August 10, 2012

Education is Our Generation's Big Problem. Let's Fix it.

## Education in Crisis

Education in the United States is nearing crisis. According to a recently released [government report](http://files.consumerfinance.gov/f/201207_cfpb_Reports_Private-Student-Loans.pdf), total student loan debt in the United States is estimated at more than 1 trillion dollars, surpassing total credit card debt and putting it at more than [40% of all consumer debt](http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php) in the United States.

Student default rates tell the most chilling story. In 2009, the Department of Education reported that 8.8% of students who graduated in 2009 [defaulted on their loans within 2 years of graduation](http://www.ed.gov/news/press-releases/default-rates-rise-federal-student-loans).

The 8.8% figure only shows part of the story. The DoE's 2 year default tracking window hardly captures the problem , given that the first payment can be [deferred up to 420 days] (http://higheredwatch.newamerica.net/blogposts/2008/cohort_default_rates_the_good_the_bad_and_the_ugly-19388) after graduation. On average, defaults occur [at the 4 year mark](http://nces.ed.gov/das/epubs/pdf/2006156_es.pdf), well outside the 2 year window.

Taking this into account, the number of student loans that are in default is probably somewhere in the [40% range](http://www.forbes.com/sites/peterjreilly/2012/01/30/is-there-a-media-blackout-of-the-student-loan-crisis/). Given that 53.6% of bachelor graduates last year were [unemployed or underemployed](http://www.huffingtonpost.com/2012/04/22/job-market-college-graduates_n_1443738.html), should we really be surprised that the default rate is so high?

![Earnings vs. debt](http://cl.ly/image/09120D2w063u/Earnings_and_debt.png)

Defaulting on a student loan is a serious matter. Once you default on a student loan, you'll be hounded for life: student loan debt is the absolute worst kind of debt you can have, as it is [not absolvable by bankruptcy](http://online.wsj.com/article/SB10001424052702303978104577364120264435092.html). Do I even need to mention which segments of our population rely on student loans the most, and thus are getting screwed the most by the student loan crisis? Hint: It's not the happy white suburban family of 4.

Keep in mind: these are not people taking on debt to buy a new SUV, bigger house or more clothes. These are people who took on debt to *better themselves* and subsequently, their earning power. **These are the believers of the American Dream.** And they are getting royally screwed over.

Oh and by the way: the more money is poured into the educational system, [the more wastefully it is spent](http://goldwaterinstitute.org/sites/default/files/Administrative%20Bloat.pdf). Between 1993 and 2007, instructional spending at universities increased by 38%, administrative spending  by 61%, but student enrollment? Only a modest 15%.  Why administration had to grow 4x the pace of enrollment is beyond me.

**In summary, we are spending more money per student,  to prepare them for jobs that less than half will be able to obtain, all the while saddling them with permanent, crushing debt.**

Faced with a dire situation like this, many graduates [contemplate suicide](http://www.huffingtonpost.com/c-cryn-johannsen/student-loan-debt-suicides_b_1638972.html).

## Looking towards the future

### Stop the Degree Fixation

Learning is the original purpose of university. There was a time when entering university meant casting off society and entering a monastic order. Glorifying god through learning and study was a student's purpose. At some point, educated people became economically valuable and the purpose of university began to change.

Once graduates began earning money for learning, it created a virtuous cycle for learning. Students would learn and earn their degrees. Graduates would earn money. Some of that money got donated back to the school, enabling more people to learn.

![LDM loop](http://cl.ly/image/1c1T2U393i1A/learning_degree_money_loop.png)

When learning loses priority, we are left with a picture like this instead.

![DM](http://cl.ly/image/1U001P3I2g0j/money_degree.png)

And thus the diploma factory is born.

The belief that a degree = money belief is why Kaplan university is able to [prey on the hopes of lower-income students](http://www.huffingtonpost.com/2012/01/12/for-profit-colleges-kaplan-university_n_1202583.html) despite having 30% of their students [default within 2 years of graduation](http://www.sec.gov/Archives/edgar/data/104889/000119312511053497/d10k.htm).

This shift in priorities is also why you will see universities putting more money into [the trappings of higher learning](http://www.youtube.com/watch?v=0c7qzv4Q7A8#t=4m23s), such as a nice campus and athletic facilities.

We need to move past the piece of paper as the end game of learning.

### Stop loaning out money indiscriminately

As long as student loans are going to be made, they should at least be made wisely. Student loans are based on the idea of future solvency. In other words, the student borrower can't pay the loan today, but after education, they can obtain a better job and pay off the loan.

If this is the core idea of student loans, then how come University of Phoenix, despite a  [23% default rate](http://voices.washingtonpost.com/college-inc/2011/02/for-profit_colleges_and_studen.html), is still able to obtain [86% of its revenue from government student loans](http://financemymoney.com/the-profits-of-education-%E2%80%93-how-university-of-phoenix-and-other-for-profit-schools-survive-and-over-charge-students-because-of-government-backed-loans-billion-dollar-growth-industry-yet-what/)? Universities that sell the idea that a degree = money should make good on their promise.

Fortunately, the Obama Administration identified this problem and recently put regulations into place that require for-profit universities to meet at least one of three "gainful employment" standards. Unfortunately, their standards are not yet tough enough, with only [5% of schools on the chopping block](http://www.ed.gov/news/press-releases/five-percent-career-training-programs-risk-losing-access-federal-funds-35-percen) after the new standards go into effect.

### Spend money more efficiently

From 1993 to 2007, our top universities increased administrative spending by 61% and instructional spending by 38%, while enrollment during the same period increased by only 15%. This means that our educational institutions are *diseconomies* of scale. The bigger they get, the more inefficient they become.  

Why does this happen? Because universities are not spending their own money:

![Diseconomies of scale](http://cl.ly/image/3P2p3O3F0h0g/Four_ways_to_spend_money.png)

As the government increasingly subsidizes higher education, university spending on administration falls into the bottom left quadrant. That quadrant is like going out to lunch on the company tab. You'll get the best thing on the menu, and you don't care about saving money.

University spending on instruction falls into the bottom right quadrant. It's like your mom giving you an American Express Black Card to buy your brother a birthday present. You're not going to be extremely careful about what you spend it on, and anyhow, if you buy the wrong gift, you can always go back and buy him another one.

## Conclusions

Of course, with Bloc being a for profit educational company, I am biased in favor of the private sector solving problems here. I strongly believe that the private sector can improve the educational situation if it is forced to be lean.

Right now, our "administration" consists of scrappy hackers splitting a house in Palo Alto. 50% of our revenues go straight back to our mentors, allowing us to hire the best of the best programming mentors at salaries that compete with or exceed the salaries they would get doing development full time.

With Bloc being completely virtual and online, we have no campus to maintain, no athletic department and no campus tours. Our marketing so far consists solely of our blog and word of mouth. All in all, we really have nothing to spend on other than educational materials, instructors and our own salaries (we pay ourselves about half of what a typical developer in Silicon Valley would earn).

What more can be done? How can the higher ed problem be solved? I would love to hear your ideas.  [Join the discussion on Hacker News](http://news.ycombinator.com/item?id=4367288)

**Education is our generation's big problem. Let's fix it.**

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