parents, but has enough variation on this factor to make us all feel good about ourselves and our society as we sing the social mobility verse of "Yay, College!".

What makes our educational caste system so stable and ubiquitous is common knowledge. Even if, like me, you do not personally believe in the social mobility variant of the "Yay, College!" narrative, you believe that everyone else believes it. Common knowledge is what everyone knows that everyone knows - not what you personally know or believe! - and everyone knows that everyone knows that going to a 'selective' or 'highly selective' college or university is the ticket to a better life for our children, a ticket that's available to anyone who's smart enough and works hard enough to grab it.

This common knowledge of "Yay, College!" is why we put such enormous pressure on our children to get into a 'good' college, and it's why so many of our children are damaged by that pursuit. It's why we borrow such incredible sums for ourselves and our children, sums that our government is only too happy to lend to us.

The American system of higher education is the linchpin of Fiat World, where reality is declared rather than lived, where we are told that social mobility is real and true and we are told that it is virtuous to borrow vast sums as the pathway to a better life for ourselves and our children.

Why are we told this?

Because the truth - that our world is organized as a largely hereditary, educational class-based pecking order - cannot be imposed from above, but must be accepted from below.

Because starry-eyed students accept a ceiling on their potential if they are told that the ceiling is a starry sky.

We are told that college is the indispensable experience for young adults to discover their potential and set themselves on a path of economic prosperity and personal fulfillment. We are told that college is the only experience that can satisfy these most central wants that we have for ourselves and our children. We are told that it's not about the money.

These are not bald-faced lies. There is a kernel of truth in all of these stories, all of these narratives of "Yay, College!". But only a kernel. The far more dominant truth, the truth with a capital T that has no popular narrative to support it (yet) is this:

IT'S ABOUT THE MONEY

In service to the Nudging State, our colleges and universities have created a luxury consumption economy of higher education so that the non-rich FEEL RICH even as they stay non-rich.

In return, the Nudging State provides hundreds of billions of dollars in public financing to support this luxury consumption economy, public financing which goes predominantly to the private gain of our new ecclesiastic class - the administrators of our colleges and universities, particularly our more prestigious ones - and the construction of ever more lavish facilities, both of which require ever more financial support.

As a result, American higher education is financed on a cost-plus accounting basis by the US government, so that every marginal dollar spent on new administrative positions and every marginal dollar spent on new facility construction generates more than a dollar in new tuition revenues, and far more than a dollar if there is a "Yay, College!" narrative associated with the administrative expansion or facilities construction.

In other words ...

The ONLY reason a college education is insanely expensive today is because colleges and universities have worked in tandem with the US government to jack up prices with one hand and provide infinite amounts of easy debt financing with the other

Here, I'll show you. First, the jacking-up of prices.

Colleges and universities have raised tuition costs far more than the underlying inflation rate for decades now. Per the Bureau of Labor Statistics and its consumer price index data collection, college tuition today is 13.5x what it was in 1980, versus a 3.8x multiple in the price of all goods and services.

Notably, the BLS reports that tuition price increases have rarely been for improvements in the measurable quality of post-secondary education (for example, "increased instructional time"), and so the price data has had few hedonic adjustments applied. In other words, unlike say, your TV or your car, your college education today is no better than your college education 40 years ago. It just costs 13.5 times as much!

Okay, that sounds pretty awful, but our wages and salaries have increased over the past 40 years, too. Maybe our wage growth has kept pace with college tuition? Hahahaha! Nope. Nominal wages have increased 4x since 1980, just ever so slightly outpacing inflation.

Relative to our incomes, college is 3.4 times more expensive today than it was in 1980.

No better. Just 3.4 times more expensive.

That's what I mean by the jacking-up of prices.

How do we pay for something we want so badly when its cost outstrips our income? We borrow. And that's where the federal government rides to the rescue, to make sure that we can borrow all the money we need to achieve our "Yay, College!" dreams.

Notice the two inflection points where prices accelerate in the tuition inflation graph. There's one in the early 1990s and another around 2003. These tuition cost accelerations match directly with the legislative timeline of federal direct lending programs and, even more importantly, the narrative timeline of efforts to politicize federal direct lending.

In 1992, the Higher Education Amendments bill revised the original Higher Education Act (HEA) of 1965 to give the federal government the ability to make student loans directly. Prior to this, the US government could only provide guarantees and subsidies to private lenders. Then in 1993, the Student Loan Reform Act made the Direct Lending program official, threatening to take market share away from the highly lucrative "guarantee program" administered by private lenders. As a result, private lenders significantly increased their student loan marketing efforts to hold share, and colleges and universities accelerated their price hikes.

In 2003, the Higher Education Relief Opportunities for Students (HEROES) Act gave the Secretary of Education the unilateral authority to reduce or eliminate student debt under the Direct Lending program in response to "national emergencies". While little used since its passage, it is today the primary legal basis for the Biden Administration's court arguments supporting a $10,000 to $20,000 principal reduction in most student loan accounts. This was a Republican bill, btw, and it passed easily as the GOP controlled the House, the Senate and the White House.

But that's the point. In 2003 the Republican party weaponized arguments against federal direct lending, pulling out a GAO report that the program had lent out $90 billion more than it had been repaid over the eight year period 1995-2003. I mean, it's a silly argument seeing as how these were 10-year loans, and it seems kinda quaint to be all bothered by $90 billion over eight years, but those were silly, quaint times, I suppose. Why was the GOP taking aim at the federal direct lending programs? Because we were entering the Golden Age of asset-backed securitization, and every large commercial bank in the United States wanted to make as many private student loans as humanly possible, all subsidized by the US government, natch.

So of course the usual suspects on the Democrat side, like The New York Times, leapt to the defense of the Clinton era legislation that had established direct lending in the first place. In particular, there was an influential article written by US News & World Report (yes, the same publication that 'ranks' colleges and universities!) titled "Big Money on Campus: How Taxpayers are Getting Scammed by Student Loans" that called out the private loans + government subsidies arrangement as the "true" scandal here.

The result of these weaponized narratives was enormous publicity for student loans. An issue that very few people cared about a year earlier became an issue that everyone who considered themselves a 'good Republican' or a 'good Democrat' had to have an opinion about. Sound familiar?

In response, colleges and universities accelerated their tuition increases yet again.

In response, consumer borrowing for college increased dramatically in 2003, and the Federal Reserve Bank of New York began tracking student loans as a distinct category of non-mortgage consumer debt, along with credit cards and auto loans.

The rest, as they say, is history.

Student loan debt grew from $220 billion in 2003 to $1.6 trillion in 2022 - the largest single-purpose amount of non-mortgage consumer debt ever taken on in the history of man.

As for the federal government's share of that lending, you'll notice that the growth rate of student loan debt doesn't skip a beat through the Great Recession of 2008-9, despite pretty much every large US bank abandoning their asset-backed securitization businesses and fleeing the student loan market. That's because the US government jumped in to provide every single dollar (and more) in public financing that private financing would not during the Great Recession. Why? Because the US government - regardless of which political party is in the White House - knows that if they lose the narrative of "Yay, College!" and its promise of a better life for ourselves and our children ... well, then it's not a Great Recession, but a freakin' revolution.

Today, more than 90% of the $1.6 trillion in outstanding student loans is lent directly by the US government.

That's what I mean by the infinite supply of easy debt financing.

That's what I mean by doing The Man's dirty work (establishing a one-of-us caste system and a feel-rich luxury education economy) in exchange for enormous institutional wealth and privilege (a cost-plus accounting system where every marginal dollar spent on administrative expansion and facilities construction generates far more than a dollar in net revenues).

That's what I mean by a smiley-faced faux superhero, wrapped in a flag, desperate for our cheers.

It wasn't always this way, you know.

American colleges and universities used to be a genuine superhero of an institution. Of course not without flaws. Every superhero has flaws. But the system of American higher education used to be an other-serving institution of heroic proportion, not a self-serving institution of obscene proportion.

How do we change American higher education? How do we return this most-important institution to its rightful place as a genuine superhero?

Well, first we stop cheering.

And here's how that happens.

Today, we have public financing of approximately $1.5 trillion in private tuition debt, reflecting an estimated 94% federal share of the current $1.6 trillion in student loan debt.

Since March, 2020 there has been a suspension of all repayments and all interest charged on that publicly-financed debt, including interest on any new loans taken out since then. Free money! All of this debt has a fixed rate averaging more than 5%, so the suspension of interest accrual alone has been worth more than $200 billion to federal student loan borrowers. Repayment of these 10-year loans begins six months after the student graduates, and there's no easy way to track the total loan balances that have (or would have) entered servicing, so it's a little tough to get a precise calculation of the cash flow benefit to borrowers over the past three years, but I'm pretty confident that more than $400 billion that otherwise would have gone into the black hole of government coffers has been retained by borrowers.

This $400 billion in suspended student loan repayments is a major fiscal stimulus! But no one ever talks about it being part of the federal government's Covid relief effort. No one ever talks about its effect on inflation and the economy. No one ever talks about how suspending student debt repayments is MMT (modern monetary theory) in practice.

The current debt suspension is scheduled to expire and repayments to resume in September, 2023, or whenever the $10,000-in-student-debt-forgiveness program is approved by the courts, whichever comes first. In practice, that means that debt repayment won't restart until September, 2023. The total amount of publicly-financed private debt at that time should be approximately $1.6 trillion, and this 10-year term debt will have an average annual interest rate somewhere between 5% and 5.5%. Using a standard amortization schedule and making some rough assumptions about when recent borrowers graduate and begin the repayment process, I come up with an initial repayment bill of $15 billion per month and $180 billion per year. These totals increase over time. These loans may not be discharged through bankruptcy.

This $180 billion in annual cash transfers from a resumption of student loan servicing this fall is the functional equivalent of a massive tax hike. None of these transfers will go to the private sector (private educational loans are not included in these calculations), and there are no government programs funded or not funded by whether or not student loans are repaid. The public financing of private tuition debt is an excellent example of how the tether between taxation and government spending - the most important macroeconomic policy relationship in our social lives as both investors and citizens - has been completely severed, to disastrous result. Put simply, the US government doesn't care whether it ever collects a dime in interest and principal in its student loan program. Absolutely no government service or program is impacted by writing all of this off forever. Snip!

But now that student loan repayments have been suspended, not temporarily but for three and a half years, even as the lending program itself expanded and became even more embedded as THE financing mechanism for higher and higher tuition costs, any resumption in student loan payments generates a crippling fiscal hit to the economy, just like a massive tax hike.

In fact, if this were a Congressional bill and it was scored for fiscal impact by the CBO like any other federal program, the resumption of student loan repayments this September would be the largest single tax hike in US history.

• A tax hike that will hit Democrat-leaning voters far harder than GOP-leaning voters.

• In the middle of what I think will be a pretty nasty recession.

• On the heels of a debt-ceiling fight that both the White House and the Trumpists want to push to the brink of default.

• Going into the 2024 election campaign.

Admittedly, there seem to be no limits to the political and governance incompetence of this White House. Even for this crew, though, it seems impossible to me that they will commit political and economic suicide by forcing the resumption of student loan repayments this fall and pushing the US economy down a flight of stairs.

But if not this September ... when? When will it EVER be politically feasible for an incumbent Administration of either party to impose a $180 billion (and growing!) annual tax?

And if we continue the can-kicking, making billions of additional interest-free and repayment-suspended loans every year ... what the hell are we doing?

What happens when Americans realize that college is free if you just borrow the money from the US government?

What happens when Americans who worked hard and saved and spent their own money for an insanely expensive college education realize that it is insanely expensive ONLY because colleges and universities colluded with the US government to jack up prices with one hand and provide infinite amounts of easy debt financing with the other?

What happens when Americans who repaid their tuition debts at great personal sacrifice realize that they were suckers, that they were played for fools by their own government and by the colleges and universities they cheered for?

I'll tell you what happens.

They Explode

They Burn. It. The. Fuck. Down.

Not the colleges and universities themselves, but the government funding mechanisms and - more importantly - the "Yay, College!" narrative structures that give these institutions their smiley-face, faux superhero mask.

Good.

Because after the narrative mask is stripped away, after the inevitable and necessary political upheaval and economic debacle occurs ... we can rebuild and reclaim American higher education as the true superhero it once was.

And will be again.

Next: "Yay, College!" Part 2 - Rebuilding the Narratives and Funding of American Higher Education

Postscript

Eight years ago I saw this coming. Since then, across four daughters and their college educations at 'elite' universities, two finished and two in progress, I have borrowed every penny of their tuition and expenses. Every penny. I've paid for nothing out of pocket. I've borrowed it all from the US government, thinking that there was a non-trivial chance a big chunk would ultimately be forgiven, suspended or otherwise diminished, thinking that there is an inevitable jubilee associated with MMT policies like this. Looks like I got this one right.

Is it fair that a relatively well-off guy like me has already seen his debts suspended for three years and might see them suspended forever? Well, it's definitely terrible public policy, and it is not lost on me that by calling attention to this I might very well be acting against my personal financial interests! But I feel so strongly about making some larger points that I'm willing to take that chance.

To use a Dungeons & Dragons reference: being lawful good doesn't mean being lawful stupid. Will I abide by whatever legal obligation I end up having on these student loans? Absolutely. Will I repay this debt in the absence of a legal obligation, out of some moral obligation or categorical imperative to pay back what I borrowed? Not a chance.

I am so over any sense of moral obligation to the Nudging Oligarchy and the Nudging State. So over it! Because I know ... because the Nudging Oligarchy and the Nudging State have proven to me time and time again ... that these entities do not demonstrate any such moral obligation to me. My relationship with giant corporations and giant governments is simple. I am IN their world but not OF their world. While I am in their world, I will play their games and I will play by their rules. I will only play the games for which I am eligible - no PPP money because our company wasn't negatively impacted by Covid. But when I play the games of the Nudging Oligarchy and the Nudging State for which I am eligible and for which I choose to play, I will play them hard.

This is precisely the opposite of how I feel about debts and gameplaying with my family, my friends ... my Pack in Epsilon-speak ... for whom I have an extreme sense of moral obligation, one that supersedes any and all legal obligations I might or might not have. What defines a Pack? Mutual reciprocity and human respect. Treating other Pack members as autonomous beings of inherent worth, as ends-in-themselves and not as means-to-an-end, and insisting that they treat you the same way. The games of the Pack are played soft, not in the sense of being non-competitive or played dismissively, but in the sense of being properly placed within the context of a much larger, much more important game of fellowship and collective action.

What is THE secret to a happy, successful life? Find your Pack

https://www.epsilontheory.com/once-in-a-lifetime/